How I bought a Rental Property with $5000
Lessons for getting started in real estate
I just closed on my first true investment property with almost no money out of my own pocket. In fact, I will be collecting a check at closing. Normally, we think of real estate as a form of investing where a large sum of money is needed for an initial down payment. How did I get started with so little?
First, let’s go back to 2012. Yes, I bought my first property in 2012. Why do I still call myself a newbie real estate investor? Well, because I had no clue what I was doing in 2012.
I was a recent college grad, less than a year into my first job, and bought my first property — a primary residence using an FHA loan and with 3.5% down. With some closing cost assistance from the seller, my total out of pocket costs came to just under $5000.
I realize the article could stop right here — I acquired a property with $5k. But here is the story on how I held that investment — through many times I thought I would lose money and parlayed my equity to begin my journey in real estate investing.
I lived in this house for over 2 and a half years but in my mid-20s I was craving the city life, not the suburban living I had bought my way into. At this point, I listed the house for sale at a price where, with realtor fees, I would break even.
It shouldn’t be any surprise to you that the house did not sell. Looking back, I’m thankful it did not sell.
Determined to not let this investment tie me down, but also not take a loss on my first major investment, I moved and rented out the house.
I am not going to glamorize landlord life. My first tenant was a dream come true. My second tenant seemed perfect but ended up being a nightmare. I had to evict my third tenant. During the time my fourth tenant lived in the house, appliances and finishes began to deteriorate resulting in higher repair costs. The worst days were when the property was empty and I paid the bills from my savings while constantly making trips to the suburbs to show the property to prospective tenants.
At the same time, I watched my net worth grow with someone else’s money and knew the headaches were worth it. Since I had opted for a 15-year mortgage, I paid down a significant portion of my mortgage in the few years I owned the property.
Flash forward to the housing boom of 2020 and a buyer approached me. After moving across the country I wanted to invest in properties that were physically closer to me that I could manage myself. I also had substantial equity in the home — enough to purchase a new property with 20% down.
With a 1031 exchange, I was able to take all of my equity from my old house and invest in a new cash flowing rental property. The proceeds from the sale cover my down payment and most of my closing costs. I’ll even get a credit back from the earnest money I put down to secure the purchase agreement. Overall, I had to pay for an inspection, appraisal, and about $800 for closing costs.
Lessons Learned
Don’t get me wrong — this investment worked out for me. But here are some of my lessons to take forward if you want to get started investing in real estate without a large down payment.
Buy in a desirable area
Location, location, location. Even I knew it in my lower 20s, but I did not take that advice. My first property was next to a highway and that made it harder to find a tenant. Most tenants in the area also rented because they could not afford to buy or had poor credit not because they wanted to. Buy in a location with demand for rental housing that attracts high-quality tenants.
Plan to live there until you have more than 20% equity in the property
If you put less than 20% down on a primary residence, most mortgage companies will want you to live there until you have 20% equity in the property. Not only do you have a buffer for property value fluctuations, but it will make it possible to refinance your loan and lower your payment.
Consider House Hacking
I lived in a 3 bedroom 2 bath house completely by myself and missed out on a huge chance to live with roommates and substantially cut my living expenses. Not to mention those roommates could have decided to continue to live in the house after I moved out and become my first tenants. Looking back, little annoyances like dirty dishes in the sink are nothing compared to the $400-$800 a month I could have saved by renting out one or two rooms of my house.
Check all tenant references
Learn from your past mistakes, check all of the references on tenant applications, and ask hard questions like “why do you want to move in right away.”
Be resilient
Real estate investing often comes with headaches, from finding tenants to their stories about why rent is late, to property repairs and unexpected costs. I had many points where I nearly reached my breaking point and just wanted out.
Much like holding stocks through ups and downs of the markets, holding real estate through unexpected events usually leads to larger returns later down the road.
