I believe buying rental properties is one of the best investments for increasing wealth and creating passive income. I am relying on my rental properties to provide me with enough income for retirement as well as the finer things in life. I have purchased 7 rental properties so far, and I am seeing at least 24% cash on cash return on all of them in the first year. I detail my strategy on purchasing, financing and finding rental properties here.
The biggest hurdle for most people when they start researching Real Estate as an investment, is the cash needed to get started. There are ways to invest in Real Estate for less than you think if you are just starting out. If you are looking to buy many rental properties like myself, then it is tough to avoid putting 20% down on investment properties. Many banks will even start requiring 25% down once you have four mortgages in your name. Most banks will stop lending to you all together once you reach ten financed properties. There are ways to finance more than ten properties, which will be discussed as we delve deeper into investing.
Loan and purchase cost
Depending on house values in your area 20% can be a lot of money! The houses I purchase are usually right around $100,000, which equates to about $20,000 needed for just the down payment. On top of the down payment, you will need to pay closing costs, which consist of pre-paid interest, insurance, recording fees, tax certificates, appraisals and other fees. It is usually safe to assume closing costs will be at least 3% of the purchase price.
You will also need to factor in repairs on the property and interest, utilities, taxes and insurance until it the home is rented. It will usually take at least two months to get all your repairs done and the home rented. I always try to get everything done and the house rented in one month, but it never seems to happen that quickly. On a house with minimal repairs, I still assume I will need $5,000 more after closing to get the house rented. It is always best to error on the side of caution and assume you will have more costs into a home than what your estimates tell you. For one thing, repairs always seem to cost more than you think and take longer than you plan.
Saving cash on the initial purchase
There are some cases where you can get into a property cheaper. You may find a gem that needs no repairs at all, but it is rare to find a home that is a great deal and in good shape.
You can ask the seller to pay part of your closing costs when making an offer. It is very common for a buyer to ask for 2 or 3 percent in closing costs to be paid by the seller. If the seller doesn’t want to budge on price, raise the price of the property to make up for the closing costs. The cash you save up front will make up for the slightly higher loan and purchase amount.
If you happen to be a Realtor or Real Estate agent you can also save a lot on each property you buy. I am a Realtor and save thousands on each purchase because I get paid a commission for my side of the transaction.
If you find yourself looking to invest and have saved just enough to buy and renovate a property be careful! There are always unexpected costs and delays associated with repairs. Make sure you have a decent cushion in the bank for the worst case scenario. I suggest at least 6 months worth of mortgage payments, taxes and insurance for each property you own as reserves. This would be money on top of the initial investment used for repairs and carrying costs.
It can take a of money to purchase a rental property. $30,000 is a big figure to most people, and really you should have more than that before you are purchasing homes in the $100,000 price range. You need to make sure you have enough reserves, if something were to go wrong. If you are purchasing more expensive homes, that number will go up significantly and go down if you are buying lower priced homes.
If you are willing to make some sacrifices, then it is possible to buy an investment property for much less than 20% down. You may have to live in the home for a year or pay a higher interest rate to secure seller financing. Again, I detail many strategies for getting into a property for less money in this article.