Saturday, February 18, 2023
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| A Solo Contest in the Real Estate |
This conversation focuses on addressing the common queries posed by young adults in their early twenties. They frequently question themselves, "Should I invest in a home, condo, townhome, or any other type of real estate that I can call my own?" Since most individuals grow up either living in a rented apartment or their parents' single-family home, it's natural that many people, when considering purchasing their own dwelling, would conclude that a condo or small house is the way to go. However, with proper guidance and accurate information, young adults can understand the reality of acquiring real estate and how it can benefit their future.
I like to begin the conversation by asking, "How would you like to collect rent instead of paying it?" This question captures their attention, and we can start to shed light on the concept of real estate. I often use the duplex example to illustrate the concept of two homes under one roof. For those unfamiliar with duplexes, I explain that it's a building with two bedrooms and one bathroom on each side, all under one roof. Duplexes are just as easy to finance as a single-family home and can often result in a larger loan amount.
For instance, let's say a duplex costs $150,000 and has a 6% loan interest rate. The monthly principle and interest payments would be $899.33, with an average insurance cost of $62.50 and a monthly tax of $137.50. The total monthly mortgage payment, including principle, interest, taxes, and insurance (PITI), would be $1099.33. By renting out one side for approximately $750.00, the individual would only need to pay $349.33 out of pocket every month.
When the concept is firmly established, the questions start to flow, "How do I buy something like this?" The answer usually begins with "By getting pre-qualified for a loan," and I go on to explain that they need to gather certain documents and bring them to the bank loan officer to start the process.
To apply for a loan as a first-time home buyer, you will need to provide the lender with several initial documents including:
- Tax returns for the past three years, along with schedules and W2 forms
- Most recent pay stubs within the last 30 days
- Bank statements for the past three months
- A list of creditors with their names, addresses, and account numbers
The lender will use this information to verify your assets, liabilities, credit history, and other details to determine if you are eligible for a loan. Upon review, the lender may pre-approve you for a certain loan amount. As a first-time home buyer, you can take advantage of programs that allow you to put down as little as 3-5% of the home's value. On a $150,000 loan, this can range from $4500.00 to $7500.00.
To lower these costs, consider attending a first-time home buyer's class to learn about available programs and opportunities. Before visiting a lender, it's a good idea to familiarize yourself with the process. In case you don't have the necessary funds, you can explore options such as savings, gifts, personal loans, co-signers, or alternative funding sources.
Keep in mind that if you want to own a home badly enough, there's always a way. Owning a duplex can also help you save money on your mortgage as 75% of the rental income from the other unit can be used to offset your qualifying ratios.
Once you close the deal and become a homeowner, you will have created a passive income stream with the rental income from the other unit. At the closing, you will also receive a prorated share of the rent and security deposits, giving you extra money for the first time in a while. Assuming you close on the 15th of the month, you will have 45 days before your first payment is due, during which you will receive 15 days of rent, security deposits, and another month's rent from your tenant. This adds up to a significant amount of money that can help you in the long run.
You've just bought your first property and are now a landlord. In the first month and a half of ownership, you earn $375 in rent, $375 as a security deposit, $750 in another 15 days, and $500 that you would have normally paid as rent. This totals to $2,750. After paying the mortgage of $1099.33, you are left with $1,650.67 in your account. As a smart landlord, you should establish a reserve fund to cover unexpected expenses and protect your income-generating asset.
Being a young landlord brings several benefits, such as building credit, gaining tax advantages, and learning valuable life skills in home buying, management, and repair. By accepting responsibility early on, you'll grow more mature and gain a higher status in the eyes of others. If you meet someone who may become your spouse in the future, they will recognize your ability to provide for them and respect your involvement in real estate.
In the future, when you start a family or move to a single-family home, you can rent out both sides of the duplex. Two years later, if you've improved the duplex, you can sell it and use the profits to invest in a single-family home that suits your changing needs. This way, you can separate business from pleasure and start a new chapter in your life.
Consider breaking the norm and exploring multiple income properties as your first step. Enroll in a first-time homebuyer class to get you ready, and approach a lender prepared to qualify for an affordable loan amount. Invest your time and effort in learning about real estate and its workings. Remember, the earlier you start, the better positioned you will be for success. Utilize the income from renting to offset expenses, and be responsible in managing tenants, deposits, and your property. Plan for the future by utilizing assets and equity lines, and continuously educate yourself on new strategies in real estate. Seek out mentors and knowledgeable individuals to guide you on your journey.
Best of luck in your pursuit of homeownership!
Your investment friend,