I’ve talked to my wife the other week about “if we ever went bankrupt” what would we do. How would we get back to where we are now? A technique to acquire rentals with little money down by being a nomad. Essentially, buying a house with the benefits of owner occupied financing, living in it for a year (per HUD financing guidelines) or longer if needed and then moving into another home while keeping the original as a rental. The benefits of owner occupied financing are that you can put as little as 3.5% down to obtain a loan. The 8th wonder of the world, leverage.
The extremely hot real estate market we are in makes it difficult to nomad though. You need to be diligent about what property you purchase and willing to take a property that may need some TLC. In Fort Collins as of June 14th, there were 25+ homes that sold for at or under $300,000 that had at least 3 bedrooms and 2 bathrooms. Below are three examples of purchasing a property with a different percentage down on each deal. The areas highlighted in yellow are the years you must remain a homeowner due to the assumption you would have negative cash flow. You never want negative cash flow as an investor.
As you can see if you put the minimum 3.5% down it will take you 4 years before you should begin to look for your next owner occupied home. As you increase the amount you put down, your debt service decreases which allows the rent to produce positive cash flow sooner. Becoming a landlord is about cash flow. Some ill fated investors begin investing with negative cash flow in hopes of hyper positive appreciation. That is a losers game that I don’t want to get involved with and neither should you.
Assuming that you put 20% down on each deal, here is a nomad scenario over 10 years looking at three properties.
Even when you put 20% down there could be years that you may have to wait a few years before you could see potential positive cash flow.
Some years and times in the cycle are easier to become a nomad than others. When the market is hot and people are bidding over the list price, you need to be patient yet aggressive. Deals are there to be found. It is good to include proper expense items and assume inflation and thus an increase in those expenses. You can, on the flip side also assume an annual increase in rents. I used 5%.
Being a nomad real estate investor is a great way to go to acquire rental properties over time. The area to also look at in the calculations are the equity in the property. That could be used to put your kids through college, sell when you retire to move to the Bahamas or whatever else. Or you could keep these properties as legacy properties and live off of the cash flow.
There are many ways to invest in property and more opportunities are becoming available with crowdfunding, tiny houses, Airbnb etc. This is one way that young people could use minimal money down to acquire property over time.