The biggest challenge to building a real estate empire is funding the down payment for all of the houses. As you grow, you will find that it becomes more challenging, especially after you buy your fourth house.
While you can buy up to ten houses, after you cross the threshold for the fourth it becomes more expensive for the down payment. Plus you can’t forget the Reserve Requirements for any house you buy after the first one. As with anything in Real Estate; if there is a will, there is ALWAYS a way.
Funding the Down Payment:
While the recession was awful for many people, the one positive consequence is that it has lowered prices in some areas to where the mortgage is below rent. When we bought our fourth house, if we had stayed there for three years we would have saved $9,000 even with a bathroom repair before principle and potential tax benefits.
This is amazing news and everyone from the first time home buyer to the investor who is looking to build an empire should take advantage of this. Once you get over the large debt that is incurred with buying homes, you can see the amazing potential with being able to finalize a home purchase and have someone else pay it off.
The key for many is often the downpayment. Depending on how you buy your house this could be lower than you expect. The key is to think outside of the box!
0% – Low Down Payments
If you are new in this field or you only own a few houses there are some AWESOME programs available that require little to no money down. The VA loan is 0%, the FHA is 3.5% and many institutions such as Navy Federal offer their own special program. Personally, we used the VA loan twice (splitting it is awesome). We also have friends who have used the FHA loan. Both of these are great ways to get your foot in the door.
I am often asked what to do when you have exhausted these simple types of loans. Most are not sure where to go next. The answer is not so simple because it depends on if you are trying to live in the house and rent it out later or if you are buying it as a rental from day one.
1. If You are Going to Live in the Home…
The loan that we personally have started using is the 5% conventional loan. This works for us now that we have used up all of our first-time home buyer loans. We have even taken a slightly higher rate and were able to have the PMI waived. Yes, it costs a little more in the long run, but it is worth it for us to have the PMI waived from the beginning.
2. If You Buy a Home as an Investment…
Once you start buying pure rentals, one is required to put 20% down for less than four houses owned or 25% for more than four houses. This is when our frugal living has been the key to our success.
While there are many people that will go for alternative sources such as flipping, borrowing money from friends, owner financing, having partners, etc., we personally have preferred to keep it all between my husband and I. We have grown our routes to finding ways to finance the next home by living frugally (How We Reduced our Living Expenses by $1,000 a Month) and using the rental profit on the next home’s purchase.
Alternative Down Payment Sources:
In some areas the down payment can be really high. That is where living outside the box comes into play. Meanwhile here are several alternatives…
- Home Equity Line. This means you can pull the equity out of another house and use it to fund a future purchase. This way you can leverage the equity in one home to buy another home.
- Borrow Money From Family. If you are going to live in the home, you can qualify for the funds to be “gifted to you.” If this is an investment, you can receive a gift so make sure you are taking that into consideration when you are planning.
- Use a 0% Interest Credit Card. We have moved money onto a 0% interest card. While you still have to be able to qualify with the added down payment, this is a great way to move money around. If you are active duty military, American Express has a fantastic 0% interest rate for the life of your military service. Here is more information about the offer: 0% American Express Card.
It is important to remember that if you are borrowing money, it is going to have to be counted against you when the mortgage broker is qualifying you. While you might be able to find the down payment, that added debt might cause you to not qualify for the loan under other rules. So work with your mortgage broker to make sure you achieving your goal results.
What about you? What are your tips for funding your next home?0