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My friend Drew recently reached financial independence at the age of 29 after purchasing four properties over the past 5 years. The rental income from these four properties exceeded his monthly expenses by about $2,000. This means he can live completely off of his rental properties and still have $2,000 to invest each month! And even better, his properties are also increasing in value.
Since 2015 I’ve dedicated my life to helping others become financially independent as quickly as possible, and I’m convinced real estate investing is the fastest path to financial independence. I’ve even seen examples of people who’ve done it with fewer than 3 properties.
While real estate has always been a relatively small part of my portfolio, I consider it a good investment that in many markets easily outperforms stocks. Your first home purchase is hands down one of the most important investments you are ever going to make in your life and there are easy ways to maximize the opportunity that you will increase your odds of buying a profitable real estate investment.
If you want to best set yourself up for success here are the 3 best ways to buy a home. While many of the best ways to buy a home won’t change in 2019, there is an established yet little-known alternative to the traditional mortgage many millennials are tapping into to make their home-buying dream a tangible reality.
1. Pick the right property
There are good real estate investments and there are bad ones, but you can easily learn to how to pick a good investment property. It’s an art and a science.
The art is picking a property that is desirable and that people would want to live in. Is it close to the train, parks, and cool things to do at night or on the weekends? Does the neighborhood have good restaurants, and a movie theater, and a nice coffee shop? Things you like others likely do too. The more convenience typically the higher the value. Properties in cities also tend to appreciate (increase in value) faster than properties in the country.
Second is the science. A lot of people pay too much for their first properties because they buy with their emotions – they fall in love with the home that has the perfect backyard or because of the original wood floors, both of which can increase the value of a home but are just one part of the picture. You need to get buy smart by not putting down more money than you can afford and buying a property that make sense for you financially as an investment.
2. Pick the right price
As a wise real estate investor once said: “You make money when you buy, not when you sell.” This is a numbers game. You want to buy a property for less than it’s worth so you have built in equity. This is why it’s essential to get your own property appraisal and look closely at the other properties that have sold in the neighborhood. As an example, you want to buy a house that’s worth $350,000 for $300,000 so you already have $50,000 of equity. This is what it means to make money when you buy.
You also want to buy a home where your monthly mortgage payment is as low as possible and definitely less than 25% of your after tax take home pay (typical advice is less than 40%, but I recommend keeping this expense as low as possible in order to invest the difference).
The average American spends 70%+ of their income on three expense categories: housing, transportation, and food, with housing being the biggest expense at close to 40%! This is where you can get the biggest saving opportunity in your life and then use those savings to invest in stocks or more real estate!
3. Pick the right down payment amount
In some situations, it makes the most sense to put down 20% and in others as little as 5%. One of the biggest first-time home-buying myths is that you need to put down 20%. I’ve had many friends who have saved and saved for a 20% down payment only to then miss out on the opportunity to buy a property where they wanted because the prices had gone up so much while they were saving for the property.
While you will be required to pay what’s known as Private Mortgage Insurance (PMI) if you put down less than 20%, PMI is nothing to be afraid of and typically will add $50 – $150 to your monthly mortgage payment each month depending on the size of your mortgage. Yes, it’s extra money that you have to pay each month, but you can easily get rid of private mortgage insurance once the property either naturally appreciates, you upgrade the home to increase its value, or your refinance as the property appreciates. It might make sense to put down 5% if you fear missing out on the market and that prices are going to go up considerably where you want to buy.
If having PMI makes your monthly payment unaffordable there is another option to only put 5% down and still buy the home you want. Unison is the company that’s created this new alternative for home buyers, already helping thousands get into the home of their dreams. They help with your down payment — translation: a lower monthly mortgage payment, too — and don’t charge you any interest or monthly payment. They simply make money from the profit when you sell your home (or share in the loss with you if your home loses value) or you can buy own their ownership stake after 3 years. They invest alongside you and may prove the smarter, better choice when it comes to finally buying your home.