So, how did I answer it? I decided to share how I got started, including my exact step-by-step formula.
Read on to find out how I went from no real estate to a multi-million dollar portfolio of residential and commercial properties.
How to Buy Your First Property
The easiest way to get started is to buy a primary residence (i.e., a house where you’ll live) and rent out a bedroom to begin to learn about how to be a landlord.
This is not technically a “rental property,” but here’s why it’s an incredibly effective place to start.
First, you don’t need very much money down to buy a primary residence, which will help you afford your first place. For example, if you served in the U.S. military, you can buy a house for 0% down using a VA loan. Similarly, if you buy in a rural area, you may be able to acquire a home for 0% down using a USDA loan.
If you can’t qualify for one of those options, then you can probably get an FHA loan that requires only 3.5% down.
Plus, you’ll get a notably lower interest rate on this mortgage because you’re acquiring a primary residence, usually about a point (1%) lower than if you were acquiring a mortgage for a rental property.
Most importantly, renting out a room will teach you about the in’s and out’s of being a landlord, including the legal protocols that you’ll need to follow.
Best of all, renting out a room in a home you own is a practical, straight-forward way to learn about the basics of leases, move-in and move-out inspections, payment collection, tenant communication, property maintenance, HOA fees, pest control, and other key aspects of welcoming a tenant into your world.
Trust me, there’s a lot to learn, so this is a great way get started with some “training wheels” on.
After getting comfortable with that, move out and fully rent this original house to tenants, while you either go rent elsewhere or buy a second place for yourself.
Primary Residence vs. Rental Real Estate
The reason to rent elsewhere if you have to (while you save up for a second place) is that although both primary residences and rental properties have tax advantages, rental real estate has more of them.
When you live in a property as a primary residence, you can write off your mortgage interest and exclude up to a quarter of a million dollars ($250,000) of net profit from being taxed when you sell your home. That number goes up to a half million ($500,000) if you’re married.
Known as the IRS’s Home Sale Tax Exclusion, this is like Uncle Sam saying, “Hey, don’t bother to pay me taxes on that $250,000 or $500,000 you made. We’re all good here.”
Let’s just say, it’s incredible. For example, that will probably never happen to the money you earn through an employer paycheck.
However, what is even better than owning a primary residence is controlling a rental property.
Tax Benefits of Rental Real Estate
With rental properties, you get even better tax benefits. First, you can deduct depreciation, which is the IRS’s way of acknowledging that the value of buildings and materials that compose them decline in value over time. This can be a huge help come tax time.
You can also use what is called a “1031 Exchange” to avoid all taxes at the time of sale—yes, all taxes (it’s wild but true).
Plus, you can deduct a wide variety of things against your rental income, including:
- Mortgage interest
- Property taxes
- HOA fees
- Pest control
- And many other relevant operating expenses
This means that your rental income will be highly “tax advantaged.”
Of course, if you do things write, you’ll also get monthly cash flow from that rental property, the tenants will pay down your mortgage, and the property will appreciate in value over time. Amazing!
Finally, your fixed mortgage payment will go down over time in inflation-adjusted dollars. Then one day that mortgage payment disappears, and your rental cash flow explodes!
How To Buy Your First Rental Property, Today
To recap, I’d recommend that you start by buying a property as a primary residence and renting out a room within it to learn about being a landlord.
As mentioned above, there’s more to it than you might think. When you’re able, move out of that home into a rental property or another house that you purchase, and rent it out in entirety to tenants.
This is how I got started and should get you off and rolling. As your cash flow grows—aided by the juicy tax advantages described above—you can keep acquiring more properties.
Before you know it, you’ll have your own real estate empire simultaneously kicking off cash flow and building your long-term wealth. Good luck!
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