In this blog post, Ryan breaks down how you can start investing in real estate this year even if you have an average salary. He breaks down 3 different strategies that you can use.
The first strategy is what he calls house hacking. This is a great strategy if you have good credit. If you don’t have good credit, you can use strategy #2, which is Land Flipping. You can use this strategy to earn some income and fix your credit. The third strategy is the most lucrative long term, which is Rental Properties.
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How to start investing in real estate in twenty twenty four on an average salary.
All right, guys, let's talk about this. I've got three ways we're gonna talk about investing in real estate with an average salary in twenty twenty four. But the first thing I wanna do is get everybody on the same page. What's an average salary?
So let's just jump over here and and do Google. Actually, I'm already on Google. What is the average salary in the United States? Or actually, let's do household income.
What is the average household income in the United States?
So, you know, depending, United States average household income is a hundred and seven thousand dollars.
Okay. So let's make a quick note of that. So household income is a hundred and seven thousand. Okay. Then let's just say, what is the average salary?
So q four twenty twenty four, the average salary was sixty thousand for an individual.
So when you say average, these are the numbers that I'm thinking about.
Just pull that up, but this gets us a good start as to what we're talking about. So the first thing I wanna talk about here is this concept of house hacking.
Okay.
This is the concept.
The concept is you buy a house, you live in the house, you fix up the house, and then you sell the house two years later.
And then you go back and buy another house. The interesting thing about this is if you've lived in a house at current IRS, two out of the last five years, there is zero tax on that. So let's let let me show you.
Okay. So this is the IRS's website.
So let's make sure we're on the right place.
In general, okay. If you have capital gains from the sale of your main home, which is your primary residency, you may qualify up to two hundred and fifty thousand of that gain or up to five hundred thousand of the gain joint filing returns with a spouse. Okay? And then this gives you some more details on that.
Obviously, you're gonna wanna check with your your tax accountants and those types of things. But I can tell you from my personal experience, you can if you're married or if you're individual you can go up to two hundred and fifty thousand, you pay zero tax on it or you can go up to half a million and pay zero tax for, a joint filing, married filing joint or this is individual. So think about this. If you buy a good deal, live in the house, fix the property up and you sell that property and you make I don't know fifty thousand dollars a hundred thousand dollars I don't know.
It depends on how good of a deal you buy it for. It depends on what fix ups you do. It depends on when you sell that property. But on average, let's just jump back over here and look at some averages here.
One of the interesting, it's two out of five years, so you can actually rent the property for three more years if you wanted to. You just have to live in that of those five years, you gotta live there for two. So typically, you live there for two, you could rent it for two, or you could just sell it right after. But let's just take, I don't know, any time frame and look at the percentage increase from, you know, twenty ten.
I don't know which one to use here. Twenty ten, two thousand and nine, and let's say you sold it in twenty eleven.
So it went from two zero eight went from two zero eight in value up to two thirty eight, let's call it.
Not a ton of appreciation on that thirty thousand dollars. But if you bought a good deal like you bought an off market property and you added value to it like you finished the basement, maybe you see another fifty thousand dollars on that, so you have eighty thousand dollars. The great thing about this is you're not paying any tax on this eighty thousand dollars. So then you could use this eighty thousand dollars to put on a down payment on a rental property, which I'm gonna talk more about here in a minute when we start talking about rental properties. But this is part of the house hacking.
Another way that you can house hack is let's get rid of this real quick.
This is house hack two.
This is what I did. Okay. So you can buy a house or you can buy a duplex or a three plex or a four plex. You can get an FHA owner occupied loan. So with this, you're only putting, like, three and a half percent down.
And what you do is you buy a good deal, and then you rent it out. Now a lot of people are doing this with mother-in-law apartments. So they buy a house and then they turn the basement or it already is, something they can actually rent out. Now there's some zoning laws and you've gotta make sure that, you're approved to do that but renting out the basement and then the rent from that basement, maybe it rents for two thousand dollars a month and maybe your mortgage payment is three thousand dollars a month.
Well, guess what? You've got a nice house with a nice yard and everything else, and you're living there for less than what a mortgage payment would be on this house because it's being subsidized by the people who rent the basement or rent the upstairs. Right? So that creates some additional value because if you're traditionally gonna be paying three thousand dollars a month and you're only paying a thousand dollars a month, you're making twenty four thousand dollars extra that you can then take that and go reinvest somewhere.
You can do this and sell that, if you've lived there for two out of five years and make the appreciation or you could rent out both of those potentially.
What I did is I bought a duplex. I turned it into a three plex and I had the two tenants pay the majority of my mortgage payment, which also with that, they're paying down my principal that was owed, and I lived there for little to nothing. But the money I was going to be spending on rent, I then took that and invested that money. So this is house hack number two, which is putting another dwelling within the property and getting other people to pay that so you have reduced rent, or reduced mortgage payments based upon somebody else doing that. So that's house hack number two. So house hacking is the first way I'm gonna say to do that.
This is something anybody can do. You need three and a half percent down. You will have to have decent credits. You are getting an FHA loan. So you wanna make sure there's no judgments or collections or charge offs in those things.
So let's say you do have some of those things, the judgments, collections, charge offs, that type of stuff, then what do you do? Okay. So there's something you can do whether you have those or don't have those. This is something that you can actually do, and this is actually called land flipping. Okay?
A lot of people don't know about this. This is a very underutilized strategy, but the concept here with land flipping is property that's unimproved. It might have or I should say property that is not built upon is hard to sell.
It's also hard to get loans on. Most lenders, if you own this piece of land, aren't gonna come and say, we'll give you money on this. Typically, a lender's gonna say, you put up the land, we'll put up the construction cost, and then we'll build on the property, but you're putting up the land. So if somebody else that pays land and they need to get money, they need to liquidate in a fast manner, it typically is gonna take them six to twelve months to get money.
Well, what if they're going through a divorce? What if they've got a family situation? What if there's a medical situation? What if they just need the money fast?
How do they get money fast? Well, one of the things they do is we say, hey, we'll give you money today, but then we'll take on the risk and sell this, but we're gonna do that at a discount. K? So what you're doing is you're actually buying a piece of land, from somebody that's a motivated seller that needs some money quickly, and then you're taking on the risk, marking that price up, and selling it in six to twelve months, and that's land flipping.
So that's something anybody can do regardless of your personal circumstances with the way that we actually fund those deals. So that's something anybody can do even if you don't have great credit where the first strategy you've gotta have decent credit. Now I hope if you do these land flips, you'll use that money to actually improve your credit so then you can actually go buy those houses, or as we move into number three, which is rental properties.
So way number three, I would do this in twenty twenty four is through rental properties. What a lot of people don't realize is what are called DSCR loans. Okay? This is debt service coverage ratio.
And basically, what that means is there's a percentage, let's just call it one point two, which means if your mortgage payment's a thousand dollars, they wanna make sure that your rent's at least twelve hundred dollars. And then they're not worrying about credit and background and all those types of things. They just wanna make sure you don't have judgments and collections. But if that works out and that matches and the property has the value, maybe they want eighty five percent maybe eighty percent loan to value if they have those things then you can get that loan and it's pretty easy to get. It's not like getting a traditional loan.
So with this, you either need to have that twenty thousand dollars.
If it's a hundred thousand dollar purchase, twenty percent loan to value, you need to have that twenty thousand dollars.
If you don't have that, you could get that twenty thousand dollars by not having to pay your full mortgage payment because somebody in the basement is paying for that. You could get that money by buying a house and then selling it two years later and getting appreciation gain. Or you can combine this with one of my favorite strategies which is called BRRRR. Okay?
And what you do with that is you buy the property, you renovate the property, you rent the property, and then you refinance the property. And so we would be refinancing the property with this DSCR loan. But we would be buying the property using a hard money loan and that hard money loan would allow us to buy a property that's not in great condition and would also give us the money to actually do the repairs on the property. So now I have the money to do the repairs.
So if I get a good deal and I improve the value of the property by doing all these repairs, I then rent the property. I have created some equity. So if I get a good enough deal, I may be able to get my purchase, my rehab, my closing costs, and my payments for the first five months all included in that loan. Typically, as long as all that's under seventy four percent of the after repaired value, not the as is value, the after repaired value, then I could get all of that included.
And if that's the case, when I rent the property, as long as I'm renting it for that debt service coverage ratio, then when I go to refinance the property, I'm already gonna have equity because I'm gonna have seventy four percent, and they need eighty percent, which means I'm coming into this deal with little to no money into this deal. I'm doing the BRRR method. I'm refinancing into a DSCR loan, and then I'm keeping this property as a rental property long term.
Now you're gonna say, well, why do I wanna keep a property long term? Well, a few reasons. One, there is appreciation. Right?
So you can see here about every ten years, you're seeing property values go up thirty to seventy percent about every single ten years. The other thing that you've gotta keep in consideration is rents go up. They just do. If you look what's happened with rents over time, it's drastic.
And one of the things I'd like to point out is two thousand eight. When two thousand and eight happened, rents went up.
You don't see this big downward like you do with with prices. And frankly, it's kind of interesting here because if you look, there's two thousand eight. So if you look at the high, two fifty seven, and it went down to two zero eight. So what are we talking? Not even.
Twenty, fifteen percent, decrease in value, and then you can see it's just gone up from there. So everything with real estate is just holding time. Right? If you if you bought here, in twenty seventeen, in twenty twelve, you're back. So five years later, if you bought at the peak, five years later, it was worth what you paid for it.
So as long as you have the holding power to keep you between there. But then you can see if you bought here and then you sold up here, you've almost doubled your money, and that's from two thousand and six to twenty twenty. So what is that sixteen years later? So it's all about having the staying power.
But the most important thing you can do in twenty twenty four if you have an average salary is to get started now.
Usually what happens is people put it off and they don't take action. And lack of action is more is lack of action will have more of a detriment in your long term financial future than doing something and making a mistake. Most people are so afraid of making mistakes they don't even try. But nothing ventured, nothing gained.
You've gotta take some action. And as long as you have the staying power in the long term, real estate always goes up. At least it has for the last since nineteen sixty, and we started measuring this stuff. I hope this is helpful in how you can get started in real estate investing in twenty twenty four on an average salary.
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