I spent from 2006 into 2009 fighting the good fight, but slowly coming to the realization that I was in a financial position I could not fix. I got good at borrowing money and the banks I worked with were happy to lend to me. I overpaid for several single-family houses and small apartment buildings that I bought with little money down. That meant little equity and no room to reduce rents as the economy in southwestern Ohio hit the skids. I filed for bankruptcy in April of 2009.
There are many books, seminars and home study courses written by so-called gurus that teach how to buy houses with little or no money down. I question the ethics of most of these purveyors of get-rich-quick schemes. These tactics have no place in my business today.
Crawling From My Wreckage
Within just a couple of years after the crash and my subsequent bankruptcy, I was anxious to get back into investing. I was no longer interested in borrowing money. Unencumbered real estate — real estate without debt or mortgage — is a beautiful thing to me. My goal was to acquire as much as I could afford.
An investor client of mine was in the habit of buying multiple properties with cash at sheriff and tax sales at rock-bottom prices. These properties were in bad shape — literally uninhabitable most of the time. My investor friend would then sell them to me via land contract at a substantial markup.
My purchase prices of these properties ranged from $2,500 to $10,000. As a rule, I would make interest-only payments for 6 to 12 months while I put the property back in service with my cash and effort. After the initial 6- to 12-month period, we would term out the loan usually over 30-36 months.
It’s Going To Take Some Money
Buying real estate takes at least some cash, either your own, a partner’s or a bank’s. Accessing bank financing may be easier today than it was a few years ago post-crash, but for most of us, a fairly significant down payment will be required — figure 20-25%.
Furthermore, depending on the type of mortgage you qualify for, the condition of the investment property generally has to be fairly good. At a minimum, the lender will look for a functional heating system, running water and electricity.
Here’s What Is Possible
It is possible to buy property in a place like Springfield, Ohio, and other Midwestern small towns and rural areas for very little money. However, these properties will require significant time and/or money to put them into service. For instance, you may find a $10,000 property that will require another $25,000 in repairs. At the end of the day, you’ll have a $35,000 property.
On the other hand, you may buy a property in good, if not quite move-in, condition for the same total investment of $35,000. Either approach is going to yield a property in your portfolio that could rent for $600 to $700 a month, depending on its number of bedrooms, yard size and garage availability. Using real estate websites, you can verify local rental rates across the country to pinpoint the numbers for your market.
Pay Now Or Pay Later
The first approach requires a lot less money upfront and usually a huge investment of sweat equity. It also allows you to improve the property as you have cash available, either from other rental properties in your portfolio or your full-time job.
The second approach is probably preferable if you have cash upfront or bank financing. However, the interest and principle required to service bank debt are going to impact your cash flow, because you have to pay the bank back over some period of time. Obviously, if you can pay the bank back over 15 years instead of 10, you are going to keep more money in your pocket each month because your monthly mortgage payment will be lower.
Building Your Portfolio On A Shoestring Budget
Whether you’re recovering from a setback or getting started with your first property, here are a few tips to build or enhance your real estate investment portfolio with as little upfront cash as possible:
• First of all, go slow. You may end up viewing and evaluating 20-plus properties for every one you make an offer on.
• Find a real estate agent in your target market who specializes in working with investors. You want an agent who understands the numbers like you do.
• A conventional loan on a $35,000 property will require at least $7,000 (20%) down, plus some lender closing costs. Once you get rolling, your investment properties should generate at least some of the down payment money you will need to acquire subsequent properties.
• There are often wholesale sellers in markets like these. Wholesale sellers buy distressed properties at rock-bottom prices and quickly turn them over as-is to another investor to put in service. Your agent or lending partner may know someone in the area who does this, so network to build these connections.
• One surefire way to start your investing career is to buy a duplex or a triplex as your personal residence and rent out the other units. Assuming you can afford the mortgage, the rent you collect from the other unit(s) will generate extra cash to funnel into your investment savings account.
• You may also be able to tap the equity in your home for an initial down payment as well, but of course that has to be paid back. Be aware that you would put your personal residence at some risk by doing this.
No Free Lunch
If real estate investing was easy, everyone would be making a lot of money. The only easy thing about it is the ability to lose a lot of money relatively quickly. Successful real estate investing requires diligence, energy and know-how. My hope is you can learn from my mistakes and avoid making the same ones yourself on your path to a thriving investment portfolio.