Last Updated on February 17, 2022 by Mark Ferguson
Real estate is one of the best ways for the everyday person to make it big but it is not easy to get started, let alone buy another rental property! It takes money, perseverance, and guts to buy real estate and use it for an investment. A lot of people want to become investors but never pull the trigger. While real estate can be hard, it is not as hard as many think it is if you use the right strategies. I have been investing for many years, and real estate has made me many millions of dollars, but I did not start with a lot of money or properties! With prices increasing in many parts of the country it has become even more difficult to get into real estate and that is why these strategies can be even more important to use. If you want to build wealth, real estate is one of the best ways to do it and it may not cost you as much as you think! But how much exactly does it cost to buy another rental property?
The video below also goes over these strategies in detail.
How much money do you normally need to buy another rental property?
A typical investment property will take at least a 20% down payment plus you may have to pay closing costs, make repairs, and need reserves as well. When buying rentals these costs can really add up as you can see below:
A $100,000 rental might take:
- $20,000 down payment
- $3,000 closing costs
- $20,000 in repairs
- $5,000 in reserves
- Total: $50,000 plus
A $200,000 rental might take:
- $40,000 down payment
- $6,000 in closing costs
- $30,000 in repairs
- $10,000 in reserves
- Total: $85,000 plus
It can take a lot of money to buy an investment property the traditional way and this assumes you can find cheap properties in your area! You may be in areas with much more expensive rentals that take much more money. There are some ways to decrease these costs like buying properties that do not need repairs or asking the seller to pay closing costs but you will still need a significant amount of cash.
Do you always have to put 20% down on rental properties?
In the past, many banks had investment property loans that required less than 20% down, but that was before the last housing crash. After that crash, the little down investment property loan virtually disappeared and has not come back. While it may be really hard to find a bank loan on an investment property for less than 20% down that does not mean all hope is lost!
There are ways to buy investment properties without using investment loans or without using banks.
I am not suggesting doing anything illegal or committing loan fraud. There are legit ways around putting 20% down on investment properties. You can also do what I did which is use equity from the house I lived in to buy my first rental property. I refinanced the home shortly after buying it and took $50,000 out tax-free since loans are not income and taxable. You can also buy as an owner occupant and then turn the house into a rental, house hack, use private money, or use hard money to buy and then refinance into a longer-term loan. Some of these strategies are super easy and some are a bit more complicated!
Own to rent strategy
I like to call this strategy own to rent instead of rent to own. You buy a property to live in as an owner occupant and after at least one year you turn it into a rental. The cool thing about buying as an owner occupant is that you can put very little money down on the home. There are programs with 3.5% (FHA), 3% (conventional), and even $0 down (USDA, VA, NACA) for owner-occupants. Most owner-occupant loans require you to live in the house for at least 1 year, but after that year you can move out and rent the home. If zoning is correct you can rent out part of the home while you live there as well. The key is that you must live there, which means you occupy the home more than 50% of the time.
When using this strategy it obviously means you must be flexible and willing to move often as well as be willing to live in properties that would make a good rental property. Not every property will make a good rental and you have to make sure the property will make money! After you live in a property for a year, and rent it out, you can then buy another property using an owner-occupant loan. Some banks may question this strategy after it is used a few times but there is nothing wrong or illegal about it.
House hacking
House hacking is very similar to the strategy used above except that you buy a property with the intent to live in the property and rent out the property at the same time. Most people buy a 2 to 4 unit property to house hack because you can still get owner-occupant loans on properties that have 4 units or less and you have other units that can be leased.
The big advantage of house hacking is that you can build a rental history from the very beginning. One problem own to rent investors have is that banks may not count rental history right away which makes it tough to qualify for a second house. In an ideal house hack situation, the other tenants will completely pay for the property with their rent allowing the owner to live for free.
Cash-out refinance
Not everyone wants to live in a house or multifamily property that they can then turn into a rental property. If you don’t want to move all of the time or you have high standards for living, you can buy a house to live in that you love and use the money from it to invest in rentals. This is the strategy I used although it wasn’t a strategy from the very beginning.
I bought a house for $210,000 in 2009 that was a great deal. I know many of you will say it was easy to get a deal back then, but I still get deals today too. I flip from 20 to 30 houses a year and get deals like that or better. The house was worth about $290,000 when I bought it and refinanced it less than a year later taking out more than $50,000 in cash. I used that money to buy my first rental property and eventually, it helped me buy my second rental property as well.
Private money or hard money into BRRRR
Private money and hard money lending is a bit more complicated but another option for those without a lot of cash to invest.
A hard money loan is a loan from a company that specializes in lending to investors. The loans have very high-interest rates (7 to 12%), high fees, are short term, and some other drawbacks but they often can be obtained with 10% down or less, and they can cover the repairs on a property as well.
A private money loan is from a friend, family member, co-worker, or some other associate you know. Some hard money lenders will call themselves private money lenders, but that is not who I am talking about. Private money loans often have high rates as well, but usually have lower or no fees, and the lenders are more flexible since you know them! I use private money all the time to buy flips and rentals with no money down but I have built some great relationships in order to do that.
Once you get the loan and repair the property or find renters you can refinance the property with a regular bank to get a lower interest rate and longer-term. This assumes you got a great deal or added a lot of value to create equity in the deal that would allow you to have an 80 or 75% loan to value mortgage.
This strategy is commonly known as the BRRRR strategy which stands for buy, repair, rent, refinance, repeat!
This is a very risky strategy as many things can go wrong!
Partner
Another way to buy your first rental property is to find a partner who will invest with you and front most of the money. These techniques are a little trickier but still possible. I have used a partner on a couple of my deals as well. Technically I had a partner on the first flips I did. That partner was my dad! I made a very small percentage of the profit and also got paid for the manual labor I would perform on the properties.
Other investors often make the best partners or people who have a lot of money and not much time. If you can learn to get a great deal, manage the repairs, and manage the property it can work out great for both sides.
Guidelines for buying your first rental
I have listed a few ways to buy your first rental without a lot of money but that is just one part of investing in real estate. You need to make sure you get a great deal, the property cash flow, it is in a decent market, and you can handle managing the property or finding a property manager. I go over all of these things in other articles on the blog, on YouTube, and in my book: Build a Rental Property Empire. That book has sold more than 100,000 copies and is available as a paperback, ebook, and audiobook!
Conclusion
Buying rental properties usually works out to be an amazing investment but it is not easy getting started, especially if you do not have a lot of money. Luckily, there are many ways to invest without using a traditional investor loan from the very beginning. I started out using some of these strategies and still use some of them today. I wish I would have used more of them when I was younger!
Source: investfourmore.com