Of all the ways to generate wealth investing in real estate is probably one of the easiest ways. The affordability of the Houston real estate market, when compared to other areas, makes investing in real estate so much more attainable in the Houston area. I might be a little biased since I love (love might be a strong word) real estate, but the truth is the barriers of entry for real estate are so low almost anyone can invest in it.
When my wife and I bought our first house we put 0% down, paid no closing costs, and the seller wrote us a $100 check at closing. That's right - the seller paid us to buy the house. Four months before buying that house, I had just graduated from college and had just finished a 4-month long job search while living off of credit cards - we had no savings and several thousand dollars in debt.
The moral of this story is that practically anyone can invest in real estate. You don't need a lot of savings to start investing. In fact, the government wants you to invest in real estate so much that the real estate market is subsidized. There area few other investments out there that are as accessible as real estate.
You only need 3.5% down to purchase a home with an FHA loan and if you're a veteran you can buy a home for 0% down. For perspective, the median home price in Houston was $262k in June 2020 - you would only need $9,170 to purchase a median-priced home in the Houston area with an FHA loan.
In addition to the down payment, you'll need to consider closing costs. However, most of these are negotiable. We were able to get the seller to pay all of our closing costs when we bought our first home and that is how we were able to get paid at closing. Now granted that cost was essentially rolled into the mortgage, however, we were able to buy a home even though we didn't have the savings to cover the closing costs.
This is why you need a great real estate agent who understands the real estate process. They can negotiate terms that meet your needs and will save you money in the long run.
If you're looking to invest in Houston, here are 4 strategies you can use to start investing in real estate. All of these strategies, except for the last one, meet the requirements of an FHA or VA loan.
This strategy is pretty straightforward and this was our intent when we bought our first home. We were going to live in it for a few years and then rent it out.
Our first home was not in the Houston area, it was in a smaller town that was more susceptible to external market factors. As it happened, a couple of new developments flooded the rental market over the next few years after buying our home and rents dropped 25%. At that point, renting it out wasn't as attractive as it was when we bought it - but there were other options.
Houston isn't as susceptible to one or two new individual developments over-saturating the rental market because it is so big. It will take a lot of new supply in the rental market or a major drop in demand for that to happen here.
Back to the strategy. Living in a house and renting it out is exactly as it sounds. However, there a few things to consider to make this strategy work.
First, if you're going to use an FHA or VA loan you will need to live in the home for at least a year before you rent it. This is a requirement for those two loan types. However, this isn't a bad thing as it gives you time to make any improvements you need on the house and get it ready to rent without being rushed to make all the repairs in one or two months. It also gives you time to replenish your savings to buy another home to move into once you start renting this one.
Second, the location of the home is a factor. Buying a home in a master-planned community with the intent of renting it probably isn't the best investment. Chances are you'd have a hard time renting it for enough to make a return. You'll need to target specific neighborhoods that people are looking rent in, not just buy - preferably near an up and coming area.
A good Realtor® can help you find these areas set up a search for you.
Live in and flip is another simple strategy that can increase your wealth. This is what we essentially did with our first home. Since the rental market in our area was over-saturated it became more attractive to just sell the house. After putting nothing down to buy our house we walked away with $35k when we sold it a few years later.
One of the major advantages of this strategy is if you live in the home for 2 of the last 5 years some or all of the proceeds from the sale are tax-free. Be aware there are some limitations and rules and I would recommend you talk to a CPA before using this strategy. However, generating tax-free returns can be a powerful way of generating wealth.
To make the most out of this strategy look for neighborhoods that are in demand. Find homes in those neighborhoods that are a little outdated or are cosmetically unappealing. Add value to the home by updating the home to meet the current market demands for the area. This could be as extensive as remodeling every room in the house or as simple as changing out the appliances and repainting the house.
You just need to make sure that whatever you do you don't spend more money than the value you're adding. You want to make money in the end not lose it.
This is probably my favorite method of investing in real estate because it is one of the quickest ways to generate a positive cash flow without a lot of investment. It is, however, not for everyone.
With the live in and rent strategy, often called house hacking, instead of buying a single-family home, you buy a duplex, triplex, or fourplex live in one unit and rent the remaining units out. Often, the income generated from rents will exceed any expenses you have on the property.
In other words, your rental income is covering your mortgage - you're essentially living rent-free. You can take those funds you'd typically be spending on housing costs plus the additional income you get from the rent after the mortgage is paid and save or reinvest it into new properties. You can see how quickly this method could help you generate long term wealth.
If you want to use an FHA or VA loan for this strategy you'll need to make sure the property is 4 -units or less. If it is 5 units or more it is not eligible for those loan programs. You'll also have to live in a unit for at least a year.
This is a lot like renting and if you're looking for the privacy of a single-family house this method might not be for you. But if you can bear with it for a year, it could set you up to build your real estate portfolio.
The final strategy is the more traditional way to invest in real estate. This method requires a little more cash upfront as it is not eligible for an FHA or VA loan. However, you're probably not going to live on every property you own if you want to generate long term wealth with real estate. If you continue to invest in real estate and manage your money well it is likely you'll need to use a strategy like this one to invest in more properties.
The idea behind BRRRR is similar to flipping houses. The only difference is instead of selling the home after it is renovated you keep it and rent it out. You buy it below market value, make repairs, and then refinance it for more than you bought it for. Ideally, you can roll your down payment and renovation costs into the refinanced loan allowing you to take those funds and repeat the process.
As you can see there are several ways you can make money with real estate in Houston. Investing in real estate doesn't take a lot of upfront investment. As long as you have the income and credit to support a loan you can get started building your wealth.
Contact me for more information on how you can start investing in Houston. I would be happy to help you find properties that match your investment plan.