Becoming a first time Landlord
By james on February 26, 2014
So you want to become a real estate investor..... How to begin? First of all, I applaud you! Most don't get the gumption to act on their intuition about owning investment real estate in Portland, but here you are- You had the idea, and now you're doing a little bit o' internet research. Most people actually give up before even getting this far, so lets keep pushing!
How does one get more exposure to the real estate market with limited resources?
Q: Buying a rental property usually requires at least 20% down right?
A: wrong! you can actually purchase a single family residence as an investor with 15% down
Well- that's great, but it doesn't really help me because I've only got about 5% down.... Well, here's where I tell you how to buy another property with 5% down. The trick is that you can buy a house for yourself, and live in it for a while (like at LEAST a year, or better yet TWO years), and then you can purchase another Primary residence while RETAINING the original residence. This is how most of us regular folks become first time landlords. They/we don't buy rentals, but rather -collect and retain primary residences over time. Please don't mis-understand this as some kind of loan scheme, you MUST truly occupy these properties, and the rules allow for it.... but it does take a lot of patience. Also, this method greatly impacts/inhibits your ability to generate cash flow. Because this strategy has you buying with lower down payments, the mortgages you get will have higher payments-- ergo: smaller spread between holding cost and rental income.
The easiest way to do this is to simply purchase the next house without selling the old. HOPEFULLY your income will support both the old mortgage payment AND the new mortgage payment and assorted other debt payments you might have. From my perspective as a mortgage professional, this an example of the SIMPLEST path forward, but I know- Its not always that simple.
What if you DON'T make enough to support all the debt of the house you want to keep and the house you want to purchase? You've got 2 options- One is : pay off enough installment debt to reduce your debt to income ratio into an acceptable level.
Option 2 is the HARDER PATH- FNMA guidelines allow borrowers to count the rental income on the departing residence if the following criteria are met:
- minimum 30% equity in departing residence (verified by a full residential appraisal)
- signed lease agreement from the new renter that will be moving in
- evidence of receipt of the security deposit from incoming renter
- cash reserves of 6x PITI of both departing mortgage and the new mortgage
SO this is a bit of a higher barrier to say the least- but I have lots of clients that have had a HUGE equity pop since 2010/2011 purchases, and I'm seeing that these items are no longer unreasonable to acquire. (*PS- the 6x PITI in reserve part is almost always covered by an IRA account)..... Speaking of IRA accounts >>
Here is another novel approach to becoming a landlord- USE FUNDS IN YOUR IRA! If you have a self directed IRA, there are ways to use that money to buy rental properties. Please contact me for details about how to do this- it's ninja/black-ops level financial technique. The property purchased with the IRA funds, can actually exist as the asset in that IRA account! The income collected with this real estate can potentially come to you tax deferred just like any other IRA asset.
Here is a link to a great team of Portland professionals who to my knowledge have the most experience with helping investors accomplish this >> USING IRA MONEY TO INVEST IN REAL ESTATE
There are HUGE benefits to being doubly or triply exposed to the Portland real estate market!