See main article on Biggerpockets: https://www.biggerpockets.com/member-blogs/10359/87977 Buy Real Estate with Little or No Money Down
This catchphrase, Buy Real Estate with Little or No Money Down, is pretty ubiquitous in the Real Estate Investing world and there is some truth to it. The truth is that you are able to buy real estate with little money down, and what I am referring to here is to do with House Hacking.
First, you may ask: what is House Hacking any way?
House Hacking basically means that you can buy a small multifamily property to live in (Duplex, Triplex, or Fourplex) and rent the other units out to tenants. As a result, you pay a subsidized mortgage, as the rents from the units cover all or most of your mortgage.
Since you are occupying one of the units and if you are buying a property for the first time, there are incentives from the government to help first time homeowners. There is a provision for the first time buyers to put little money down: 3.5% as a downpayment to purchase a property (note: there are other instances in which you can use FHA loans that we would not go into here).
So, hooray! You are able to use a little bit of money to be a Landlord and start collecting rent checks (or Venmo alerts). Not quite. There are 3 QUICK METRICS to look out for when analyzing small multifamily properties.
1. CRIME
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LOW CRIME This may sound pretty obvious; however, during your excitement of buying your first property, you might not take this account for a variety of reasons.
Or you might make a big mistake some investors make by trying to make an "educated" guess of the crime in the area during a visit to the area and think "hmm.., it seems to be a safe area". This isn't going to cut it. Moreover, what is safe to one person might not be safe to another.
TIP: Use the property address on websites such as Trulia or similar sites to get intel on the crime status of an area. For Trulia, it is best to choose an area with the LOWEST CRIME.
2. RENT TO VALUE [RTV] RATIO
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1% RULE As you start looking at a lot of properties, it can become increasingly difficult to analyze a lot of deals quickly. Consequently, you want to look at these deals quickly and make a decision about whether you want to take a deep dive or not.
TIP: The Rent To Value [RTV] ratio is dividing the total monthly rental income over the total value (or asking price). For instance, if the total rental income from a duplex is $2,000 per month and the Seller is asking $200,000, then this might be a deal you want to take a closer look at because the RTV is >= 1%. Hold on before you go putting in an offer, there is ONE last metric to look out for.
3. RENTERS TO OWNERS [RTO] RATIO
Normal 1574802370 Max Bottinger Gup8 M Cv Ssf0 Unsplash 50% RULE After buying your property, you want to ensure that you are able to get your units rented as quickly as possible. Not surprisingly, there is a direct correlation between how many renters are in a particular area to how quickly you can rent your unit.
In order to mitigate any risks of having your property sit on the market for any longer than needed, it is best to have the Renters To Owners [RTO] metric at the forefront of your mind when evaluating your next small multifamily or your first multifamily property.
TIP: Use your zip on a website called City Data to find out the ratio of renters in your particular zip code. Typically, my rule of thumb is to be above 50%. That said, you should remain somewhat flexible and pay attention to your local markets.
SUMMARY
You are able to start your Real Estate Investing with little money down by House Hacking. However, you want to increase your chances of success and mitigate any risks by using the three metrics:
Crime Rent To Value [RTV] ratio Renters To Owners [RTO] ratio Normal 1574803117 3 Metrics
If you are currently House Hacking or learning about it, what are your tips and tricks to a successful #HouseHack?