It is commonly understood that the best and fastest way to get into real estate investing is to owner occupy a 4-plex (or “quad”) as your first residential purchase.
ONE: You can get most of your down payment back before you have a mortgage payment
When you close on a property, in most cases you do not have a payment in the month that you record and the following month. Then on the third month, your payment is not past due until the 15th.
That means you can structure a purchase where you can collect rent for nearly three months before you have a mortgage payment. Depending on rents, this may be most of your down payment.
If you’re using a VA 0% down loan, you can imagine how beneficial this is. This could very well fund a small update or remodel of your unit to increase rental potential. Or a snowmobile. Just saying.
BONUS: Although you must live in the property, you do not have to occupy the property immediately. Allowing a tenant to live in the unit you intend to occupy for 30 to 90 days after recording (ask your lender what they require) will allow you to collect more rent during the time that you have no mortgage payment. This results in an even higher return of your down payment.
TWO: Focus on cash flow and less on Fancy Pants
Your first income property is the foundation of your future investments. Where it is understood that we all want something that needs minimal work, cash flow solves all problems.
Have a vacancy? Cash flow to the rescue.
Have a heating system problem? Cash Flow will heat you back up.
Have a unit that needs updating? Cash Flow pays for bling.
A really nice building that barely scrapes by is not a wise investment. Eventually every property has something that will break or go wrong. If the cash flow of the property is not enough to cover the expenses, then you’re paying for it with hours you work at a job. That’s not cool.
THREE: Don’t live in the nicest unit.
There are three reasons for this:
♦If you intend to buy another income property in the future using an owner-occupied loan (these have the lowest down payment and interest options) then the next property must be a move-up property. Living in a large nice unit makes it difficult to find a property that will be an improvement to your current living situation.
♦You reduce the income potential of the property while you live in it. Every square foot of the property has income potential. By living in a large unit you reduce the income while you’re living in the property and you want this income to help save for your next purchase. Remember, cash flow solves all problems.
♦You can fix up the unit you live in and then rent it out for more when you move into your next building. This results in greater cash flow.
FOUR: Think small to go BIG.
Big 4-plexes with three bedroom units may seem like a great investment because the larger units rent for more, but that rarely ends up being the case.
Smaller buildings with one and two bedroom units typically perform better over the long run. Here’s why smaller buildings can make more money:
Less bodies mean less wear and tear.
QUIZ: What is harder on a property than a large dog?
Three bedroom units attract tenants with kids and kids are rough on property. Dogs don’t slide down stairs or play dodge ball in your common area.
You will also have more people moving bigger furniture through your common area when you have a change of tenancy.
Lower utilities. Since the landlord typically pays the water bill, a 12-bedroom building with 16 people in it is going to consume a lot of water. Even more so if there are washer and dryers in the units and dishwashers. Often the water bill can be three times higher than a building with only slightly less bedrooms. Add on the costs of more trash collection and greater heating bill and that extra rent money can get eaten up fast.
FIVE: Pay attention to the buildings next door
Your ability to attract good tenants requires you to provide clean, safe and affordable housing. That means the building next door will impact your curb appeal and will directly affect a good tenant’s first impression of your building.
This is very important. No matter how much money or effort you put into your building, your good work will be diminished if the property next door has mattresses on the side of the building, an over flowing dumpster, trash everywhere and broken down or distressed vehicles decorating the parking area and yard.
BONUS INFO: Go to REX (The Real Estate eXchange, Inc.)
To be successful in real estate, you should surround yourself with successful investors.
REX (Real Estate eXchange, Inc.) is a club whose purpose is to create a safe haven for new and seasoned real estate investors to network with like-minded individuals for the purposes of education, training and motivation. Our club’s philosophy is that we should not depend on others to secure our future. Instead, we depend on acquiring and sharing knowledge to create wealth through real estate investing.
REX meets twice a month. Once in Anchorage and again in Wasilla. We are over 1000 members strong, the meetings are FREE and you get to network with real investors making real money doing real deals in real estate in Alaska. Call Kevin Cross, President of REX at (907)529-2289 for more information.
About the author:
Kevin Cross is a Realtor with Keller Williams Realty who has been providing investor specific services for over 10 years.
2012 President of the Anchorage Board of Realtors
Current President of REX (Real Estate Exchange)
Active Landlord and Rehab Specialist
Teacher and Instructor all things Real Estate
Snow Machine Enthusiast