30k starting out. Critique my plan?

Question

I have a full time job but I want to build a rental portfolio and become a cash flowing Real Estate Investor as quickly as reasonably possible. Currently I am renting an apartment until September of 2018. My plan now is to owner-occupy a house that I will buy at that time to get the benefit of not having to put down 20%. Then in a year I will repeat this, move to the new place, and rent out the old. This allows me to buy more properties as I will not need 20% down each time and will be buying them owner-occupied. The downside of this though is that I will only be able to acquire properties at the rate of one per year. I want to build my rental portfolio faster than that. The other options I see are to buy cheaper houses on which I can afford a 20% down payment, or to flip houses and use those profits as down payments on rentals. Once I own the first property I will be able to take out HELOC to potentially do this but I just want to know if this all makes sense and what options exist I may not be considering. Thanks. A lot of my plan centers around the fact that you need 20% down if you are not owner occupying. Are there ways around this?

Jack P. · Answer

@William Houstian,

There are a lot of ways around the 20-25% rule if you involve partners, private money lenders, hard money, etc., but I wouldn't recommend starting out that way. It's difficult to get your foot in the door because of inexperience, and you would assume a lot more risk.

As for your plan, remember that the lending programs that require less that 15-20% down also have a number of limitations. For FHA loans, you can only purchase a second property with FHA backing if your move is due to employment changes, etc. That is, you can't keep the same job and buy 3 houses with FHA loans in the same area.

If you want to make money fast, do a flip...or several. However, those take up much more of your time and require much more work and risk to make money.

I would recommend looking at purchasing a multi-family fourplex to gain some experience and take advantage of the benefits of being an owner-occupier. That, and take some time to set up your long-term real estate plan.

Peter Ulstad · Answer

@William Houstian

I agree with @Jack Pinney here, I wouldn't plan on getting a new FHA loan every year unless you plan on putting a new conventional mortgage on the existing properties. If you are planning on doing the owner-occupant thing, I'd also recommend going down the multi-family property road. The metrics are usually better.

Until you have a good grasp on what you are doing, I'd also caution you on the HELOC approach. While it seems like a good idea on the surface, over-leveraging yourself is an extremely risky strategy. Banks will generally only give you a line based on your equity in the property, so if you are only putting 3.5% down on each one, that doesn't leave any room for a HELOC.

Good luck to you, keep posting and let us know how its going!

Thomas S. · Answer

If your goal is to grow fast stay well clear of SFHs. The cash flow is lower, expenses higher and risk of a crippling vacancy way higher. Additionally you must compete with emotional home buyers that will drive up prices.

If you can do a 4 plex per year 4 doors beats a one door SFH hands down every time.

Derrick E. · Answer

I buy cheap houses paying all cash and collect rent payments. Most expensive house I have bought was the first one which was $30k and it rents for $800/month.

William Houstian · Answer

@Jack Pinney @Peter Ulstad thank you for the info! I will explore lending options. I definitely want to do owner occupy with an FHA loan at 3.5% down on a property that I rent out come September, be it a triplex or just a SFH. After that though, I will either need to put down 20% on rentals or find a creative lending solution so I don't have to. With the latter option, I'm told it will be difficult to obtain without a proven track record. With the former, it looks like I would have to either buy cheap properties or flip houses to earn that money. That's where I'm at.

30k starting out. Critique my plan?

30k starting out. Critique my plan?

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