Crowd Source Your Down Payment

I’ve tried to write this post so many times that my head hurts.  I’m just going to keep it really simple this time.  If you’re not buying a house using a bank mortgage, you can “Crowd Source” all or part of your down payment.  That means that you sign up on a site like Prosper.com or LendingClub.com, apply for a loan, and people all across this great nation of ours lend you money, 25 bucks at a time.  It’s downright awesome.

I borrowed 10 grand using LendingTree.com and got an interest rate of 6.25%.  If you have good credit, that’s about the rate you can expect.  Bad credit?  Well with higher risk comes higher borrowing costs and rates can go as high as the mid-20s.

As a quick disclaimer though, buying a house with basically no money down is a great way to magnify your returns but you are also exposed to higher risk if the investment doesn’t produce as much income as you had expected.  This is exactly why banks don’t let you borrow your down payment in this way.  They want you to have more skin in the game.

Just look at these sites as effective sources of funding and at least check there before you go to any hard money lenders or put a down payment on your credit card.

Tuition

2014 didn’t cause me to rethink why I invest in real estate but it did give me a healthy wake-up call regarding risk and leverage.  Higher leverage is the way to achieve higher returns on any producing investment but with it comes higher risk.  It was a year of dealing with a tenant going through a bankruptcy (8+ months of no rent) then destroying one of my houses (~15K in damages), more turnovers than planned, and more repairs than anticipated.  These events have caused a fair amount of stress in my life to say the least.

What have I learned?  Maybe use a little bit less debt when financing my next properties.  Keep all properties professionally managed since actually managing rentals is not what I am good at.  Don’t give up when the going gets tough.  As one of my real estate investment mentors says, treat the losses due to the tenant’s bankruptcy as tuition.  It’s an expensive lesson and one that I would have preferred to learn the easy way but life doesn’t always teach you lessons the easy way.  Sometimes it costs $25k but you certainly don’t forget those lessons.  Tuition.

Don’t Overthink It … Just Start by Buying One House

The sole purpose of this post is to demystify the concept of investing in real estate and give you a frame of reference for getting started on this path.  Consider the following two points:

1.  According to the Census Bureau, 64.4% of American’s own their home (as of October 2014).

2.  For a great many of these home owners, their home ends up being their most valuable asset when it comes time to retire.

So what does this mean to you as an aspiring real estate investor?  It means that THE MAJORITY of Americans somehow manage to make it through the process of actually buying a house!  (Oh, and that number is down from 69.2% back in June 2004.)  Most people end up doing it.  They figure it out, save up, hire a Realtor (or do it on their own), jump through the hoops, and in the end, come out of it as home owners!

Now consider this, most things get easier after you’ve done it once.  Case in point … it took me 6 hours and three trips to Home Depot to install my first garbage disposal, the second one took closer to two hours and only one trip to home depot.  It was a WAY more efficient process.  Buying a home gets much easier as well because it’s not your first rodeo.

My advice to you is to figure out what it’s going to take to buy your first house.  You might need to save up 20% for a down payment, you might need to hire a Realtor, you may need to hold down your job for another year so you can qualify for a mortgage.  Whatever it takes, figure it out!  64.4% of Americans have already done it so it’s not like you’re charting new territory here, the proverbial wheel has already been invented.  Once you’re shopping for your first house, you’re already a real estate investor.  It makes very little sense (most of the time) to have your first home purchase be a rental because the ROI of owning your home is usually greater than that of a rental.

Now guess what?  It’s time to start the process over again!  It is just that easy.  Sure, it might take you another two years to save up for another down payment, and sure, you might have to move into the next house you buy but you are about to embark on a journey that you have already succeeded at once before!  Furthermore, banks will lend continue to be able to loan you money as long as you have 4 or less financed properties, so you won’t have to move into any creative financing strategies for quite a while.  Think long term on this and when you retire, you’ll have two houses, fully paid off.

To summarize, you can embark on a road to great wealth if you just do what 64.4% of Americans have ALREADY done, and then do it again … and again … and again.