The Secret to Financial Success When Getting Into Real Estate
If you’re a smart investor you’re going to figure out how to maximize the return on your investments but who wouldn’t want a head start? Luckily, the U.S. Government and your decision to invest in real estate provide that option. Right now, months into a pandemic and the uncertainty that comes with it, is a great time to remind ourselves that from crises come opportunities. In 1934, in the wake of the Great Depression, Congress passed the National Housing Act and over 85 year later Americans interested in buying a home can still benefit and set themselves on the path to financial success...if they know how to.
At the heart of the National Housing Act was the creation of the Federal Housing Administration (FHA). The goal was to “encourage improvement in housing standards and conditions and to provide a system of mutual mortgage insurance…”. Quick background: because of the economic conditions at the time, it was nearly impossible to buy a home and equally as difficult to get a loan to do so. It was common for banks to ask for 50% down and require the loan to be paid off in just 5 years! So the government stepped in to help stimulate the housing market. So how do you take advantage in 2020?
Both Nexus Property Management™ owner and CEO, Nick D’Agnillo, and General Manager and Vice President of Sales, Greg Rice, know the playbook because they used it to spearhead their own financial success. Both own multiple properties, all of which are multi-unit homes.
STEP 1: Use the First Time Home Buyer Opportunity to buy a 4 unit home.
The American Dream that culture and school teach us is that we should get a job and immediately buy a suburban home with a white picket fence and a dog in the yard with our 2.5 kids. Nope!...don’t do it!...or at least don’t start there. By purchasing a multi-family unit with this one time opportunity you put yourself in the driver’s seat for future real estate purchases that you couldn’t pull off otherwise. The Government is cutting you a deal to get started so spend it on something that will put more money in your pocket. The FHA will insure a first time buyer with an affordable loan and all you need to do is put 3.5% down! Compare this to the typical 20% needed and the value is obvious. Let’s add some numbers to make sure that sinks in: If you want to buy a $300,000 home, all you need to pay up front is $10,500...instead of $60,000 at 20%. So for that value, do you want something that is just going to sit there or something that is going to generate income?
It’s an incredible opportunity, but if you buy that suburban home, all you’ve done is saved yourself a bunch of money to satisfy your comfort. By investing in a 4 unit home, you give yourself the opportunity to live in one unit and to collect rental income from the other three. While you don’t have your white picket fence (yet), you also won’t have to pay toward your mortgage because your tenants will be doing that for you. In essence, you’ve got a $300,000 home that cost you just that initial 10 grand. It isn’t complicated, it’s just not widely known. And for those who do figure it out, it’s often too late. Once you’ve used your First Time Buyer Opportunity, it’s 20% the rest of the way.
Remember, the government created this to make housing affordable, so there aren’t hidden risks and strings attached. To qualify, all you need is a credit score above 580, steady income and proof of employment, a debt-to-income ratio below 43%, and the home you purchase needs to then be your primary residence.
STEP 2: Refinance And Use The Equity From Your First Home To Purchase Another
To be eligible for an FHA cash-out refinance, you’ll need at least 20% equity in the home you bought. By contacting a trusted mortgage lender you can find out more, but the story goes like this: You move into your apartment and patiently wait for the value of the building to increase (which it is constantly doing in this market) while your mortgage is paid by your tenants and you live for free. When the time comes that you’ve accrued that 20% equity, you can look into refinancing. You’ll need to contact a lender and they’ll begin the process of getting your home appraised. If it makes sense for you, you can then take a loan of up to 80% of the home’s value per the appraisal (banks have been a bit more strict/less generous due to COVID but they’re still playing ball). Once you have that loan, you’ve got the 20% you’ll need for your next real estate down payment in your hand.
SEEMS TOO EASY:
Without experience or a real estate background, this probably seems too easy or maybe you’ve still got some questions. One way to be sure you’re getting all the answers and the most support possible is to hire a property manager who is experienced in and specializes in Buyer Agency Services. At Nexus Property Management™ we proudly offer real estate buyer representative services in the form of our NVest® program. We provide consultation, property search and analysis, and will accompany potential buyers on property showings. We’re there to advise when it comes to making an offer and in signing and creating contracts. In searching for properties we locate properties that fit your criteria and price range, along with full analysis, financial models, and ROI forecasts.
With Nexus in your corner you’ve got a proven expert guiding you in some of life’s biggest decisions. Take one of our most successful clients, Jesse Mayo. Three years ago, Jesse didn’t have any real estate background. He took the refinancing advice outlined here and he now owns six apartment buildings! He is a perfect example of what can happen when you know the game and you’ve got someone on your side to support you as you go.
STEP 3: Repeat
Whether you continue to buy rental properties, like Mayo did, or you then decide to buy that family home with the fence now that your money is working for you through real estate investment, the equation is a no brainer. It’s a shame that this game plan isn’t more widely known. As the Property Management Authority®, we will do our best to continue to spread the word. If we can help you on your journey, don’t hesitate to reach out.
Mick Lefort is the Vice President of Operations for Nexus Property Management™. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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