How much money do you need to purchase an investment property? Where does that money come from? This is Part 2 of a series. Please check out Part 1 at the following link: Investing In Real Estate for you Retirement
We will focus on 3 ways to acquire an investment property.
- Conventional Loan– Generally need a minimum of 15% down (in most cases at lease 20% down to avoid mortgage insurance and 25%-35% to cash flow in the Denver markets).
- BRRRR Method– Buy, Rehab, Rent, Refinance and Repeat
- House Hacking– Buy a home as a primary residence for as little at 3% down, live in it for at least a year, then buy a new new primary residence to move into and rent the first home.
All three of these options will not work for everyone. Let’s take a look at the pros and cons of these options.
**Remember purchasing real estate as an additional form of income for retirement is considered a long term investment.**
Conventional Loan- When you use a loan to purchase an investment property you want to make sure the income (rent) can cover the yearly expenses. Property insurance and taxes are usually paid for in the mortgage, but you also need to budget for maintenance, property management (unless you self manage), legal and accounting fees, as well as any HOA dues.
Pros of a Conventional Loan
- Leverage OPM (Other Peoples Money)
- Can get into a property with as little as 15% down
Cons of a Conventional Loan
- Usually need at least 25%-35% down to cash flow in the Denver market
- Need to be able actually qualify for a loan
- Closing costs can range $4-5k or more
BRRRR Method (Buy, Rehab, Rent, Refinance and Repeat)- With this method you try to buy property at a good price with cash or alternative financing, potentially need to fix up the property to attract renters then refinance the property. The money for a purchase like this can be found in the equity of a current home (such as a HELOC, Home Equity Line of Credit), cash pulled out of other investments, personal loans from investors, a “fix and flip” loan or 10% hard money loan just to name a few.
Pros of the BRRRR Method
- If you are handy with rehab you could acquire equity quickly
- Buying with cash can be an advantage in a competitive market
- Could save money on acquisition costs
Cons of the BRRRR Method
- If you are not experienced at rehab, expenses could be higher than expected
- Requires a lot of your time
- Most risky to borrow money at higher interest rates which most “fix and flip” and hard money loans require.
House Hacking- By far my FAVORITE method! Unfortunately I am at a point in my life where this is not an option for me (I don’t think I could convince my hubby and kids to move every year- too many LEGOs to pack)
Pros of House Hacking
- You can get into a home for as little at 3% down and receive a lower interest rate on a loan!
- You can rehab while you are living in the home
- You get to know the property and the area the property is in to better advertise to potential tenants
Cons of House Hacking
- You end up moving a lot
- Sometimes you end up dealing with a little dust on a regular basis
- Significant others may not approve of this method or the time required for rehab!
- Recommend starting small which may mean less elbow room at first
What are other ways to get money for a down payment?
- BUDGET – Start saving, stop spending. 30% down can be around $75k in the Denver market to get a loan to purchase investment property but saving up 3% (or $7,500) for a first home takes a lot less time. You need to start somewhere.
- REFINANCE A HOME you already have
- Use a HELOC (Home Equity Line of Credit) on a home you own to provide the seed money
If you need more information on the types of financing available for purchasing investment properties please contact me to be connected to a lender that can best suit your needs and help you meet your specific goals.
I have owned and managed investment properties for over 19 years. I have been a licensed Realtor® in Colorado for 17 years. I understand the entire process from working the numbers to make sure your property is a good investment to the day to day management and long term benefits that an investment property can provide. Give me a call and I would be happy to share my experiences and discuss your desires to get into the investment game!
Chantal Gemperline | Colorado Home Realty | Realtor®, SRES®
970-215-1438 | Chantal@ColoradoHomeRealty.com