How to start?

[Daniel King]

Hello all! I’ll get straight to the point. I really want to get into real estate investing, and I feel as though house hacking is my best option to start with. Here’s the situation. I’m 18 years old, going to flight school for one year, and then I’ll be starting a fight career starting at a very low salary. In order to live in Dallas (where school is), they have rent for $800/mo, and of course I can rent for much more elsewhere. I feel as though renting is the opposite of what I want to do to start this journey, but with no credit (yet), no money (yet), what is the best way to break into this thing as young as possible? Thanks.

[Melissa Hartvigsen]

Hello @Daniel King,

First, I recommend reading Dan Sheeks "First to A Million: A Teenager's Guide to Achieving Early Financial Independence".  It lays out a plan for how to budget, build credit, and get into real estate investing (if that is what you want), or how to set up other income streams. The appendix of this book has an excellent "to do list" and additional reading that will help you.

Next, How to get the loan:

To piggy back off of @Erin Church to qualify for a standard loan you generally need at least 2 years of steady income history, at least a 640 credit score (though the higher the score the lower your interest rate).

Or, you need to have a qualified co-signer. They must have the credit and income history the bank requires but do not have to live in the property with you.

Once you have the above, you should shop around with different lenders to find out which loan program best suits your needs. Of course there are FHA loans, and conventional loans, but there are other loans sometimes called "Portfolio" or "Private Lending". The last two may have more flexible loan guidelines, but come with higher interest rates.

How to build credit:  One way to instantly get credit is to have a responsible adult with good
credit and responsible credit card usage add you as an "authorized user" to their account. Within 30 days, this gives you a real boost on your score.

If this option is not available to you, you can get a secured card through your bank or credit union. They basically have you set up a savings account that will pay the bank if you default on the credit card. After 6 months to a year, you may be eligible for a regular credit card, and then they would close the account and send you the savings deposit back.

The trick to keeping your score high with your new credit card is to never use more than 30% of the available credit, and to pay the ENTIRE balance every month. Example. If you have a $500 credit limit, the maximum you should charge on that card is $150. When you go above 30% of the available credit, the credit bureau actually deducts points from your credit score.

Part of having good credit is having a mix of installment loans (like home loans) and revolving credit like a credit card.

The rest of getting good credit is built on time and payment history.

Budget for your purchase:
I tell my clients to budget for at minimum 6% of the purchase price to be ready. That is because your loan program may require 0%, 3%, 3.5%, 5% or more down. The 6% number I use is to account for closing costs and additional expenses that are not typically financed like the home inspection and appraisal.  However, as a first time home buyer doing a house hack, you may qualify for some down payment or closing costs assistance. By shopping around for a lender, you can find these programs.

Finally, if you cannot purchase as soon as you want to, do not be discouraged. Keep building your credit, income, and savings so you are ready to go.

Best wishes,
Melissa