Your clients may or may not have extra cash to invest in real estate but you can still help them build their wealth as real estate investors. After all, property investments can generate incomes, real estate may be less vulnerable to the volatility of bonds and securities and property investment may outperform stocks and bonds.
Ethan Roberts, a real estate investor, real estate writer and real estate editor, offered several tips for potential real estate investors to begin their property investment journeys even if they don’t have a lot of reserves currently available to them.
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- Buy a house as a primary residence with a zero down payment from the VA or with a USDA loan.
- Down payment and credit score requirements for primary residences tend to be much less stringent than for investment properties.
- Recommend that your client stay in this residence for a minimum of one year so there are no questions about whether or not the property is a primary residence.
- Then, after than minimum one year, suggest that your client turn the property into a rental.
- Suggest that your client buy a duplex and live in one of the units while renting out the other unit.
- Duplexes can be financed with an FHA loan.
- As of March 2015, the down payment requirement for an owner-occupied duplex was 3.5%.
- The rent generated from the other unit of the duplex will most likely pay off a good chunk of your client’s mortgage.
- Suggest that your client create a Home Equity Line of Credit (HELOC) on the primary residence or other investment property that your client may own.
- There are many banks and other lenders that will offer your client a HELOC if/when your client has substantial equity in either property. Your client can then use that HELOC for reinvestment purposes.
- Typically, a HELOC will create a line of cash for approximately 70-80% of the current equity in the owned property.
- HELOC interest rates typically come in at the prime rate plus 1-2%.
- One of the main advantages of a HELOC is that there are usually no closing costs. Additionally, HELOCs can close quickly with just a “Drive-By” appraisal for which the lender often does not charge.
- Use the rent collected for the property to pay down the monthly (or more) principal and interest on the HELOC. This is sort of like your client creating her/his own mortgage on his/her own terms.
- Remember that a HELOC has variable interest rates and is technically considered to be a second mortgage on the property. Suggest to your client that she/he may want to pay down a good portion of the HELOC principal while interest rates remain low.
- Suggest to your client’s seller that he/she pays closing costs.
- The trade off for the seller paying closing costs is that usually your client will have to offer full asking price or close to it on the listed property.
- HOWEVER, at the full asking price, if the lender offers a quote for a total mortgage payment including taxes and insurance is equal to or greater than the rent your client thinks she/he can realistically charge, forget it and look for another deal. Rental properties should always generate positive cash flow in order to cover unexpected repairs and vacancies.
- Suggest that your client’s lender either pay closing costs or offer a rebate on your client’s down payment.
- QuickenLoans along with Freddie Mac’s Possible Advantage program recently announced their 1% down payment option on single-family primary residences for owner-occupied properties.
- The buyer puts down 1% and Quicken provides a grant for the remaining 2%.
- A minimum credit score of 680 and debt-to-income ration of 45% or less are required to qualify for this option.
Thanks to Ethan Roberts, Auction.com and QuickenLoans for source data.