Most people know that in today’s world if you want to buy an investment property your lender will most likely require you to put at least 20% down. This is a huge barrier for a lot of new real estate investors (20% down on a house selling for $200,000 is $40,000). Unfortunately, because most people don’t have the 20%, often times this keeps people from investing in real estate all together. Is there a cheaper way to buy your first rental property?
I bought my first investment property a few years ago with only $6,825 as a down payment. The purchase price was $195,000 which means I only put a 3.5% down payment on the house. Today, just over 3 short years later, my small $6,825 investment has turned into over $90,000 through appreciation. How was this possible? I used a secret weapon called an FHA loan.
An FHA loan allows you to purchase a home while putting down only 3.5%. This loan is designed to make homeownership more affordable for first time homebuyers. The catch is that you will only qualify for it if you intend to reside in the home. The loan is not given to people who intend to immediately rent out the house and not live there themselves. It is actually illegal to lie to your lender and tell them that you are going to reside in the home if you are not going to.
So how did I legally buy my first investment property with only $6,825 down? It’s pretty simple… I bought the house intending to live in it for at least one year. That doesn’t mean that I did not intend to move out not long after the one year mark to rent out the house. There is no rule that says you can’t eventually turn this house into a rental property. As long as you reside in the house for one year before you rent it out then you will still qualify for the FHA loan.
Try to find a house that would make a good rental property, even if it is not your ideal home. Remember you only have to live there for at least one year and then you can turn around and rent it out. Without the FHA loan I would have had to put down almost $40,000, but instead I only put down $6,825.
The best part about this is that anyone can use this strategy. As long as you have moderate to good credit, can save enough for a 3.5% down payment, and have verifiable income then you can buy your first rental using this strategy too!
You can lean more about the FHA loan here: