Buying Our First Property on a Budget- And How You Can Too
Shortly after being married, two things happened: (1) We started saving for our first house, and (2) we wanted to get income properties to provide an extra source of income. Since we weren't looking for our dream house yet, we thought, why not buy a duplex so we can fulfill both of those goals at once, and best of all live for free!
After talking with multiple family, friends, and other investors, we felt good about this approach. We figured if we want to build our rental portfolio, we could repeat this process about every year for the next few years and we would be golden! That plan hasn't really played out that way as personal circumstances have changed, but to this day this first duplex has probably been our most profitable property and we got it using the methods explained below.
Here is why starting with a duplex worked for us, and may be a good option for you.
1. A multi-unit investment property for your starter home = dream home faster
We all know living in a duplex or 4-plex is not anyone's idea of a dream home...but most people don't get their dream home at first anyway. Here's our thought: instead of saving for years and throwing your money away paying rent until you can buy a dream home, become the landlord yourself. If you find a half-decent deal on a multi-unit home, you can essentially be living for free because the other unit(s) are paying your mortgage for you! And not only are you living for free, but you are getting a physical asset tied to that money while gaining equity at the same time through the rent you're collecting from the other units. Look at this quick scenario:
If you waited 5 years to buy a house, "saving up", by renting at $1,000/month, we would have spent $60,000 in rent money. If instead you bought a cheaper, not-so-dream-home duplex with rent covering your mortgage, you would have saved giving that $60,000 to someone else and collected rent of $60,000 that paid for your mortgage and gave you equity in your home. Granted, some of that mortgage payment is going towards interest so you are now about $100,000 richer than if you rented for those five years! You can then use this money for your dream home later if you decide to sell OR better yet, keep that house and rent out all the units to keep getting monthly cash flow as part of your retirement plan!
2. If you live in the building, you can get in for super cheap!
So here's the scoop with lending: you can always get a conventional mortgage on a property up to FOUR units. Typically, with a conventional mortgage you put a 20% down payment and can get a competitive interest rate (currently around 4-5% APR). For most people it takes quite a while to save up for a 20% down payment and that alone puts home ownership out of the equation often times for years. So how did we get around that? We got what's called an FHA loan that lets you get in the property with only a 3.5% down payment with an interest rate as low as 3.5% ~ that's peanuts!
The two caveats to an FHA Loan is that you have to pay mortgage insurance each month (about $100/month for us), and the monthly payment will be a little higher than a conventional loan just because your principle amount borrowed is higher (but if you are doing this as an investment property and you have that calculated into your expenses, it is not a big deal). For us, it was much better to be able to get into a property quicker than to save for years to avoid that insurance. And we can always refinance later to get out of the mortgage insurance. We were shocked at how easy it was to buy a house. If you have decent credit and one adult in the household has a good job, or even if both adults have only average full time jobs you can get approved for a loan pretty easily. Our first house we put down about $10,000 out of pocket--including closing costs. We had to pay for repairs on top of that, but you can get a loan that includes repair costs as well.
In comparison, if you are buying a investment property with traditional financing that you are not going to live in, you typically need 25% down, get slightly higher interest rate, and there is no way to get an FHA loan. So if you can live in a home for a little bit (technically, a year) before turning it into a full investment property, you save money!
3. Save money by doing the work yourselves
Okay, this topic is more of a debatable one. We'll be honest, we have since given up on doing most work ourselves because it takes more time and energy than we have. Especially with homes that we are flipping, the quality of work and speed mean money...and we are no professional contractors! BUT for our first home, it was great for us to do the work. The house was a disaster (check out our projects tab to see pictures and more details) and we had to flip both sides in 20 days between tenants. We did a full cosmetic facelift-flooring, paint, bathrooms, countertops, etc. It may have been the toughest 20 days on our marriage yet, but by doing the work ourselves it made the difference of it being affordable enough for us to purchase the home. Also, since we lived in this property we could continue to finish some projects while living in it so the time was not as big of an issue. Normally, we don't recommend doing repair work by yourselves, but sometimes it is worth it.
Now this duplex approach is not for everybody. It is challenging and takes commitment from every family member in order for it to work. But for those willing to delay moving into their dream home right away and want to get their feet wet with real estate investing, this would be a great way to start! You can test out being a landlord while living in the property for free, gain equity in a home, and ultimately save money!