Time and time again, I sit at the closing table with people who are buying their first home and the conversation always ends with, "My next goal is to buy an investment property." Of course it is a great idea to aim to buy investment property, however it is so much easier to reach that goal when you don't have an existing mortgage that will hurt your debt-to- income ratio, decreasing your buying power. What am I trying to say here? BUY THE INVESTMENT PROPERTY FIRST.
I would like to clarify that as a Finance guy, I always think of the financing side of investments. So I think about how a loan should be structured and how to get it approved.
Today, I am going to share the five reasons I chose to buy multi-family properties BEFORE I purchased a nice home for myself and why I encourage others to do the same.
1. Lower Down Payment
When you are purchasing your first property, as long as it's 4 units or less, you can qualify using an FHA loan. In this case, you would need to live in one of the units for a minimum of one year. Your down payment, if using an FHA loan would only be 3.5% of the purchase price. Let's say you're buying a property with a purchase price of $650,000. Your down payment would only be $22,750. This is significantly less than the 25- 35% down payment you would have to give if you bought this property using a regular investment loan.
2. Rental Income Helps Increase your Buying Power
Let's say you are buying a 4-unit property. You would live in one and rent the other 3 units. For the qualification of the loan, you would be able to use 75% of rental income generated from the 3 units as your income to help increase the purchase price you would qualify for. This was the very reason, I chose to buy multi-family properties first.
3. Cash-Flow
Let's say you buy a 4-unit property. You would live in one and rent the others. Let's say the rent on the other 3 units is $1,500 per door. That would give $4,500 to help you pay your mortgage and bills. Once you decide you are ready to buy another property, you would rent out the unit you were occupying and increase your cash-flow even more.
4. Appreciation
On average, properties appreciate approximately 5% per year. This means a property that you buy at $650,000 would appreciate approximately $32,500 a year. Of course, there are instances where a property's value will appreciate more than 5% a year. Let me give you an example. I bought a property for $560,000 in 2019 and today in 2023 that property was appraised at $950,000 and before you ask, yes, it's a multi-family property.
I still consider myself to be fairly new to the business, however 8 years have flown by and I am still constantly learning to master my craft. They say it takes 10,000 hours of practice to be considered an expert in a field and over the last 8 years, I have passed that milestone. I guess this means you could consider me your Mortgage Expert. I would hope that in knowing how long I have been in business, you would consider my advice to be credible and use it create your plan to break into the world of investing. You need a great real estate financing expert on your team to get you approved for your investment properties and my team and I are ready to be of service.
This year, create your plan and start executing. There is an abundance of opportunity for those who properly prepare. Make 2023 your year of growth.
Happy New Year!
-Alfred
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