Today we're going to talk about a really hot topic and that's rental properties, how to buy your first rental property, I'm going to show you the three best ways and how to do so. Why I love rental properties, because it's traditionally was made people wealthy, you can make a lot of money fast flipping homes, wholesaling. But to create generational wealth, you always want to buy real estate and hold it.

Reasons Why Rental Properties Generate Wealth

1.       Cash flow. You're going to get money in your pocket every month.

2.       Tenant paying your principal mortgage.

3.       Appreciation of the property over long term.

4.       Multiple tax benefits from owning that property.

How Do You Go About Buying Your First Rental Property?

1.       Traditional method that's 20% down. It's my least favorite method, but it's the most common, why is it the most common because most lenders require it, why don't I like it because of the cash on cash return. So you're buying a property for 500,000. That means you have to put $100,000 down, say you're making $500 a month, that's $6,000 a year making only 6% return on your $100,000 investment. Now take in mind, we're not talking about principal pay-down appreciation of the property or the tax benefits. But that's just why it's my least favorite of the three.

2.       Buying the property as your primary residence. Why? Because you have to put less down, if you're a first-time homebuyer, you can put as little as 5% down, which means the same $500,000 home is $25,000 down as opposed to 100. However, with this method, you actually have to move into the property first. But there's nothing stopping you from buying another property next year and renting this one out. Now, I know some people are going to say no, you can't do that, you cannot buy a rental property as a primary residence. That's true. But there's nothing to say that you didn't buy with the intent to move in and things change. Later you buy a house that more suits your needs, and you can rent that one out. Now how long do you have to stay in that residence before you can buy a new one rented out, that's going to depend on who you're talking to. But as long as you can prove that you did intend at the time to use that as your primary residence, I don't think you're going to have any problems.

3.       Bur method. You buy it, renovate it rented out, refinance, and repeat. Although I never believe in buying a property at full market value. The other two methods allow you to do so whereas this one, you need to find it under market value. The reason why I love the Bur Method is you get to buy the property discount and get all your money back. Now you need to buy the property at 80% of ARV minus construction costs. ARV stands for After Repair Costs, that's what the property is going to be worth once you've done the work. Why 80% of ARV because that's what most lenders require. Now say the ARV of the property is $500,000. Now the max you be able to purchase property for is 80% of that $400,000 Minus the repair costs, say the repairs are going to cost you $20,000, you can buy the property at $380,000. So first, what I'll do is I'll buy it, then I'll fix it up, I'll put the $20,000 in, get it rented out, and then I'll refinance the property is now worth $500,000. So the bank will give me $4,000 in return, this way I get all my money back, the purchase price plus the money I put in. Now that's where the last and most important part of the Bur Method comes in, repeat, I can now take that money and do it all over again.

If you like what you're reading, but you're wondering, where do I find the money for the construction costs, there's a variety of different lenders and ways you can get that money. So if you're liking the content, stay tuned on our website, and I'll talk about that in a future blog.

With the two other methods, whether you're putting 20% down or 5% down, that money is stuck in the property and you're not able to use it.

The last thing I want to add regardless of which of the three methods you choose to use, you're going to have to qualify for traditional financing. That means you're going to have to have a good credit score, have a good debt to equity ratio, and you're going to have at least two to three years of tax returns depending on your lender. And if the property you're buying is already a rental unit, you're going to have to qualify for a certain rent ratio.

Whichever method you choose rental properties is a great way to generate wealth. And that's what the cash flow, the principle pay down, the appreciation value, and the tax benefit.

If you're looking to buy your first rental property. The first thing you want to do is find out what you'll qualify for. There are tons of online mortgage applications, or if you're serious, send me a message we'll connect you with one of our preferred lenders and get you started right away.