Anthony Spitaleri | Real Estate Ninja
You have heard the stories of those who don’t work and make most, if not, all of their money from investments properties but never understood how. I’ll tell you this, it doesn’t take a millionaire to make money from real estate (although it certainly helps to get the ball rolling). As a Real Estate Agent in one of the top 10 cities in the United States, I have helped countless investors reach and even surpass their income and portfolio goals through investment properties. Here’s a quick list of what you don’t need:
- You don’t need to save a ton of money for a down payment
- You don’t need to purchase in the trendiest city that every one loves today
- You don’t need to wait any longer
Before Purchasing Your First Property
The first investment property can often be the most difficult to buy. I suggest making a purchase plan which contains:
- Improving Your Credit Score
- Not making any large purchases
- Relying on purchasing with credit cards
- Paying down any debt
- Not originating any inquiries on your credit report
- Do not co-sign a loan
- Do not change bank accounts
Purchasing Your First Property
Keep in mind that most investment properties require 20-30% as a down payment. In the beginning of this article I spoke of not needing a ton of money up front and here is the key. The key is to purchase the property as your primary residence and live in it for up to the 1st year. Depending on the verbiage, some mortgage lenders require that you live in your primary residence for 6 months + 1 day or up to 1 year + 1 day. At the end of this period you are free to begin turning a profit! You see, as a first-time homeowner you may qualify for special incentives such as a low down payment and better terms.
FHA – Federal Housing Authority
The National Housing Act of 1934 created the FHA. The FHA is a government agency tasked with stimulating home ownership and lowering the down payment restrictions for you, the buyer, without increasing risk to the lender. The most common type of FHA loan is the FHA 203(b). It allows you to place a down payment of as little as 3.5% with good credit (you see why credit has an influence now?). You can also include up to 6.5% of closing costs into the loan. The downside to an FHA loan other than you will have to occupy it as your primary residence is that you will have to pay a mortgage insurance premium. This is due to you not putting down the usual 20% as a down payment.
There are also additional types of FHA loans available such as: financial help for seniors and an energy efficient mortgage. For more information, please visit their website at: https://portal.hud.gov/hudportal/HUD?src=/buying/loans
Criteria and Research
Before you buy your rental property, I would select a few areas to compare each to. Ensure that each neighborhood meets your criteria whether it is close to highways, work, supermarkets, parks and so forth. If you need to sacrifice a better neighborhood for an extra 10-minute drive to work each way, it may be worth. Remember, it is only short term. Depending on what you need space wise, I suggest sticking with a property that is a 2 or 3 bedroom with 1 or 2 bathrooms. Keep your budget in mind and select a few locations that may work for you.
Next you will need to compare the average rental rates, purchase prices, and rental occupancy percentage if possible. You don’t need perfection but you are looking for a place that offers a low purchase price, higher rental rate and high occupancy percentage. It’s worth noting that if you are looking for a property inside of a gated community, there may be a monthly HOA (Home Owners Association) fee. The HOA fee will reduce the amount of money you will earn each month and annually. The HOA usually provides some type of common area maintenance like lawn mowing, security or gates that require a key or card as well as a pool and fitness center.
When deciding between properties, choose the property that is as close to move-in condition as possible. This house would need minor touch up like paint, trimming, caulking work and maybe a small appliance such as a microwave. Do not go into this by using the money you saved from your low down payment and spending $20k on a renovation before renting this out. This is not the time to do that right now. The benefit to living in this residence prior to renting it out is that you can spend a bit of time fixing small repair items over the length of time. And if something should break or clog, you can repair it before renting it out. When financing, the better the condition the easier it is for the loan approval.
Furthermore, if you are financing your purchase, you will need to be pre-qualified with a lender before the seller will review your offer. The pre-approval process will give you the amount that the lender is actually willing to finance based on your credit and income to debt ratio. You also do not need to use the full amount given. The lower the purchase price, the lower your down payment.
Already Own Property?
If you currently own your any property and have a bit of equity, you could choose to refinance. When you refinance, you can use that money to make a down payment on another property or improve the current property prior to renting it out. Another way to leverage your current property is to sell. If the market has done well and you have had your place a few years, consider selling. You can use the proceeds from your sale to upgrade to a slightly bigger place. If it is enough money, you could look else where and possibly purchase a 2, 3 or 4 family home.
Bonus Tip! If you happen to sell your primary residence you may be eligible to exclude tax on up to $250k from the gain of the sale. This amount only applies to a single tax filer. For married couples, you may exclude up to $500k.
Building Your Real Estate Portfolio
If you are not eligible for an FHA loan and are financing, your next property will most likely require the 20-30% down. Use the equity in your current portfolio to leverage the purchase for another. You can also save the rental income and use that towards your next rental property purchase. Look for something the same size or slightly larger in a good neighborhood because we both know – it’s all about location. Location also plays a big factor in the selling price so look for something that is a good location but is easily accessible. The lower the purchase price, the lower your down payment. And with each new investment property your cash flow increases.
Keeping Maintenance and Costs in Mind
It is common for those who have just begun to build their rental portfolio to manage their properties. This is called direct owner management. It works but may add stress to you since you are tied to the property personally and financially. The great rewards from owning an investment property come from the amount collected as passive income each month. This will allow you to travel and manage on your own time. If you are the handy type and have a great tenant, you shouldn’t have much to worry about. And if something does break, you should be able to take care of it quickly and efficiently. I do highly suggest that you have someone in mind for the following categories if you wish to have a team to work with you in the event that an issue arises:
- HVAC which stands for Heating, Venting and Air Conditioning
- Plumbing
- Electrical
- General Contractor and or
- Handyman
What questions or comments do you have about purchasing your first rental property? Email me by clicking here.
Asking $2250 which is on par with The Bond 1 bedroom market. Questions on this or another residence at The Bond? Contact us for all the details or email us about The Bond in Brickell by 
Anthony Spitaleri 