How to Start a Real Estate Empire with Only $12,500

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How to Start a Real Estate Empire with Only $12,500

Ali Jamal Forbes Councils Member

Real Estate

If you're not currently a homeowner or haven't purchased your first multi-residential property, you may still have hopes of building a multi-million or billion-dollar real estate portfolio. Yet that goal appears to be far-fetched amid a global pandemic, while scores of people are losing their jobs and our economy sinks knee-deep into a recession.

As someone whose $40 million real estate portfolio was built on the opportunities provided by a recession, and whose purchasing power for new acquisitions have increased by 50% as a result of our current situation, I can attest that sweeping your hopes and dreams under the rug right now will be one of your biggest mistakes. That's especially true for first-time homebuyers or someone looking for a new primary home. Laying the foundation of this soon-to-be empire can begin with as little as $12,500.

At the same time, it's important to be realistic and lower any expectations with respect to the asset class. The first property you purchase will not be a fancy new house, often referred to as Class A/B. You may have some wiggle room with asset class as your portfolio grows, just not initially because your growth potential is largely based on the property's capacity to be rehabilitated, re-evaluated and then refinanced in the near future.

Here's a step-by-step guide on how to accomplish a feat that, at first, may seem unattainable.

1. Cap your search at $50,000.

This will allow you to make a 5% down payment of $2,500, which comes from the $12,500 you have in savings, and still leaves you with $10,000 to spend on renovations.

To find properties within this price range, I recommend using the appropriate location parameters. Often, we're not likely to find a suitable $50,000 property in the urban core. By "suitable," I mean a property that can be refurbished and reappraised with at least a 25% increase in market value within five years. For now, your best bet is to focus on a tier two market or the suburbs.

2. Apply for a Federal Housing Authority (FHA) loan.

The Federal Housing Authority Loan (FHA) offers federally backed loans to borrowers who have a credit score of 580 or higher and a debt-to-income ratio that's less than 43%. While most bank loans require a 20% downpayment, FHA loan requirements can be as low as 3.5%. Both first-time homebuyers and investors are eligible if the loan is for their primary home.

First-time homebuyers may also find additional assistance for the down payment through state or local programs. For example, the state of Georgia offers the American Dream Downpayment Initiative (ADDI), which provides first-time homebuyers with assistance if their income falls below 80% of the median income in their area.

3. Establish a strong financial disposition.

Once you've acquired your primary home, your next investment property will likely be financed through another bank. This means you need to create a strong financial disposition by earning money on your primary home through refurbishing and then renting out additional living space, maintaining a good credit rating and holding down a steady job. Give yourself at least four to eight months to create the strong financial standing you need.

4. Refinance.

Once you've done all of the above, ask your current lender to reappraise your home. If you've played your cards right, you should see at least a 10% increase in market value. Request a $20,000 line of credit against your primary home to make a downpayment on your next investment property. Then take this disposition to another lender along with a thorough business case for your proposal to buy your next investment property.

Your proposal should include an income summary that provides details on how your new property will generate revenue while you're maintaining a good credit rating and possibly even maintaining positive cash flow from your original, primary home. If your investment property requires major renovations, consider taking out a cash advance against your credit card and then make monthly payments using the rental revenue earned from your new property, as opposed to requesting this additional financing from your lender.

5. Repeat and upgrade.

As long as you're in the black, you would continue this cycle every year, with each subsequent home increasing in value. You should also be able to afford a larger down payment on each subsequent property.

As one can see, the road to your real estate empire doesn't have to be demolished by recent events and our stagnating economy. Paving it, however, requires a good dose of realism. These guidelines mostly apply to those of you who have a steady job that the bank approves of, with respect to financing, and the financial discipline to save up at least $12,500. For now, that might mean dining out less and no more online shopping for things you don't need, etc. Like most things in life, there's short-term pain for long-term gain. And times like these serve as a stark reminder that we really need to kick-start our plans for long-standing wealth in a New York millisecond.