When you’re first getting into real estate investing, you know the general outline. Find a home that is a value-add, or in a good neighborhood that can generate strong cash flows. But this leads to the next question, what is the best kind of property for beginner real estate investors?
In this series of Real Estate Investing Basics, we are going to look at what kind of property a beginner should invest in. If you want to reference the other posts in this series, check out:’
- Real Estate Investing Basics- How to Find the Best Realtor
- Real Estate Investing Basics- Buying Your 1st Property
What Type of Property Should I Invest In?
The short answer is a multifamily duplex. It doesn’t necessarily have to be a duplex, it can be a triplex or more, but it does have to be multifamily.
Why is this? If you invest in a single-family home, you’re going to have to pay that monthly mortgage from your own pocket. With multifamily or a duplex, you can source your mortgage payments from the rents you’re acquiring.
- Duplex: a multifamily residence that has two separate units in one singular building. It can be arranged in various ways, but they have two separate entrances.
- The idea is similar for triplex and fourplexes.
- What’s the difference between a duplex and an apartment? The biggest difference is the ownership status. Duplexes are owned by a single person and apartments in a complex can be individually sold to multiple people.
Think of it like this: you have a $1600 mortgage on your duplex. You live in one half of your duplex and lease out the other half for $1600/month.
Because of this, you are now living rent-free in your home and your mortgage is being paid off every month from rental income, not your own personal income.
People may look at this situation and say “well you’re just breaking even.” However, by getting rid of your biggest expense (housing), you are saving yourself up to 50-60% of your monthly expenses!
With these additional funds, you can save up money to buy another rental property, you can invest in the stock market, you can pay off any loans early, etc. Additionally, when you move on to having more properties/more units, that just means that more income goes to you.
You can be making more than your monthly mortgage payment. With that extra money, many people put those additional funds back towards paying their principal so they up their equity stake in the property.
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What Is The Best Strategy to Use?
You should move into the property and use this as your primary residence. This is literally called a house hack.
- House Hacking: “a strategy that involves renting out portions of your primary residence to generate income that is used to offset the cost of your mortgage and other expenses associated with owning a home. When done correctly, it allows people to live in expensive areas for free, or even generate positive income through homeownership.” For more information read Forbes’ article on house hacking.
It is getting into a conventional loan where they will allow you to put down 3%-3.5%, and this allows you to get into the property with the lowest possible down payment you can get when getting into real estate.
If you stay in this property for the one required year, you can move on and do it again. When you do this, you can rent out the other side, and now you have this property generating income for you to buy another property. And you rinse and repeat with your new property.
Live it in for a while and rent out the other half of your property. Your old mortgage gets canceled out from the rental incomes from both units. Your debt to income ratio isn’t negatively impacted, and you’re making more money.
There are plenty of people who do this and take advantage of this housing strategy. It definitely can be a hassle and take a lot of time and effort. Moving every year or every other year can be tiring and hard on a family. But if you’re in the position to do so, and you can afford to move every year, just imagine the wealth, appreciation, tax benefits, and potential cash flows.
This can springboard you into the realm where you don’t have to move into the property in order to afford it. You can build upon this to get you into bigger and better deals.
If you don’t have the ability to live in your rental space and be moving every year, but still want to get into real estate with no money down, check out our series on How to Get Into Real Estate with No Money Down:
- How to Get Into Real Estate With No Money Down-Seller Financing
- How to Get Into Real Estate With No Money Down- Hard Money and Gift Money
- How to Buy Real Estate With Credit Cards
To wrap everything up…
Getting into real estate isn’t easy. There can be high barriers to entry, a lot of initial work and due diligence, and research. It’s not as easy as just logging into Robinhood and starting to immediately invest.
Knowing what kind of property to invest in will hopefully help you get your foot in the door. Remember that you should aim for multifamily residences, and try to use the house hacking strategy if you can.
And once you get into real estate, the cash flows, tax benefits, and appreciation will come. Real estate has made more millionaires than any other kind of investment. And the reason behind that is because of those barriers of entry. So don’t give up, and keep on working hard!
Investing in real estate will allow you the opportunity to have the financial freedom you deserve, but there are many barriers and challenges to real estate investment. The Orlando Academy created a “Real Estate for Beginners” course, based and designed around Orlando Miner’s 10+ years of real estate investing experience. With over $500,000,000 in transactions closed, the program has been proven to work over the last 15 years.