FHA Loans and your retirement

What is the link between FHA financing and retirement? It’s the easiest and most powerful way I know of for realizing a retirement that isn’t at poverty level. This way can actually make you a millionaire and you can start from $0 as long as you have 2 years work experience, a certain level of credit score, and are able to qualify for the payment. As long as you can document all this, you are on your way.
If you understand 3rd math, you can do the numbers! Real estate investing in essence is truly simple, and open to the masses. Obviously there are almost infinite variations on any given scenario, and this is one of the greatest parts of real estate investing. You can tweak it in so many ways according to your specific goals, talents, etc. I’ll start at the bottom (which is where I started) from next to nothing. When you start with a first home with 3% down (FHA financing) and have seller pay closing costs, you are actually in the most powerful leverage position. You can even have the 3% gifted to you! If you figure an average appreciation of 5% and a house value of $100,000, after 1 year you would have $5,000 in equity buildup. Since you only started with $3,000 your return would be 166%! That is only the average-that is why it is so important to put in the sweat equity into your first home-the returns are astounding! Once you buy investment property your average return with the same appreciation would be 25%, since you have to invest more of your own money, typically 20% down. Make the most of your situation!
The actual dollar numbers are not very exciting to begin with, but as an investor you need to look at return on investment to understand the power of real estate. I would regard this as a lousy return and try to tweak it by working on the house and creating more value (spend a small amount of money & create the biggest bang for my buck). When you get into millions of dollars worth of real estate the percentages turn into big money.
Progress can seem slow in the beginning, but remember you are living in this house doing whatever it is that you do, and your house is doing this by itself on the side. These returns can be much bigger if you buy this house at a discount (if it’s bank-owned or a short sale and you bought right you should have equity by the time you move in), buy it at a low point in the real estate cycle, create some sweat equity yourself, buy the dump on the block (my personal favorite), etc. As you acquire more rentals, you are making the same percentage return but on a much bigger dollar amount. If you own a million dollars of real estate and get an average of 5% return, that is $50,000 that first year! What follows is an example of how I came to appreciate leverage.
Our first home that turned into a rental required a $7500 investment plus approximately $5000 and alot of sweat. We sold it after 2 years and netted $55,000 after all associated costs. That works out to 440% return over two years or 220% annual return. This would have been higher had we known we probably could have got closing costs paid by the bank! Then our 3% down would have been $3,750 plus $5,000 in remodelling costs or a total of $8750. Our return would then have been 628% total return or 314% annual return! On our home, I don’t even know what kind of return we’ve gotten out of it! We took out money to buy the first duplex, and then much later took out more to buy others. We made about $55,000 after holding onto the duplex for only a year. That was 100% financed, since the down payment came from our home refinance, and the rental income covered the expense of borrowing it, so how do you figure your return on investment-it’s infinite! How’s that for a great return? This is actually common in real estate. Where else can you do that?
Once you get started and buy your first investment property think leverage, specifically 5 times what you have to invest. You are making 80% of your returns using the banks money. Another way of looking at it is whatever gains you realize on the value of the property, multiply it by 5 times. That is your return on investment.
When you have enough equity to put down 20% on a rental, refinance your home or get an equity line and take the cash out (not for vacation, boat, fancy car etc.) and buy your first rental. Do the math and make sure your rents will cover the mortgage payment plus the cost of borrowed down payment (equity line), with a little extra cash flow on top. You can get a mortgage calculator or book with tables to figure monthly costs. You might elect to have your first rental managed by a management company, usually for around 6% of the monthly rent plus 1 months rent fee per tenant moved in, until you are more comfortable with it. Our first was managed for the first year, after that we figured we could do it, and never looked back. It’s about comfort level as well as how fast you want your money to grow. There is a trade off.
Once you have your first rental, you now have 2 homes growing at 5% annually, so you are increasing your velocity of money. Your equity begins to grow faster as you accumulate. You can look at your rentals as super-charged 401ks (except way better), each one growing by itself with your guidance. After your first house or two, you shouldn’t have to work for the money to buy the next one. Your houses are now working for you. The next purchase will come from one of your existing rentals, and so on and so on…. It could take you as little as 7 years to create a million dollars of net worth if you could start with two homes ($7,500 initial investment each).
If you already have a 401k or money sitting in a CD you can get there even faster!