Sep 25 • General discussion
Real Estate
If you’ve been thinking about getting into real estate, here’s one strategy I think more people should understand.
Instead of starting by purchasing a single-family home, consider purchasing a 2–4 unit property and living in one of the units.
Why 2–4 units?
Because properties with up to four units can still qualify as residential property for FHA financing, and qualified borrowers may be able to purchase with as little as 3.5% down, as long as they meet FHA requirements and use the property as their primary residence.
Now let’s put some numbers behind the strategy.
Let’s say you purchase a duplex.
You live in one unit and rent the other.
For simplicity, let’s say your total monthly mortgage payment is $1,600 and you’re able to rent the second unit for $1,600 per month.
The mistake would be looking at that $1,600 coming in every month and thinking, “Now I have extra money to spend.”
That’s not the strategy.
If you were already prepared to pay $1,600 every month for housing, continue putting that money aside.
$1,600 x 12 months = $19,200.
Now, real estate isn’t perfect math. You’re going to have expenses. There can be repairs, maintenance, vacancies, insurance increases, taxes, utilities and other costs. So I’m not saying you’re automatically going to have exactly $19,200 sitting in the bank after one year.
The point is that instead of carrying your entire housing expense yourself, you now own an asset that is producing income and helping offset your housing costs.
Meanwhile, you’re intentionally saving and preparing for the next property.
And that’s where this becomes a strategy instead of simply owning a duplex.
Your next purchase might be another duplex, a triplex or eventually a four-unit property.
Let’s say you eventually acquire a four-unit property and each unit rents for $1,300 per month.
That’s:
$1,300 x 4 units = $5,200 per month.
$5,200 x 12 months = $62,400 per year in gross rental income.
But pay attention to the word gross.
That does NOT mean you made $62,400.
You still have to account for the mortgage, taxes, insurance, repairs, maintenance, vacancies, property management if you use it, utilities you’re responsible for and reserves for the things that will eventually go wrong.
This is also why I wouldn’t immediately start treating the cash flow from your first few properties as money to live on.
You’re still building.
The strategy is:
Acquire the asset.
Stabilize it.
Control your expenses.
Build your reserves.
Save.
Reinvest.
Acquire again.
That’s how one property can potentially become two, two can become three, and over time you begin building an actual portfolio.
The goal isn’t simply to say, “I own rental property.”
The goal is to build assets that produce income, build equity and eventually create enough sustainable net cash flow to give you options.
One important note: FHA financing has occupancy, borrower, property and underwriting requirements. There are also additional requirements for some 3–4 unit properties, and buying your first property with FHA does not mean you’ll automatically qualify to use another FHA loan for the next one.
So don’t copy the example numbers and assume they’ll work in your market. Run the numbers on the actual property, understand the financing and have reserves.
The numbers can change. The strategy is what I want you to understand.
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Real Estate
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