So you have no capital?

[Luis F.]

What can you do to start building capital that'll allow you to buy your first property? How much did you build up before buying your first property, and what exactly did you do with it after? I'd like to hear any ideas or past experiences.

[Jon Holdman]

Rian's answer is a common one for the real estate business. Whether your not you can have any success with that depends on you. The thought behind it, "increase your income", though, applies generally.

You build capital by spending less than you make and accumulating the excess. Two routes to that. One is to increase income, whether by wholesaling or something else. The other is to decrease expenses.

Lots of gurus increase their income by selling courses about wholesaling. In his book "The Four Hour Work Week", Tim Ferriss recommends that idea. Not wholesaling, which is not mentioned in that book and appears to actually be quite difficult, but teaching courses. Whether tutoring individuals in something you know or making some DVDs. But what you do is going to depend on your skills. Loral Langemeier talks about "the fastest path to cash". Doing something you already know something about is usually a faster path to cash than trying to learn a new skill.

If you take a hard look at the expenses in your life you may find numerous ways to cut. Some pretty painless, some less so. Dave Ramsey has an excellent book "The Total Money Makeover" about getting your finances on track.

If you're talking about buying and holding, there are ways to acquire the property with minimal up front cash. If you have good credit and good income, the hard money refi route can work. Buy with hard money, fix it up, get a tenant in place, wait six months to a year and then refinance with a new appraisal. Only works with good credit (720+, 750+ is better) and enough income that the rent doesn't need to be considered. Owner financing. Buying on land contracts or lease options. Buying subject to.

What you do need, though, is some cash for reserves. Rental property has a habit of waking up one morning and saying "think I need some money today". Most times its $50 to fix a faucet or toilet ($200 if you have to pay someone) or $300 for a furnace repair. Every now and then its a months lost rent when the tenant disappears after being a week late on the rent (that is, chooses the "quit" option when you post the "pay or quit" notice.) Once in a while its $2000 for a furnace or $4000 for a roof. Fannie Mae wants to see reserves equal to six months PITIA (A = anything else, like HOA fees).

Short of winning the lottery, though, there's no short cut to having a big wad of cash. You have to do something to earn it and you have to avoid blowing it.