What's the best way to start investing in a house?

 

 

There are SO MANY ways to start investing.  I am personally a fan of doing an FHA or VA loan into a duplex, triplex or four-plex. 

The loan type is really the huge issue.  If you use a VA Loan, FHA or USDA type loans can be a great way to get into the market with out much money.  This stipulation is that you must live in the house.  So you can move in, fix everything up and then do the same thing to another house.  This will give you a lower cost to enter the market with a high Cash-on- Cash Return (Net Operating Income Divided by Cash Invested) and you get to diversify the risk over multiple units making for a lower break even point than a traditional single family home.  Keep in mind though the lower the cash in, the riskier the investment because you do not have the equity to move if there is an issue.  If you are forced to sell at a loss having the equity in the house is the difference between taking a loss and coming out of pocket thousands of dollars.

The conventional loan is the next option.  This is usually around 20-25% down and the advantage is that you have equity in the home as well as you do not get stuck paying Mortgage Insurance Premiums like some of the options mentioned above.  This is a lower risk and the advantage is that you are going to pay back the mortgage with cheaper money because of the Time-Value of Money Principal.  

The third option is to pay for it all in cash.  Many investors and agents will discourage this, but the key thing to remember is that you are eliminating a lot of risk by purchasing in cash.  While there are advantages to leveraging the amount of cash you have, the advantage of a paid for house is that if you can't rent it out for a period of time you don't have the mortgage overhead.  If you look at many of the large investors and Real Estate Investments Trusts (REITs) they typically pay all cash unless there is a loan assumption required with a large early pay off penalty.


Now not every house you can buy is a great deal.  If you are investing you MUST remember that you make your money when you buy the house.  You want to get the house near 70% of the value, in a seller's market maybe up to 80-85%.  You can buy a house that is cash flowing (making profit after the expenses) however your returns are going to be lower if you do not buy at the right price.

The next thing is you can not be cheap.  To often landlords will try to bleed everything out of the home they can which will lead to a lower value at resell or lower rents.  Fix the house, take pride in it, yes it is a rental but still someone will need to want to live there as well.  If not, you may have a really expensive problem down the road.  

Will you get rich over night this way, nope not at all.  Will you have head aches from being a landlord?  Yes.  Is it worth it? Yes, passive income is awesome and while you may have to do a little work here and there it is nothing like what it is when you factor how many hours you work and what you are getting paid in return.