Setting Conditions

I always get a chuckle out of these “buy real estate with no money down” seminars that roll through town from time to time. Unless planning to live in the investment property, most banks will only go 75% loan to value on a conventional loan for an investment property.

This means, when securing a conventional mortgage from the bank, 25% down payment will be required. Banks aren’t going to let an investor off the street have a 100% loan to value mortgage for an investment property. The buyer could just walk away and leave the bank holding the bag! Bottom line, it usually takes cash on hand to invest in rental properties.

Before shopping for that first investment property, conditions must be set. Building a good credit score and debt to income ratio are important first steps. It also takes saving up enough capital!

My wife and I were in our mid 30’s before we saved up enough money to buy our first investment property, a duplex that we occupied. Setting the conditions is a lot more than just raising the down payment and securing financing. Before calling a real estate agent and shopping for the first property there is a lot to consider.

In my upcoming new book “Collect Rent, Don’t Pay It: A Beginner’s Guide to Rental Property Investing,” I take a look at what I think are important conditions that must be set before taking the plunge into real estate, even before shopping. First of these conditions is establishing investment goals.

Establishing goals will fundamentally drive the type of property to look for. If desiring a rental property that is likely to produce a monthly income but may appreciate more slowly in value, then multi-family may be a good choice.

If just looking for a safe place to invest some money beyond the stock market and monthly net income is less important, then perhaps a single-family property in a good location may be the best option.

In either case, it is extremely important to remember real estate is a long-term investment. If needing to “cash out” the investment in five or less years, real estate is probably not the right place to tie up your capital.

There are plenty of folks who have made a lot of quick money flipping real estate but flips are a totally different way to invest and I certainly don’t have any experience with flips!

My wife and I determined our long term goal was to invest in rental properties that produced a good net monthly income that we could grow through reinvesting and also use as capital to buy more properties. A snowball effect, if you will, to grow our rental business.

As tempting as it was, we didn’t touch the income from our properties for nearly 12 years. We reinvested every penny. We are partial to multi-family because of the generally higher monthly net income, but we have also successfully invested in single family rental properties as well.  In fact, we bought the single family home we live in now with the intention of turning it into a rental some day!

How long will you use rental income to grow the business? When will you start taking owner draws? Will you dispose of the investment in 10, 20 or 30 years? Important to note, an investor’s capital is pretty much locked into the investment for that timeframe. Time is a primary consideration when establishing real estate investing goals.

Only recently did we start using net income to augment our living expenses. Someday we intend to use the income as a means to early retirement. We have no definite plans to begin disposing of our properties until a need arises or we are just ready to move on from real estate.

However, we are very comfortable in the fact we could use the equity in our rentals to completely pay for our kids college, our primary residence mortgage, a vacation home or any combination of the three. Investment goals are an important first step, especially when considering rental properties!  

Want to learn more about the financial truths that have helped our average American family achieve success? Check out my book, Millionaire on a Worker’s Budget: Five Financial Truths to Build Wealth on sale now at Amazon!

The commentary provided in this blog is for informational purposes only and is not intended to be a source of financial or investing advice.

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