Are you someone who wants to buy investment property, but you just can’t figure out how to finance your first buy? If so, this article is written for you.
What follows are seven different ways to finance your first property. Before that, I’ll also share ideas to make sure this first purchase fits into your overall wealth building strategy so that you don’t waste time going down the wrong paths.
To begin, you should know that every successful investor began right where you are. Just like the longest journey always begins with the first step, enormous real estate wealth begins with your first deal.
I remember very well being a 23-year-old standing at the edge of my new venture into real estate, asking questions like:
- “How am I going to do this?”
- “How will I raise the money for my deals?”
- “Will the lessons I’ve learned actually work for me?”
It’s normal to have apprehension and self-doubt before starting something important. But the anecdote for this ailment is a big spoonful of knowledge and another big spoonful of action.
I’m going to give you my best in the knowledge department right here, and you’ll have to do your part by taking action on what you learn.
Is that a fair deal?
Now, let’s move on to financing your first real estate investment!
Strategy Before Details: The 5 Wealth Building Stages
Jumping into borrowing a lot of money against real estate before you understand the bigger picture is sort of like taking off in an airplane without knowing how to land. You may successfully get off the ground, but good luck trying to find your destination and land in one piece!
Here’s the big picture of wealth building as I see it.
The wealth you will build from real estate will allow you to have more freedom, more flexibility, and more time to do what really matters. You can call this financial independence, retirement, freedom, or whatever you want. It’s the peak of the mountain on your wealth building journey.
To reach this financial peak, you have to build a large net worth (a.k.a. equity) so that you can eventually live off of the income from your investments and never have to trade hours for dollars again.
But before you reach that final stage, there are other milestones you’ll pass as you climb the financial mountain. These intermediate stages are important because they determine your overall real estate strategy, which includes how to finance your deals.
Related: Real Estate Financing: The 4 Best Ways Savvy Investors Fund Deals
Here are 5 stages you’ll pass during your climb:
- Survival is the milestone when you’re earning some money and getting your bills paid. It’s also the place where you’re digging yourself back out of financial holes you dug in the past.
- Stability is like Dave Ramsey’s first three baby steps. You pay off personal debts, you have cash reserves in the bank, and you build job skills that are in demand and command a better income in the marketplace.
- Saver is the stage where you realize the importance of your savings rate and put it into practice. Building wealth is actually simple, but it’s not easy. You need to maximize your income, simultaneously decrease your spending, and set aside a lot of money. Below-average wealth builders save 0-10% of their income, but above average wealth builders save 25%, 50%, and even 75% of what they bring in. The faster you want to reach financial independence, the more you need to save.
- Growth stage is where most of us think of investing. It’s taking your $50,000 nest egg and turning it into $1,000,000. The key is to maximize compounding by reinvesting earnings, buying good assets, and maintaining discipline.
- Income stage is when you already have a large chunk of equity and you’re ready to enjoy the fruits of your wealth-building labor. The objective here is to turn equity into regular income that gives you time, freedom, and flexibility.
Which of the 5 wealth building stages above best describe you? Are you in survival, stability, saving, growth, or income modes?
Don’t beat yourself up wherever you are. Everyone has to climb the same mountain, and the fact that you’re doing it now is all that matters.
Once you know your stage, it will help you begin focusing on a real estate investment strategy.
Choose a Strategy Before Your Financing
Your real estate investment strategy and your financing are closely connected. You’ll be in trouble if you just walk into a bank and say, “I want a loan so I can buy investment real estate.”
A strategy is your decision about which part of the real estate universe will best help accomplish your financial goals right now. You can invest in fix and flips, house hacks, mobile homes, commercial buildings, private notes, and much more. But you can’t do them all at the same time on your first deal.
So, a strategy is about focus. It will help you get the right financing on your first deal.
If you’re working on wealth stages #1 or #2 — survival or stability — keep in mind that you need a job or a side business more than you need investing. Investing takes your cash, and you need to put more cash in your pocket right now.
I wrote in more depth about 7 ways (other than wholesaling) to make money in real estate as a newbie. Most of these don’t actually include you borrowing the money because other people will buy your deals, but you’ll learn a lot about financing in the process.
If you’re working on wealth stage #3, saver, it can make sense to begin purchasing and financing investments. Real estate is a great forced savings plan. Many people say it’s bad that real estate is illiquid or hard to sell. I say it’s GOOD. You’re forced to leave it there and not spend it!
If you’re in this stage, a great place to start is with house hacking or live-in flips. You have to live somewhere, so why not multi-task and make your investment a savings tool? Owner-occupant financing programs like FHA or VA, which I’ll explain more later, allow you to get into properties with less down payment.
You could also get into house flipping and rental properties at this stage, but because you lack sufficient savings, you’ll need to leverage the down payment and reserve money of partners or private investors. This is exactly what I did early on.
If you’re working on stage #4, growth, you should have the credit, income, and capital to jump into real estate investing in earnest. You could focus on the strategy of fixing and flipping houses, renting small residential properties, buying high cash flow rentals like mobile homes, or moving into one of the many other smaller niches of real estate investing.
In the section below, I’ll share some basic ideas below for how to finance your real estate with any of these strategies.
For stage #5 investors, the goal is typically not to leverage up but to deleverage. At this stage, income is a higher priority than maximum growth. You may still choose to have some financing, but I’m guessing if you’re in this stage you’ve already figured out most of the ideas I’m sharing here.
So, you’ve got your stage in mind, right? You have a basic idea of your strategy, and you’re ready to get started.
Now let’s begin unpacking the different possibilities to finance your first investment property.
You can read about the 7 financing sources and the rest of the article on BiggerPockets.com: