I believe that Millennials are selling themselves short financially. They’re not thinking outside of the box. Heck, that’s why I started this blog. I wanted to help others in my generation see what’s possible if they’re willing to think creatively about their financial future and what they can do to get ahead.
A good example of this “selling themselves short” mentality is with respect to real estate. Millennials simply don’t think that investing in real estate is something they can do. They often think they need hundreds of thousands of dollars in the bank to get started.
But they don’t. And I’ll tell you why in a minute.
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Look, folks. Real estate is an amazing investment. Unlike stocks, you can buy it for less than market value. You can use leverage in amazing ways. The tax benefits are enormous.
Knowing all this, I decided in my 20s that I wanted to buy property. But I was torn between 1) buying a place to live so I could stop throwing away money every month on rent and 2) investing in cash-flowing property so people paid me rent every month.
I went back and forth on this issue for YEARS until I finally figured out that I could do both. Yes, I could both buy a place to live and buy cash-flowing real estate, both at the same time!
💡 How I Did Both
My first property was a 4-unit using FHA 3.5%-down financing in a suburb of Los Angeles. The purchase price was $435,000 with a $15,000 seller credit. I lived in one unit and rented out the other three. Single at the time, I also rented out the bedroom in my unit and slept on a mattress in the living room.
- I was living for free while my friends were paying through the nose for L.A. rent,
- I was building equity as my tenants paid down my mortgage,
- I was cash flowing hundreds of dollars a month, and
- I got 4 units an hour from Downtown L.A. for a mere $15,000 out of pocket.
- A single-family home purchased from a distressed seller (he purchased for $210,000 during the boom; I got it for $75,000 cash),
- A beachside luxury spec home development deal along the California coast, and
- A buy, rehab, retenant, refi apartment syndication in Arizona — the returns on which have blown the stock market out of the water.
🧠 It’s a No-Brainer!
The FHA fourplex strategy really is a no-brainer for single Millennials. If one does nothing else in real estate, they will have succeeded by getting into a fourplex as a young man or woman with only 3.5% down.
Assuming they bought good property whose rents exceed the monthly expenses, then in 30 years when they’re in their 50s and the mortgage is paid off, and they’ve done the smart thing by raising the rents over the years, they will be sitting on a million-dollar asset that cash flows thousands of dollars per month at the cost of a measly $15k or so out-of-pocket when they were 20-something.
I can’t think of any better way for young people with limited resources to prepare for their future so early on in life with so little cash out-of-pocket.
💸 FHA Self-Sufficiency Rule
One thing to keep in mind when looking for an FHA owner-occupied triplex or fourplex is that 75% of the sum of the market rents on all units (including the one you will be occupying) need to cover your monthly payment (principal, interest, taxes, insurance, and mortgage insurance). This is known as the self-sufficiency rule. It only applies to 3- and 4-unit properties (not SFRs or duplex) bought using FHA financing. There are other FHA requirements concerning which you should contact your local lender, but determining whether or not a triplex or fourplex meets the self-sufficiency rule is a good place to start as this rule will immediately eliminate many properties from your search, especially in expensive markets like mine.
The fact that the self-sufficiency rule only applies to triplexes and fourplexes in no way means that you cannot purchase a single-family home or duplex using FHA financing. It just means there’s an additional requirement that 3- and 4-unit properties must meet because as these are typically larger, more expensive properties with bigger mortgages and bigger monthly payments and hence pose a greater insurance risk to the FHA, which, by the way, is a mortgage insurer, not a mortgage lender. As FHA’s credit and income requirements are not as strenuous as they are for conventional mortgages, it seeks to mitigate its risk of insuring a 96.5% loan-to-value mortgage on a larger property by making sure that the rental income is high enough in relation to the mortgage.
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