Becoming a Real Estate Investor

A Pastor and Park Ranger walk into a Real Estate Office…

Becoming a landlord in Lewiston was nothing that my clients Forrest or Molly had ever envisioned when they started their home search. Both from the Greater Portland area, they wanted to remain near their families and jobs - Forrest is a pastor and Molly is a park ranger. Lewiston was eventually being considered because it offered homes in their price range, roughly $200,000 less than in the Greater Portland area. With a limited budget, they found not just a home but serendipitously took their first step to building their real estate “empire”. For the price of a single family home, they purchased a duplex. This is the story of how struggling first time home buyers became rental property superstars.

Armed with an FHA loan, they moved into their home for only $5,500 out-of-pocket, the minimum 3.5% required for the down payment. Since one of the apartments was rented, they could count that income to qualify for a home loan and reside in the vacant unit. A year later Forrest took a parish in Livermore Falls and they moved into church-provided-housing. While Molly was on her off season, and with the previously rented space now being vacant along with the former owner occupied unit, she used the time to renovate both apartments and doubled the rental amount received.

This additional rent money let them save fairly quickly. A year after buying their duplex they bought a camp next door to Forrest’s mother. “We weren’t in the market for a camp, we were in the market for that camp.” In March of 2020, when the pandemic hit, Forrest added a porch, heat pump, stairs down to the water, and a new outhouse to the camp. His projects cost a total of $3,500, but he added $42,000 in equity to his camp. “I couldn’t believe it. We bought it for $58,000. Putting $3,500 in brought us to a total cost of $61,500. But because of the increase in equity (to around $100,000), we then took out a mortgage for $65,000 to use as a down payment on our second rental property.”

Forrest and Molly now own a total of five units and have another multi-unit acquisition in the works. Their current goal is to buy at least one property a year. “For someone starting out, I wish I had gotten the advice I’m going to give. There are three things every first time landlord should do.”

What are those three things? Forrest listed them as such:

1. Benefit from a Low Down Payment FHA Loan

Take out an FHA loan. It’s 3.5% down which will save thousands getting started. Don’t pay down the mortgage. Money is cheap, and the interest can be deducted from your taxes. The less extra you put on the principle, the more seed money you keep in your bank account for the next property.

2. Capitalization Rate of At Least 6%

Get a capitalization rate of at least 6%. This is one of two numbers that guide Forrest looking at every potential property. If you have a property for sale for $200,000, you should expect to make a $12,000 profit a year. Check the numbers to confirm. If not, then walk away.

3. Return on Investment of At Least 25%

Get at least a 25% cash-on-cash return on investment. This is your yearly profit divided by your total investment (closing costs and down payment). If Forrest can’t make his money back in four years, he walks away. You can find how to use the four square method with this Bigger Pockets resource.

We jokingly kid around that Pastor Forrest and Molly will be millionaires by the time they reach 30 with their increasing real estate holdings. They are currently in the process of adding a total of 8 more units to their portfolio. What motivates these young landlords? Their reason is uplifting. Forrest explains “I grew up in poverty. To be able to live a middle class lifestyle is important to us. Anything extra we make will fulfill our dream of being philanthropists. I would love to be able to serve a struggling church and not have them worry about how to get the money to pay me. We want to give back. That’s why we wanted to be landlords.”

Molly added “It’s a lot of hard work. Don’t let anyone tell you it's not. You will work for your money, no doubt. But when you can provide nice housing at an affordable price that benefits you and the tenant, it’s such a great feeling.”