I met an old friend a few days ago to show him some homes.
He told me about his plans to buy a condo, live in it, then later rent it out, and buy something else. He said that he knew that idea seemed “far fetched,” but he wanted to see about getting on that path.
He told me he had met a few people recently who had done it and had gotten way ahead by owning rentals.
I said to him “you know that’s kinda my thing too, right?”
I told him about the condo in Mukilteo that he used to come over to (back when I’d host Taco Tuesday there), and how that’s now a rental property.
He stopped me and said “when did you pay that off?”
So that’s when I knew I got to give him the good news that it would be way more within reach than what he had been thinking.
Spoiler alert: I have not paid off my condo. I still owe about $90,000 and make a $1025 payment every month, which thankfully is about $300 less than the rent I get. In that conversation, I got to tell him that you absolutely do not need to have one property paid off to move onto another. Qualifying for the new mortgage isn’t even that tough, because you get to count your potential rental income as income to qualify. In other words, you don’t need to qualify for two full mortgage payments.
I told him all the numbers involved with what Darin and I have done. He was surprised to hear that our rental income pays for all our mortgages, including the house we live in.
I broke it down for him and by the end of conversation, his eyes were open to the world of real estate investing with a newfound excitement that it’s within reach!
I thought I’d put into writing a more in-depth look at what I’ve done and how I did it.
So here it is. We’ll start from the beginning.
It was 2009. I was 22 and single.
Income: I had a real estate license but had never sold a home. Not even close actually. 100% of my income was from my restaurant job. I served tables 2-3 nights per week and that was it.
Credit: I had A+ credit because I used it really minimally. I had a history of car payments. I had credit cards but only used them for gas and paid them off every month. I didn’t know much about credit, but I knew that the only thing that really mattered was that I had a history of payments made on time.
Debt: I had no debt, which is the only reason I was able to squeak out an approval for this condo. Compared against my barely over poverty level income at the time, I actually had a little room for some debt in the form of a mortgage payment.
Down payment: I was a saver back then because I had to be. I was living with my parents rent free. Not everyone has that luxury, I know. My expenses were low. Real low. Pretty much just gas, car insurance, phone, and the rest was for fun money/saving. My car was freshly paid off at the time. I saved, obsessively. But also because of the condo I bought, (long story) I needed 20% down. That wasn’t possible for me so at the time so I did borrow a little bit from my parents for my down payment.. By this time they had accepted that I wasn’t going to go to college, so the small amount they had set aside for my education would now go into my down payment fund. And, I paid them back, for the most part, until they told me to stop. I know, not an option for everyone either, I’m really lucky. But know, you don’t need to put down 20%. It makes your payment lower and your life easier because of that, but not very many first time home buyers put that much down. Not having 20% down will not prevent you from becoming a real estate investor.
Once I was in, here’s what really helped me:
I continued living my life as if I were saving up for a down payment.
Frankly, I was. I knew I wanted to own multiple properties. At the same time, I was a 22 year old living on my own for the first time. The first time I ever bought laundry detergent and groceries to stock the fridge was then. I wanted some reserves because I was still getting used to having to pay for things, but on top of that, my next down payment was on my mind.
I got a roommate, almost immediately. I figured out what market rent was, and I charged her a little less than half that amount, which ended up being about half my payment. Every month, I made the payment by myself, and I saved every penny of the rent she gave me.
Here’s what helped:
No debt, savings, a roommate, parents loaned me some money to increase my down payment.
What made it hard:
Really, really minimal income.
Property #2: Lake Stevens house
In the spring of 2013, Darin and I had been married for a few months. I was 26. We were living in my condo. 2012 was an expensive year. We got married (and we paid for about 80% of the wedding with our own money). And, we bought a new car with cash right before Christmas of that year, which was just a couple months after the wedding.
We thought It would be cool to sit down with our lender and get on the path to buying our next home. I had lived in the condo for over three years, and he had been there for not quite one year. We knew we’d want a house eventually, with a yard and a little more room. We were surprised to find out that we’d qualify for anything at all. We decided to buy whatever we could, knowing it wouldn’t be anything fancy.
Income: Being self employed, 2012 was the important year in terms of qualifying for a mortgage in 2013. My 2012 wasn’t exactly a breakout year either for me. I was distracted with wedding planning and only sold seven homes, which translated to probably under $30,000. Darin was also self-employed and wasn’t a super high income earner that year either, but combined we made just enough to qualify for the new mortgage payment. Our income was probably what would be considered a little below average for our area. At that time, in order to include your potential rental income in your current primary residence, you needed to have a certain amount of equity, which we did not have, so we needed to qualify for the two payments (the condo, and the new house). We did, barely.
Debt: Somehow, none. Besides the condo payment, which would of course count against us because of the lack of equity in it. Darin also has two homes in Wisconsin, but since they had been rented, we were able to use the rent he was getting on a monthly basis as income, which meant those payments didn’t count against us.
Down payment: We had 20% down, we wouldn’t have qualified otherwise. Our payment would have been a little too high for our debt to income ratio (even with no debt). We were battling against barely average income for 2012 and a condo payment we needed to make also. It was a very low purchase price, which is why we had 20% down.
20% down, no non-mortgage debt.
Also, we weren’t picky. We wanted a move-in ready house, but didn’t need to be huge, fancy, completely upgraded, etc. The house was really plain jane, had a tiny backyard, and a one car garage. One thing we thought was odd about the house, which was almost a deal breaker, was that there was no door from the house into the garage. In the end we thought “at least it has a garage.”
What made it hard:
Low income and big expenses in 2012. Also, Darin’s credit wasn’t the best at that time, because he didn’t have much of it. His credit score mixed with unfortunate timing, our interest rate is 5.125% on that house. Historically, that rate isn’t bad. But it’s higher than what we’ve gotten used to over the past 8-9 years!
Property #3: Another Lake Stevens house
Fast forward to 2015. We were comfortable enough in our plain Jane Lake Stevens house. Our daughter, Morgan was a few months old. One summer day, Darin showed me a house on the other end of town, I thought “for fun.” I had zero thoughts about buying another home but next thing I knew, we were writing an offer. That offer was not accepted and didn’t work out, but now I had the bug. I wanted to buy another home. Something a little bigger, and a little nicer, that would allow us to rent out our first house in Lake Stevens.
In mid July of 2015, we strolled into a new construction sales office and (a couple hours later) strolled out with an accepted offer on a new home, that would be complete right before Christmas.
I was 28.
Income: Finally above poverty! Our income was decent in 2014, which was the year we used to qualify. And this time around, we had rental income to supplement our income. Lending guidelines had now changed, and the rental income we’d get from our first Lake Stevens house (the one we were living in) would count. All we had to do was get a lease signed before closing.
Down payment: We had 10% down.
Debt: We had one car payment, but that was it besides mortgages and credit cards that we paid off every month.
We had money saved (10% of the purchase price). We could count the rent we’d get from Lake Stevens house #1. And, we didn’t have to count the condo payment either since that one was already rented, and I was able to show the lender a history of rent checks and leases.
What made it hard:
The fact that Darin and I are self employed is the only thing I can think of. It’s just a lot more paperwork, and more ups and downs to explain. But honestly, this was the easiest home purchase by far.
So here I am in 2017. Feeling grateful that I bought when I did, and kept each house. I set a goal in 2007 to buy three homes before turning 30 and I did it.
Between the first two homes I bought, I get over $750 per month in rental income. Meanwhile, my tenants are paying down my principal, the homes are appreciating in value, and I’m enjoying tax deductions.
I love it when a plan comes together.
The most important business/financial decision you’ll ever make
A topic I skimmed over earlier is Darin’s real estate investments he had before we got married. He has two investment properties in Wisconsin. They’re both rented, and we receive positive cash flow from those rentals every month.
You could say I married into that and got lucky. I just see it as marrying the right person, who shares similar goals and agrees on the same kind of lifestyle. The most important business/financial decision you’ll ever make is who you marry.
When I met Darin in 2008, he had been hit really hard by the housing crash. He had a negative net worth actually. He was upside down on his homes, and on top of that, was having some trouble with his renters. But, I liked the way he thought and had no doubt he’d turn it around.
Today, in 2017, when you add on the cash flow from Darin’s Wisconsin properties, and the homes I've bought, our rental income (cash flow) covers the mortgage payments for all the rentals, and even for the house we live in, the one we bought in 2015. It’s not a bad position to be in. Certainly worth some of the sacrifices we’ve made along the way.
Our rental income didn’t come super easy, but it’s not as hard as you might think.
If you aren’t a super high income earner like I haven’t always been, it’s still possible. You just need to be purposeful about your spending and saving habits. It’s how I did it anyway!
I do not believe in being cheap.
I don’t think life is about sacrificing every day for your entire life. I think a lot of people, even my close friends, wrongfully assume that I’m cheap. I was probably cheap back in the days when I made less than $25,000 per year, but that was because I didn’t have any extra money to spend. Any time I’ve ever chosen an item off a menu because of the price, or shopped for more than a couple hours, then left the mall empty handed, it would be easy to assume I’m cheap.
I believe there’s a time and a place to enjoy the finer things in life. For me, owning a home came first. Once the second home (and therefore, passive rental income) came into play, it felt right to treat myself once in a while. After my third home, those times and places come a little more often.
The best way to increase your net worth is through real estate. When you own appreciating assets that provide you with tax deductions, you can feel better about the occasional splurge.
My continuing path to wealth through real estate ownership has been just short of a decade so far. I’ve gotten a taste of the compounding benefits of owning multiple properties, and how easy the money feels. I’ve gone from poverty to my home paid for by tenants. I figure if I can accomplish this in less than a decade, this is certainly the path to freedom and nice things in my future.
I don’t want to run out of money at age 70 and have to figure out which local business will hire me so I can make ends meet. I don’t want my family to feel obligated to take care of me either. I also don’t want to have to think twice about what fancy meal I order off the menu at a fancy restaurant at 70. I don’t want to feel guilty about it either.
When Morgan is in her 20s and wants to start a business or buy a home, I want to know that if I want to help her, I can.
Having these visions and goals for my future seems so much more possible while having real estate assets on my side.
If you want some of the same things for yourself, you should know that it’s possible, You don’t have to make six figures per year to get a good solid start, or take the next steps.
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