17 Apr From a first-time homebuyer to Airbnb Superhost
This a guest blog post by one of my long-time readers- Walid Saleh. The story of how we met is an interesting one.
I signed up with a company to travel 12 cities in 12 months and met Walid in our group of about 25 people. We started talking because of our common interest of Airbnb… it wasn’t until we sat down one afternoon in a kitchen table in our co-working space in Santiago that I had found out he’s actually a subscriber to my newsletter.
‘Very small world,’ I thought. It was one of those serendipitous moments. He came in with another side of the story – on owning and building a cashflow business while also growing his real estate portfolio.
I was blown away by his insights and have pestered him to guest blog for me for a long time. I know there’s about 10% of my readers that have the cash to buy especially now in this downturn in the real estate market.
Enters Walid Saleh.
The benefits of rental arbitrage are many, and most will agree that the single most important benefit is the monthly cash flow potential. Maybe you want to re-invest some of those earnings into one day purchasing your own short term rental property?
Today, I will share with you a few techniques that you can use to invest your hard-earned money into growing your real estate portfolio.
For Sale By Owner (FSBO)
I purchased one of my rental properties back in 2010 and I did it without having to go through a bank. This is a great option which is often overlooked. I used the owner financing strategy to buy real estate directly from a seller without involving a bank.
For Sale By Owner is where the seller acts as the bank and you make monthly payments directly to the seller using the house as collateral. You will still need a down payment and the amount can be negotiated (forget the 20% rule).
These types of deals are rare but they are out there.
A quick online search on sites like craigslist “For Sale By Owner”, Zillow, or FSBO.com will turn up some properties in your area. Important things to keep in mind: 1) make sure to get the property inspected and 2) and there are no loan prepayment penalties (for refinancing in the future).
For the more motivated investor, if you have your eye on a specific property that is not For Sale By Owner, you can ask the seller or encourage them to consider doing owner financing.
Here’s why. Let’s use one of my deal as an example:
|Down Payment:||$50,000 (15%)|
|Loan Term:||15 Years / 180 Months|
This equates to a monthly payment of $2,372.38. Assuming I make these payments for the next 15 years, I would have paid a total of $427,028.40 directly to the seller. That is an additional $127,028.40 in interest payments straight to the seller’s pocket instead of the bank.
Now, not every seller is in a financial position where they are willing to do owner financing, but it’s worth a shot.
First Time Home Buyer Programs (FTHB)
There are many great first time home buyer programs out there.
The benefits here are reduced down payment amounts, lower interest rates, and less stringent qualification process. This is another powerful strategy you can take advantage of.
You’ll want to be careful because a lot of these programs explicitly don’t allow investment properties. So one way to get around this is to purchase a duplex or triplex home and live in one of them. This is a great way to be a first time home buyer while having your rentals pay your mortgage for you!
There are state-specific programs as well as federally available ones. You will need to do your own research, but in my example, I went through a program called Neighborhood Assistance Corporation of America (NACA).
The beauty of this program is that I was able to purchase a $370,000, triplex home with no down payment required for just $16,000 out of pocket. Not only that, but they also bundled an additional $12,000 in rehab costs into the final loan amount so I was able to make some updates to the property without any extra cash out of pocket.
I highly recommend you start with this strategy for your first home purchase because once you own a home you won’t qualify for these programs anymore.
1031 Tax Exchange – For the more advanced investors out there
What is a 1031 Tax Exchange?
1031 is the IRS Code that allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long as another “like-kind property” is purchased with the profit gained by the sale of the first property.
Let’s use a quick example to help illustrate this.
Say I bought one investment property 5 years ago for $260,000. Now as an investor I want to sell it at the current appreciated market value of let’s say $460,000. So, my capital gains tax would be $200,000 in profit. But by doing a 1031 exchange instead, I can recognize a tax savings of $60,000 on that profit and reinvest that money into purchasing another property.
Did someone say leverage?
This is the easiest and quickest way to accelerate and grow your portfolio. Keep “trading up” so you can re-invest that money and buy a more desirable or larger property. This is how I grew – with bigger units and more cash flow.
Keep in mind, the IRS allows up to a maximum of 180 calendar days between the sale of the relinquished property and the purchase of the replacement property, so you’ll want to plan well and hire a reputable exchange company to guide you through the process. It generally costs between $500-$1000 to hire an intermediary to manage the exchange process and funds.
I have successfully used a combination of these strategies over the last 10 years to grow my real estate portfolio. I currently have 10 Airbnb listings and they are all a direct result of using these strategies.
You too can start with just one property and with a bit of knowledge, hard work, and determination you can build your empire.
You can follow Walid for more insights on buying and growing your real estate investment below:
Sam’s note: I wanted to share the most up-to-date advice. This is a great way to hedge your investment when the economy is not doing well.