These people tend to tell that the key is to use capital that’s not your own – like from a bank. I understand how it works with common mortgage. But let’s say I already have a mortgage, thus own one property/real estate. Now I’m in debt towards the bank and they’re not giving me another loan to buy another flat since I need to be repaying the first one (?).
So, how does it work? Where do these people get the needed money to buy the second property? The third one?
In: Economics
Think of real estate investing like a game of Monopoly. You start with one house, then leverage its equity for another mortgage. Some investors also partner with others or use private loans. Once you have a few properties generating rental income, it gets easier to finance more. It’s all about using the value in your current properties to fund new ones. It’s a cycle of buying, renting, and refinancing.
First, let’s get something out of the way: lots of people are liars. Either they don’t own what they say they do or they were much wealthier when they started than they purport to be.
Most of what you see is people buying rental units. They have tenants and income. The tenants are paying back the mortgage in effect.
This was easier when interest rates were low.
We have a rental price runaway problem and predatory landlord situation precisely because organized investors (like, companies not just individuals) are exploiting the rental real estate market.
When you get a mortgage, the bank just wants to be relatively sure they are going to be paid. When you purchase a second (or third, fifth, 18th…) home, they want to know if it’s a rental (I should hope it is!), the expected rent, and they want to know the chances of vacancy.
As long as it looks like it won’t be difficult to find a good tenant, the home won’t require major repairs (they will require an appraisal), and the market rent will cover the mortgage, the bank is generally pretty happy to loan the money to people with good repayment history.
In short, they won’t lend *you* more money to just buy additional houses to sit there empty or for you to use, because your income won’t support that… *But* if you are renting them out, that rent is now a part of your expected income.
You do need to have some money down on each one as well. What happens in many cases of multiple home owners is that they “leverage” their other homes. So let’s say they bought home #2 for 300k a few years ago with a 240k mortgage and it’s now worth 375 after some minor renos and market changes… they can try to use some of that additional equity as the money down for home #3 by borrowing against it. In essence, not actually needing any new actual money down.
While they keep adding up properties, many are over leveraging themselves and end up with very little equity in each property, but have decent cash flow from the rents collected. If property values stagnate or drop, those types of landlords tend to find themselves in a world of hurt… if values go up, they get pretty wealthy.
Buy one property. Rent it out for more than the mortgage. Now the renter is paying for it for you.
Show the bank that the first property is self-sustaining. Get a second loan, since you’re a safe bet, since you have someone else paying that first loan for you.
Buy a second property. Rent it out for more than the mortgage…
There is a skill, luck and hard work not to mention a risk taking mentality involved. And with risk comes the possibility of ruin (financial). The most talked about method is house flipping. Another is to accrue rental properties.
The luck part comes in being in a market that is growing. The skill part might be identifying properties that are undervalued for one reason or another. Frequently these properties need to be renovated and upgraded before putting it back on the market. So with a starting capital, start with one property, buy it, renovate it then put it up for sale for profit. Then reinvest the profit into more properties and repeat. Lots of hard work and knowing how to fix houses (cheaply).
If the market is appreciating fast enough, there may not even be much need to fix them. But decisions need to be made quickly in recognizing value. You need capital to service the loans until they can be sold. Even one or two bad calls can wipe out the investor. High risk, high gain.
Another way is to purchase properties for rental. A beginner usually starts at the low end (usually Section 8 housing). Being a landlord is thankless, time consuming and needs toughness to deal with recalcitrant tenants, frequent repairs etc. Once you get going and start earning more rental income from the property, it might be possible to take more loans (as the banks have more income/collateral to loan against) Relying on property managers reduces profit margins. So the more time the investor puts in, the bigger the returns. Hard work.
Of course, all of this depends on which country you’re in, what kind of markets you have, the tax laws involved etc. So probably need good lawyers, accountants and a reliable team of contractors. Also getting to know your banks well. Property investing is a business and not a get rich quick while lazing around. Of course, being successful might result in super high returns, but there are also lots of failures and people who have lost all their money (which you won’t hear about) Think about it – there is no “easy money” in life.
My grandparents owned 30 houses. Aunts and uncles all own houses. My parents had 20 when Dad died. Mom has lived off that and slowly selling them for 25 years.
I don’t own houses for a reason. I’ve been there through full gut renovations and had to deal with arguing with the county over tax rates. I make a similar standard of living to mom and dad, but I’m an accountant. The bonus is I’m not out painting the interior of a house I need to get on the market instead of enjoying Christmas.
Most people lie, especially on social media. Don’t trust everything you see, but…
Most people who own multiple properties in a rental portfolio had a huge advantage through rich parents. It might not have been as literal as their parents handing them 400k for their first properties on their 18th birthday but at the very least had finances to help part way or finance the child to live rent free to save up a deposit.
Much more rare but some people hit it big selling companies they created in their early 20s. My friend from school was from a poor family but created a clothing brand he sold for 4m. He then went into property development.
Most of these self made property Devs were never self made.
Secured debt.
Commercial real estate mortgages usually have language whereby if you default on paying they can immediately come into court and get the rental income transferred to the lender. Commercial real estate foreclosures are generally quick and easy (no consumer protections) so the lender can quickly get title to the property and resell it. You can also do “blanket” mortgages where a bunch of properties are securing a loan for big lump sum.
As long as the lender has sufficient collateral to cover the loan, they are OK.
Problem for the property owner/borrower is that if they get into trouble, things go sideways really fast
Buy one, maybe live there and rent out spare rooms, now the renters are paying your mortgage. With the money you save, buy another one. Now the renters are paying your mortgage and living expenses. You no longer need a job, so you can spend more time renovating a third fixer upper from auction or something. Now you are generating income from your rentals, save up and buy another one.
Now you have two for profit properties you don’t need to be as frugal and can pay contractors to do work or have an estate agent take on the maintenance for a cut of the rent. Now you are making money and doing very little for it, you put a portion of it away and continue reinvesting that portion in additional properties, maybe one to live in.
Each property you add to your portfolio makes it easier to buy the next.
Banks are happy to lend you money under two conditions: 1) you demonstrate the ability to consistently pay back the loan, and 2) you have “collateral” in something that the bank can take from you to pay off the loan in the event that you can no longer pay it back.
Real estate property fulfills both of these conditions fairly well – if you own it and don’t live in it, you have the ability to rent it out for income to pay back the loan, and the property itself acts as collateral that the bank can foreclose on if you default. They will ask further that you put a down-payment so that you’re invested in the property and won’t just walk away the first sign of adversity, and likely they will want you to have a steady source of income that isn’t the property so that you can continue to pay it off if it goes vacant for a few months between tenants. But if you’re financially stable enough to own the property you live in and regularly pay that off, while still being able to save up enough for a down payment, it’s not super hard to get approved for a mortgage on a second property.
Once you have multiple properties to your name, it becomes even easier for the bank to approve further loans, as you have the income from those properties and an also use them as collateral
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