Making Your First Purchase While Young

Since the majority of people grew up in either a single family household or an apartment, most consider purchasing either a condominium or some sort of small house as their first initial real estate investment. It is quite surprising how much information younger individuals are lacking when it comes to real estate. It is my goal today to inform you on how to acquire real estate and use it to earn profit.

Instead of paying rent, how would it feel to instead be collecting rent? Let us start with a duplex. These can be financed just as easily as a family home and oftentimes, for a larger value. Let us suppose you choose to purchase a duplex for $150,000 at an interest rate of 6%. According to a thirty year plan, you would need to pay approximately $899.33 a month. Let us also add $62.50 a month for insurance and $137.50 for taxes. This accumulates to a sum of $1099.33. Let us suppose you decide to rent one portion of the duplex out for about $750.00 per month. This deducts your monthly payment to $349.33. That sounds much better, doesn’t it?

So how exactly do you go about purchasing such a piece of property? Well, more likely than not, you are going to need a loan. To pre-qualify for a loan, you will need three years worth of records detailing your tax returns, your latest pay stubs and bank statements, as well as a list of your creditors, their address, and your account numbers. Given these documents, the lender you choose can start to process your loan application. Once you have been verified and approved, you can start searching for a home to purchase. Furthermore, most financial institutions offer first time buyers a 3 to 5 percent discount. A discount is great but there are other things you can do to lower the cost even more. Therefore, I recommend that you next sign up for a home buyer’s class. This will provide you with a much needed insight into the basics of purchasing a home, as well as an insight into your local real estate market.

Continuing on with the duplex, it is obvious that not only have you found a new home, but you are earning $750.00 a month from it. Your property is working to help you make money. You are still living well but paying a lot less for it. In fact, since you are paying $349.33 for living space worth up to $750.00! Furthermore, more than likely, you will receive a portion of the current due rent, along with the security deposits. That adds even more money to your pockets.

If you hypothetically close the sale on the 15th, that will allow you 45 days until you must make your first payment. Since 15 days have already passed, you will receive 15 days worth of rent, or $375.00. Plus add a security deposit of let’s say $375.00. Plus, within 15 more days, you will receive $750.00. At the end of the month, you have another 30 days to pay the bank and your pockets are full. Once the 45 days is over, you will have received another $750.00 and then you must make your first payment of approximately $1099.33. Add up $375.00 + $375.00 + $750.00 + $750.00 and then subtract $1099.33 and you arrive at $1150.67 left. This would be a perfect time to treat your parents and other family members to dinner!

At this point in time, you must now realize that the responsibility for other human lives has come under your care. You must take care of the home. If you did your research and picked an exceptional piece of property, managing the home should not be too incredibly difficult or expensive. Plus, since you yourself live there, I imagine you will want to make improvements just for yourself. Anything from bringing in new carpet to redoing the landscape.

So what so far are the benefits? Well, you have counterbalanced a tremendous amount of expenses. Furthermore, you are now establishing an incredible credit rating, as well as gaining tax-related advantages. Not only that, but you will have established a secure position in the real estate market at a very young age. This is a great benefit. It will help tremendously with your future.

As you age, you may get married and decide to start a family. At this point in time, you are now ready to rent out the entire duplex. By now, due to inflation and the improvements that you have made, your property is probably worth approximately $175,000. Let us assume it has been two years since you bought the property.

Within the past two years, you have reduced your overall balance to $146,034.04. The difference between $175,000 and $146,034.04 is $28,965.96 and represents the equity of the duplex. With this information, you are now capable of applying for a home equity line of credit, or HELOC. With this HELOC, you can now purchase a $145,000 home using a down payment of 20%. By avoiding private mortgage insurance, you are making the situation much affordable for yourself. Furthermore, keep in mind that you are receiving $750.00 from two people at the duplex. By now, you are entitled to raise the rent to $800, therefore totaling your monthly rent to $1600.00. After paying off your $1099.33, you are left with $500.67. The HELOC, of approximate value of $29,000, will cost you $336.71 <assuming 7% interest>, therefore leaving you with $163.96 in your own pockets.

So as is very obvious, you have offset a lot of expenses, learned a great deal about real estate, built a tremendously good credit, and made some extra money. So before you look into your first home, do consider purchasing a duplex. It will provide you with great leverage in that you will immediately be put ahead your peers. Whereas most of the people your age are trying to save up for a home that may take five to ten years to purchase, you are looking at just two more years until you can move into the big house!