Starting REI with low income, high capital

[Rory Kinnear]

Hi folks, I've been researching how to get started with REI (house-hacking/duplex, or SFR with roommates), and am wondering what sort of strategies people use when starting off with lower income but high starting capital (inheritance). I see TONS of advice for the reverse situation. It seems conventional Freddie/Fannie loans are capped based on income severely limiting my financing and in Los Angeles I'm finding I would need to put over 50% down (which I can, just uncomfortable being so un-diversified). The FHA loans can get me much more financing but have such higher costs and really add up making that an unattractive option.

Thoughts? Strategies? Is it worth the FHA costs to be able to secure more financing, or just load up personal capital on my first property?

[Scott Trench]

I think that for me, personally, I have the goal of attaining early financial freedom aggressively, but also like to maintain a conservative financial position with lots of liquidity and a hefty positive margin between my income and expenses.

If I had a huge lump sum of money that I came into all at once (and was otherwise unlikely to be capable of rebuilding said sum in less than 5 years), I'd be looking to invest it consistently, according to a system that I could sustain. I would likely not, for example, invest more than 50% of the large lump sum into one real estate investment starting from a position as a complete newbie. Instead, I'd invest a third, a quarter, or less, in a cash flowing property in or out of state, after at least a few months of planning, research, self-education, and networking. 

Then, between the savings from my personal life, and the cash flow generated from the real estate investment, I'd consider making another investment a year or so after the first. After a few years, and after my career continued to gain steam, after my properties produced more and more stable cash flow, and my reserves grew, I'd be able to gradually invest the entire lump sum, in between 3-7 periodic investments, hopefully preventing me from buying all at once at the wrong time in the market (almost no one can successfully time the market). 

During this time, I would probably make sure that I took advantage of the cash infusion, and shore up my reserves, and diversify the investment in CDs, bonds, and other investments that are relatively safe in the short-medium term.

This is one perspective, so I'm sure that there are others that have different thoughts. I'm not trying to say that this is the best way to do anything, just that this is a way that strikes me as something I'd be tempted to consider as an effective, yet reasonably conservative way to invest in the asset class that I believe will help me build the most wealth over time, without putting myself all at once in a position that I might be unable to sustain. 

You ask about financing. One potential advantage to this strategy is that you might have the ability to qualify on a property that you purchase with just 1/3 - 1/5 of this total amount. After a year or two of experience, this rental income will may help you qualify for additional financing, and may be counted as part of your income. This is what has happened for me, and my real estate investments actually significantly increase my purchasing power because 75% of the gross rents is counted toward my income, and this is still significantly higher than the debt service on my properties. However, there is no substitute when it comes to financing to simply talking to a couple of lenders. Find a few local lenders through referrals from trusted friends or family, or your own research elsewhere, and ask about your options. You may have more than you think!