Monday, July 3, 2023

The Best Rental Property Strategy for Beginners



Getting started on the road to rental investments is generally the most difficult obstacle for people without 25-30% down payment.  That is where buying the property as an owner occupant can be a huge advantage.

The first example would be to buy a home to live in with a minimum FHA down payment of 3.5%.  If you find the right seller, they may even participate in paying part of your closing costs.  This type of loan requires that you live in it, which if it is a single-family property, means you won't be able to rent it while you are living in it.

There is no set period but after living in the property for a while, say a year or so, you buy another single-family home to live in but instead of selling this home, you rent it.  With rents as high as they are currently, it will probably even have a positive cash flow.

The rub may be in putting together another down payment and closing costs to acquire the second property.  There is no physical limit to how often FHA will allow this if there is a legitimate reason for moving like closer to work or family, better floorplan, safer area, or others.

FHA allows a buyer to buy up to a four-unit building on an owner-occupied loan if they live in one unit.  While the buyer may not have the income to qualify for the payment on a four-unit, the lender will consider the rents to be received from the other units.

In this type of situation, the cash flow from each of the three units could reduce the amount needed to pay for the portion of the home you occupy. FHA, VA, and Conventional all allow for owner-occupied financing for up to four units.

Multi-unit acquisitions build the portfolio faster, but the problem is that local zoning laws may have restricted them to certain areas.  Some cities may have duplexes but not three and four-unit properties.  Properties with more than four units are not eligible for owner-occupied financing.

This approach could allow a person or couple to put together a sizable group of rentals with a minimum amount of down payment within a few years.  Interestingly, after investors have several properties, their equities grow to allow them to buy others and financing becomes easier because lenders are more confident with experienced investors.

The contrast to this approach is for a person or couple to buy a home to live in and as they start spending money on decorating and fixing it up, the ability to qualify for investment properties becomes more difficult.

To find out more about this type of strategy to acquire rental properties, contact your real estate professional.  You can also download our Rental Income Properties.

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