1. Do I need perfect credit to buy an investment property?
Absolutely not! Your goal should be to have a credit score of 680 or better to qualify for a mortgage. If your credit score is below 680 but above 600, you can buy real estate with hard money. Hard money has fewer credit standards for qualifying purposes, but more stringent terms (higher interest rate, interest-only payments, and higher points charged up-front).
You can use hard money to make flips and use capital gains to bring your personal credit up to par. If your credit score is below 600, you can wholesale property to other investors. Wholesaling involves taking a property under contract at your set price and then assigning your contract to another investor at a higher price. The average amount you can earn per wholesaler is about $5000. You can use this money to repair your credit. Now you may be wondering, “Why buy a rental property if I can make extra money doing flips and wholesale?” The answer is simple: Aim to earn money with “Wake up whenever you want”. Rental income produces passive income and builds wealth. Flipping and wholesale is still a job. Rentals are investments. If you are interested in repairing your credit, visit 100percentfinanced.com and look on the “Valuable Resources” page to find the credit repair organization I used to improve my personal credit.
2. Can I really buy a rental property without putting up any money?
Yes friend! Most of my deals have been done using little or none of my own money. If you can find a single-family property that you can buy, rehab, and pay closing costs for less than 65% of the After Repair Value (ARV), then you can get a hard money lender to give you 100% of it. money.
For example, let’s say a real estate agent found you a distressed single-family property that will be worth $100,000 after ARV. If you can buy it for $40,000, invest $20,000 in rehabbing the property, and $5000 in closing costs, you can own the property 100% financed.
Now, if you have a credit score of 720 or higher, you can apply for business credit and use those funds to buy single-family and multi-family homes. Personally, more than 5% of my properties (30 rental units) I have purchased with savings. 15% have been acquired through hard money. 80% have been acquired through business credit.
3. How can I make money on real estate with tenants, bathrooms, and taxes?
People assume that most of their cash flow (monthly profit from rental property) is eaten up by bad tenants, evictions, repairs, and increases in taxes, insurance, etc. With this false belief, many people stay away from owning real estate.
First, don’t buy low in the hope of selling high. This can cost you money to hold the property (maintenance costs) until it is sold, which can negatively affect your cash flow.
This is not investing; this is freaking out. There is a difference. Flipping is similar to gambling or investing in the stock market. Buying low and selling high is a speculative business model that is based on the market (something that is out of your control).
Investing is buying an asset to generate a monthly profit and holding it until the wheels fall off. My rents pay for my lifestyle and it took a lot of time and money to add them to my portfolio, so why sell them? Why not keep it and leave an inheritance to my children?
Most beginning investors are hurt by real estate because they don’t buy well. They do not factor in reserves for vacancy and maintenance in their cash flow analysis. Also, they do not conduct a property inspection and fix everything in advance. Lastly, they fail to do proper due diligence and place a section 8 tenant on the property. If you buy it right and follow a solid business model, then you can really make money in real estate.
4. Can I really quit my job and live on passive income from my rentals?
Absolutely! All you have to do is fill out your financial statement (income statement, balance sheet, cost of capital, etc.) to first see where you stand financially. When you find out how much it costs you to live on a monthly basis (everything from tuna, to toothpaste, to taxes), then you can buy enough rental properties that meet or exceed this amount.
For example, if you want to have $5,000/month. In passive income to live happily and pay all your bills, if you average a monthly profit of at least $200 per rental unit, then you can estimate that you need about 25 rental units to replace your paycheck. It is feasible to retire young through real estate in five years. I did it in four.
If you have decent credit and a little cash, you can tap into business credit, hard money, and other assets to get the financing you need to buy these 9 to 5 rentals. Retirement is having enough passive income to exceed your expenses, not based on age or a large amount of savings. Even if you enjoy your day job, it’s always wise to have more than one source of income.
5. Can I buy a rental property even if I don’t own the house I’m in?
Yes. Many investors I know rent because they love their apartment in a particular neighborhood. They simply see real estate as a muse for financial freedom and will use their rental income to one day buy their dream home.
Everyone should aspire to be a homeowner, as homeownership is the American dream. You can do what I did and buy a small multi-family property; lives in one unit and rents out the others. I got an FHA loan with a 3.5% down payment; He lived in one unit and rented out the others. That way, my tenants paid the mortgage and I lived there for free.
If you choose not to live in a multi-family property with other tenants, that’s okay. Owning a rental property before purchasing your primary residence will not hinder your chances of obtaining a mortgage. Actually, you should increase it since you have additional income to report through your rental property.
6. Why should I invest in real estate, especially if the market crashes?
When the market crashed a few years ago, property values fell (as did interest rates). To me, that created a perfect storm for the real estate investor: lower property values and lower interest rates should create a buying frenzy. Listen, now is the time for you to get as many properties as you can.
Let’s say you own a rental property, the market crashed, and your property’s value dropped dramatically. Why would you care? If you invest for cash flow (buy and hold strategy) and not to invest (buy low and sell high), then you don’t care about property value as your property is making a monthly profit. Also, if the market crashes, more people are renting and not buying properties (although they should). Lastly, when has a landlord lowered the rent due to a market downturn? With my tenants, they expect to get a rent increase every year, which further increases my cash flow.
7. How do I know if this is a “deal” or not and end up making a big mistake?
Tutorships. Starting out, I never closed on a property without introducing it to a successful mentor or group of fellow investors. Why? I wanted an extra set of eyes on every deal in case they could see something I didn’t. Use those training wheels until you’re mature enough to walk on your own.
A “deal” is a rental property that puts a monthly profit in your pocket. This again is called cash flow. See the formula to calculate an annual cash flow below:
Gross Rents – Taxes – Insurance – Management – Utilities – Landscaping – HOA Fees – Maintenance/Reservations Vacancy – Misc. Rates – Debt Service (mortgage, hard money, or trade credit payments) = Cash Flow.
Some of the things like property management and landscaping can be done by yourself. Also, you may not have to pay utilities, HOA fees, etc. Basically, cash flow is your gross income – expenses – debt service. That is all. Investing in real estate is simple but not intuitive, so make sure you have someone with a track record of success guiding you.
