I was listening to a Bigger Pockets podcast over the weekend and Brandon Turner, the host, presented a unique question to the guest. He asked, “If you could give five pieces of advice to your twenty year old self what would they be…?” This really got me thinking.
I thought to myself, “What pieces of advice would I give MY former self as it relates to real estate investing?” This may seem funny given I’m only twenty-eight years old but within the next twelve months Emily and I will reach financial freedom through our real estate investments. As in, our positive cash flow from our rental properties will exceed our monthly expenses - if we chose to retire, we’d have the monthly income to do so.
So again, I thought to myself, “If I was JUST STARTING OUT what direction would I give myself knowing what I know now?”
If you’re in this boat - just starting your real estate investment journey - and you’re interested in a life of financial freedom then PLEASE keep reading!
Alright, here’s the meat and potatoes of the advice I’d give my twenty year old self…
Buy a duplex using FHA owner occupied financing, rent out the extra rooms in the unit you occupy to friends, and rent out the other half to tenants.
Let's do a deep dive into what this ACTUALLY looks like and the associated finances - because contrary to popular belief this DOESN’T take 20% down or crazy amounts of money. I’ll break this down into three easy steps and the ins and outs associated with each step.
To obtain FHA owner occupied financing you’ll need to find a quality lender. FHA financing allows a buyer to put down just 3.5%. In the example I explain below this is less than $15,000 (using a $400,000 purchase price and assuming the closing costs are financed into the purchase price). Just like realtors, there are thousands of mortgage lenders out there. My advice, find a lender that plays within the small multi-family space. Yes, the realtor will help you find the ideal property but you’d be surprised at how often you’ll communicate with your lender throughout the buying process. Ensuring you have a quality relationship with your lender should be priority number one!
Step number two is to identify your buying criteria. This should include things like location, number of bedrooms per unit, level of finish, etc. If your criteria is any duplex in the Twin Cities that’s a “good deal” you won’t go anywhere - I can promise you that. When Emily and I were starting our investment journey we were EXTREMELY specific on our buying criteria: four-plexes in South Minneapolis with value add potential in excess of $100,000. This allowed us to become experts within our buying criteria. We didn’t get thrown by shiny properties that fell outside our guidelines. This allowed us to capitalize on the properties that did fall within our guidelines. In the example I highlight below - based on the advice I’d give to my twenty year old self - I recommend a S. MPLS duplex with three bedrooms, one bathroom in both units.
I’m skipping a couple important steps here but your realtor will be able to help identify properties of interest and bring you to closing with relative ease (so long as you have a good realtor!). What I want to dive into here are the finances associated with the duplex you just purchased!
Here’s what you’ll need to capitalize on the downer occupied duplex purchase… $15,000.
That can be a large figure for most of us - but if you can find a way to scrape together the above capital I can guarantee you your life will change FOREVER!
Below is an example of a duplex that recently went under contract near Emily and I’s first four-plex in the Whittier neighborhood. It’s two units (thus, a duplex!) with three bedrooms and one bathroom up top, and the same setup downstairs.
Let’s go through a few of the above figures line by line (p.s. this is a FREE tool on the Bigger Pockets website).
The asking price of this property is $390,000. You’ll notice I have the purchase price a shade over $400k - that’s because we’ve rolled the typical 3% in buyer paid closing costs into the purchase of the property. This reduces your up front obligation in the form of cash needed to close.
To the right, we have the monthly income for the property totalling $2,825 - that's broken down into the following:
Unit 1 (the unit you occupy):
Bedroom 1: $565 (rented to a buddy)
Bedroom 2: $565 (rented to a buddy)
Bedroom 3: This is YOUR unit!
Unit 2 (the tenant occupied unit): $1695
You’ll notice in the bottom right hand corner of the above chart we’ve accounted for ALL the expenses the property will incur. This includes things like the principal and interest payments on the mortgage, private mortgage insurance for the FHA financing, property repairs and setting money aside for large capital expenditure items like the boiler and roof, general property insurance, real estate taxes, utilities etc.
Now, here’s the best part!
After we deduct all the property expenses from the income the property generates there’s a net loss of just $240. Wait, wouldn’t this be a bad thing…? Nope!
What this means is that you just purchased a duplex for less than $15,000 out of pocket and you brought your monthly living expense down to JUST $240! If you’re renting now, then you know how much of a steal it’d be to have a living expense for less than $500!
What do you do from here…? You live there a year, paying just $240 a month in living expenses, all while saving all the money you WOULD have been spending in typical rents in the same area. Then, after one year (per FHA requirements) you move out and go do it again. Now, the property is cash flowing a positive few hundred bucks a month and you’ve saved enough money for a down payment to go do it again.
I’m doing my best to make the above as digestible as possible and there’s A LOT that I left out so if you’re curious about any of the finer points or have questions on any assumptions I made feel free to grab time to chat directly through my calendar here: Chat w/ Paul.
I look forward to hearing more about YOUR investment journey! I’ve made it a goal of mine to connect with as many people as possible and share what Emily and I have learned in our own journey towards financial freedom.
Posted by Paul Begich on