5 Steps to Becoming Financially Free with Rental Properties (Using Little Money)

There are actually a few ways to do become financially free with rental properties, but the one I'm explaining in this post is one I call the "Owner-Occupied Method". The reason why I preach the owner-occupied method is because its probably the most accessible option for people with an average income. It doesn't require you to have thousands upon thousands of dollars for down payments and fancy renovations. When down correctly, this method could help you reach financial freedom in just a few years, with just a few properties.

Another popular way is called the BRRRR method, and it is similar except you aren't living in the properties and you will have to use investor loans. If you truly don't want to (or can't) move into each property you buy, then the BRRRR method may be a better choice for you. I'll make a separate post explaining this in depth. You can actually do a mash up of the two, which is what I have done. At the end of the day, the way you chose to invest is up to you, and will differ based on your specific goals and requirements.

I get a lot of my inspiration and knowledge from reading investment books. One that I highly recommend reading is The Small and Mighty Real Estate Investor by Chad Carson. If you aren't interested in being busy 24/7 running a hundred properties, and instead want to have the freedom to enjoy your life, then this book is a must read. It offers simple, practical advice for how to become financially free with the least amount of properties, so that you actually have the time and money to live your life how you want.

Before you start buying properties, you need to have a budget and goal in mind. Start with your monthly living expenses. How much money do you need to make each month to live? Figure this number out, and then decide what your ideal monthly income would be, such as one that would afford you the ability to pursue your passions. For example, lets say your minimum ideal monthly income would be $5,000 a month. Depending on it you choose to continue working or if you want to solely live off your investments, how quickly you reach that goal will vary.

If you only wanted to own 5 investment properties, they would each need to cash flow $1,000. This isn't easy to do when you consider your mortgage, taxes, insurance, repairs, and upkeep. Here are some ways you can increase cash flow:

1. Put more money down on the property

2. Refinance to a lower interest rate

3. Decrease expenses

4. Increase income (rents)

5. Buy multifamily properties

6. Pay off mortgage

7. STR (Airbnb)

Easier said than done, but you could always continue this plan to 10 years and 10 properties. Then you would only need to cash flow $500 each.

1. Buy Your First Home

Obviously, the first step in becoming financially free with real estate is to start buying real estate. If you don't already own a home, there are many lending programs for first time home buyers that offer low to no-money-down loans. Purchase your first home using one of these loans. It is wise to choose lower-price homes (under $250k) when doing this method, at least in the beginning. You may even decide to buy a fixer-upper, or value-add as investors like to call them. You can find disheveled properties at quite the discount, just make sure that you take into account the repair costs before purchasing the home, as these can easily go over your budget and stunt your plan.

Its very important to consider your strategy before you buy your first home. Assuming your goal is to have cash-flowing properties, you need to figure out what type of rentals profit in your area. The main consideration is if you plan on buying single-family homes or small multifamily homes. Both have their benefits and drawbacks, so due your due diligence and team up with a real estate professional (such as a REALTOR®!) to help you figure it out.

I personally prefer multifamily homes because they are oftentimes the same price as single family homes but have the security of numerous income streams in one building. Like I described in my House Hacking post, you can buy a duplex, live in one side and rent out the other. You may be able to completely cover your mortgage payments through the renter's monthly rent, which will expedite your savings.

2. Live in and Renovate it for 1 year

After you buy your first home, regardless of its condition or the kind of financing you used, you'll typically need to live in it for at least 12 months before the lender will permit you to rent it out. You can spend these 12 months making any necessary repairs or renovations to increase this home's value and livability. Once you've hit the year mark, its time to start looking into purchasing your next home.

3. Buy your 2nd house

You will then purchase your second home using a conventional loan, which you can often find for between 3-5% down. This will require you to save up some money beforehand, so don't get discouraged if it takes you more than a year. You may choose to buy another home similar to your first home, or you may try something different. A REALTOR® who specializes in investment properties can help you run the numbers and figure out what kind of home is right for you. Once you close on this property you will then move in to it.

A big thing that people can get confused about is the difference between buying a new primary residence and buying a "second home". With this plan, you are buying a new primary residence to live in, which affords you the low down payment options. If you wanted to stay in your first home and just buy another home, this would be considered an investment, and you would have to pull together a 20% down payment. While many people despise the idea of having to move every year or so, living in each property is the key to being able to afford numerous properties if you make an average income.

4. Rent out the first house

Once you have purchased and moved in to your second home, now its time to rent out your first home. Assuming that you spent the year or so you were living in this home to make it rent-ready, you shouldn't have to do much in terms of preparations. Its important to research your city's landlord-tenant code and residential rental property laws before renting your property out. Most areas require permits, inspections, and licenses in order to legally rent a property out. Make sure you learn these and keep up with them to avoid legal trouble.

I'm not going to go into detail in this post about how to be a landlord or how to property manage, as that's an entire category of blogs in itself. I will say that being a landlord does not have to be overly complicated and as difficult as many make it out to be. If you purchase homes that are close together, and you are able to build a network of reliable vendors, then you should be able to manage 5 homes yourself.

However, if you decided to purchase numerous multi-family homes (which is what I do and recommend), then you may want to hire a property manager to handle all the units. Know that a property manager will charge at least 10% of the rents per month, and likely other fees for marketing and finding tenants.

5. Repeat until you're financially free

   
   

   

   
   

Now that you have moved into your second home and rented out your first home, you will repeat the process from the beginning. Spend the next year working on your new primary residence, and at the end of that year look into purchasing your third. If you do this plan correctly, you will have built up a small portfolio of cash-flowing rental properties that (ideally) are able to replace your income from your job. The amount of properties you buy will vary depending on your personal income goals, cash flow, and types of properties you're buying.

Knowing how to analyze and choose rental properties is also a broad topic that I won't dive into in this post, but making sure you're buying properties that actually cash flow is of upmost importance. If you aren't sure where to start, I recommend educating yourself through the many books, podcasts, blogs, and groups that are available online. I before I bought my first investment property, I spent an entire summer reading and educating myself on what to buy and how to do it. I've compiled a list of some books I recommend:

• 

  "The Book on Investing in Real Estate With NO (and low) Monday Down" by Brandon Turner

• "The Small and Mighty Real Estate Investor" by Chad Carson

• "Build a Rental Property Empire" by Mark Ferguson and Gregory Helmerick

• "How to Create Lifetime CashFlow Through Multifamily Properties: The New Rules of Real Estate Investing" by Rod Khleif

• "The Book on Rental Property Investing" by Brandon Turner

Once you decide you're ready to buy, contact a REALTOR® like myself to help you through the process and begin your journey to financial freedom!