At age 17, I was introduced to the book, Rich Dad, Poor Dad by Robert Kiyosaki.  From that day forward, I knew I wanted to be wealthy and become a real estate investor. However, over a decade later my poor money management habits left me in a significant amount of debt. 

Here is the path that I followed to purchase my first rental property and how you can apply them.

Committed to Financial Discipline

I realized that if I wanted to own a real estate portfolio, I could not continue the habits that landed me thousands of dollars in bad debt.  For my situation to change, I needed to BECOME someone who was fiscally responsible and focused on growth.  I had to be disciplined and truly evaluate why I was constantly purchasing things I didn’t value.

In other words, I had to feel comfortable with money sitting in my bank account.

I had to let go of the excessive desire to spend ‘extra’ money and focus on my real goal – freedom. Whatever the temptation was, it was NOT going to get in the way of me purchasing my first rental property. Click here to read how I did it.

Action– Define what your values are and what you truly want.  This entails shifting your mindset to be satisfied with what you have and limit your desire for more.

Next, commit to getting your personal finances in order by paying down debt and starting a cash reserve.

Leveraged Other People’s Money

I purchased my first home with a VA loan in 2010; during the Great Recession.  Little did I know that this would be the catalyst for launching my real estate portfolio.  Because I purchased when the market was low and in a good location, the home had equity I could leverage.  In addition to buying at the right price, I also started getting my financial act together by reducing my debt and saving money.

However, my strategy was not to deplete my savings for my down payment but to use other people’s money through a cash-out refinance. (This means I would take the equity out my home and restart the mortgage payment).

By reducing my debt, my debt to income ratio was low and my credit score increased. This made me an ideal candidate for the best interest rate and the largest cash-out settlement.

The process was extremely simple. I completed the refinance application, the bank checked my credit report, and they sent an appraiser to evaluate the home.

When the appraiser came to assess the value of the house, he asked what improvements I would do to the home.   I told him I was still debating, but in my mind, I had no intentions of using that money to upgrade my primary home.  Why? Because remodeling a kitchen or a bathroom does not put money in your pocket unless your goal is to sell the home at a higher value.  This money became the seed money for my down payment.

We closed on the new loan, I received the cash, and I did not spend it.  This is important and I don’t want you to miss it.  I allowed the money to be available for a specific purpose and all other desires did not matter.

I emphasize this because if I was the old Stephanie, I probably would have traveled the world, purchased a whole new wardrobe, and purchased other stuff I would not remember.

But because my DESIRE was so strong to purchase an investment property, I could see the money and know I was prepared to achieve my goal.

Action – Become an attractive candidate for the bank to offer you other people’s money.  An attractive candidate has a strong credit score, low debt to income, and some cash reserves.

Be laser focused on your goal and be comfortable with cash being available.

If you do not want to leverage the down payment, you can also save for it.  Some lenders will allow you to purchase a single-family investment home with 10 percent down with private mortgage insurance.  A duplex will likely require 25 percent down.

(Note: Check with your lender for specific guidelines)

Committed to Real Estate Education

While I was paying down my debt, I studied several real estate books, but once the cash out refinance was final, my education was much more focused and deliberate.  I needed to be confident in my analysis and investment criteria so that when the opportunity came, I was prepared.  I would analyze deals for practice to understand what was considered a good deal.

I narrowed my search to multi-family (2 or more units) properties to reduce the risk of relying on one tenant to pay the mortgage and all other related expenses. Here are a couple of books I read in my study:

Investing in Real Estate by Andrew McLean and Gary W. Eldred

Investing in Apartment Buildings by Matthew A. Martinez

Multiple Streams of Income by Robert G. Allen

Action– Educate yourself on the real estate process.  Start with one of the books above or search for real estate investment on Amazon.

It is fine to seek a mentor in this process, but you should be familiar with this business before you start.

Made My First Offer

After months of studying the fundamentals, analyzing deals, and understanding the market, I made my first offer.  I fell in love with it (FYI – this was a mistake).  It was a cute duplex, in an established neighborhood with good schools and working professionals.

After a couple of negotiations, we settled on a price.  Yes! I got my first contract.  But little did I know that the contract is just the first of many hurdles to get to closing.

The due diligence (inspection) period was especially critical because even though the home appeared very sturdy and well maintained, it was an older home that was not upgraded to meet today’s building standards.

After receiving the inspection report, I was disappointed, but not defeated. I was open to negotiating some of the repair work with the seller.  Unfortunately, the seller did not want to budge on price or do any repairs.  With the required updates to bring the home up to code, the numbers just did not work.

Despite my realtor desperately trying to convince me that it was still profitable, I walked away.

I was more than prepared to be a landlord.  Why didn’t it work, I asked?  It was MY time and I loved the house.  But luckily, my father was in my ear letting me know, “Don’t worry baby girl, if this one is not for you, there will be another.”

Action– Establish your criteria and be firm on what you will accept.  Do not become emotionally attached to a property and be prepared to walk away if necessary.

Closed My First Deal

And my Dad was right.  In April 2017, another duplex came on the market.  Unlike the previous deal, this one only required some cosmetic updates and it already had one tenant.  And his rent payment was enough to pay the mortgage.  Not to say this deal was without some drama, but it was minimal and we closed on the loan within 30 days.  An added bonus was I received my first rent payment the next day after closing!

Action– Be persistence, but also patient with your goal.  Wait for the RIGHT opportunity, not just any opportunity.

Leveraged Other People’s Money Again

Now, I was officially a homeowner and a real estate investor!

I leased the second side of the duplex and the property was paying for itself and building a cash reserve.  This was great! However, now I had another dilemma.

How was I going to expand my rental portfolio?

I just used my refinance funding for the down payment on the first duplex. I had some money in my cash reserve account, but I didn’t want to use that because that was to protect me if in case of an emergency.  My rental property had some equity in it, but not enough for a full down payment yet.

After researching creative financing options in real estate books and listening to various podcasts, I decided to leverage the equity in my current home again, but not through a cash-out refinance.  No, I didn’t want to reset the mortgage again because the interest rates were higher now.

I decided to open a Home Equity Line of Credit (HELOC). Because I had solid credit and additional income from the rental property, I was a great candidate for this product.

Note: This option is ONLY recommended for those who have the FINANCIAL DISCIPLINE to not splurge on items that don’t make money.  You must be comfortable with having access to capital and not be tempted to spend it on your lifestyle. 

The good thing about a HELOC is that it does not accrue interest until it is used.  It also does not impact your mortgage payment.  It is a separate bill whenever you use it.

Turned My Primary Home into My Second Rental Property

This was not really a part of the plan, even though I knew it was always an option, but I turned my primary residence into my next rental property.

This has to be one of the fastest methods to invest in real estate.  There are a lot of accidental landlords because of this method. Honestly, I wish I would have done this earlier.

The rule is that you must live in the property for at least one year to qualify for owner-occupied rates and down payments minimums.  After a year, you can, move into your next home and rinse and repeat.

I had been debating and talking to my friends about downsizing and moving to Washington DC for a while.  However, in late 2017 I stopped talking about it and made it happen.  While I wanted to move closer to the city, I never planned to sell my house.

It worked out perfectly that I learned how to list the property, screen tenants, and develop leasing agreements without a management company.  (I learned this without being a real estate agent.)

I leased the property in less than 30 days and coordinated my move out date to minimize the cost of managing two house payments.  A bonus was that this move not only expanded my rental portfolio but saved me more than $500 a month by reducing my expenses and creating positive cash flow. A double win!

Action: Work on getting your first house and turning that into a rental after one year.  The barrier to entry is low as you can use programs such as the FHA Loan, First Time Homebuyer, or the VA Loan. These programs are available for 1-4 unit properties.

If you select a multi-unit property, you can have the tenants pay the mortgage while you leave there. This is called house hacking.

Expanded the Portfolio

Even though I easily added a new rental to my portfolio, I was still on the lookout for more properties. I was always searching, it became a little bit of an obsession.

In between searching for my first duplex until now, I had viewed several other homes and made a few more offers that did not work out.  However, my luck turned when in the middle of winter another duplex became available. I quickly analyzed the numbers and made an offer.

This property needed some work, but the seller, very eager to sell, was willing to negotiate to accommodate for the repairs.

Remember the HELOC that I had available? The line of credit that I saved just in case I needed it? Yep, it was time to leverage it.

To accommodate the lenders’ request, I did have to use some of my cash reserves as the down payment along with the HELOC.  But the HELOC paid the majority of the down payment.

I did not have any concerns about this request because the property would pay for itself, replenish my cash reserve, pay off the HELOC, and establish a reserve account for repairs.

Action: Stay ready. As the saying goes, “When Preparation Meets Opportunity Equals Success”

Final Thoughts

It’s amazing what you can accomplish when you set a goal and commit to it.  The key is to stay focused and prepare yourself for when the opportunity arrives.

Now some people are adamant about not using debt and that’s fine.  This strategy is not for you.  However, in my opinion, debt is not bad.  Debt is a tool and the person using the tool can use it for good or for bad.

For example, most people that are not wealthy, leverage credit to sustain their lifestyle.  This is exactly what the banks and lenders want you to do.  Why? Because it makes THEM more money.

The wealthy use debt wisely to pay for assets that not only pay for themselves but also provides cash flow.

It’s time that you shift your thinking from consumer to producer. Commit to getting your finances in order and create a wealth plan to purchase assets, not liabilities.

Let me know your thoughts. Have you tried this strategy? What are some other ways you have purchased real estate?

Leave a comment below.