Before turning 30, Dandan Zhu reached financial independence and quit her day job. She still does some recruiting work and real estate investing on her own terms — but why stop when you love what you do?
Zhu scaled her real estate portfolio quickly through aggressive savings and pursuing a high salary. But as much as a six-digit salary helps, you don’t need a massive income to start building passive income streams with real estate.
Here’s how Dandan did it, and how she quit her day job just two years after starting to invest in real estate.
Dandan’s First Investment Property
“My first investment property was back in 2014 in Brooklyn. It was a condo in the roughest part of town, where there are plenty of gun deaths and gang activity. I knew that the NYC real estate scene was going to have significant appreciation but due to how expensive the whole city is, I could only afford to buy in a transitioning area.
“I had studied the market for quite some time until finally one day I saw an open house for a two-bedroom, one-bathroom condo at the affordable price of $340k. The day I saw it, I made an offer and looped my agent in to get the process going. Since I already had 20% to put down on it and a pre-approval, the next step was to wait until they finished the unit, since it was going to be a complete gut renovation.
“Most buyers are first-time homebuyers, so they needed a place immediately to move into. Given that this home would take another year to fully be renovated, this was a risky property that most investors and owners didn’t want to play with. This is the only reason why I was able to snatch it at such a great deal.
“A year later, we went through the mortgage process with a 20% down payment on a 30-year fixed rate loan. Since I had a high paying job, I could easily qualify for the loan and already had six figures of savings that I hoarded by living very cheaply and house hacking. Can’t remember the exact numbers but I had to bring $90k or so to the closing to account for all the buyer closing costs and taxes.
Selling & Expanding
“The condo appreciated to $615,000 by 2016, when I decided to sell it. I felt that the market was peaking and the marginal gain of holding versus selling wouldn’t be worth it.
“I ‘retired’ from my 9-to-5 in early 2016 in order to fully pursue becoming a landlord. I ended up using the proceeds from my Brooklyn condo to 1031 exchange the proceeds into a new condo in Massachusetts ($189,000 cash using the proceeds from the sale). I also bought two rental properties in Baltimore: a duplex ($245,000 with 20% down on a 30-year fixed loan), and a single-family rental ($135,000 with 20% down, with a co-signor since I’d quit my w2 income at this point).”
Professional Tenants & Growing Pains
“From the period of 2016-2018, I barely kept my living expenses afloat because my Baltimore properties had some really bad tenants and I lost quite a bit of money due to nonpayment of rent, continued eviction filings and property management fees to carry out the evictions, and also to fix the tenant damages.”
I know how that goes. I had terrible tenants in Baltimore as well. Nowadays, I no longer invest in low-end urban neighborhoods or tenant-friendly cities.
“I was using new tenant money and deposits to wash away old debts while accumulating and carrying a $17,000 credit card balance, the highest I’ve ever had. Thankfully, I pushed through, didn’t sell, and started earning money again through a new recruiting business which saved me. In 2018, one of my tenants clogged up the toilet and destroyed my bottom unit in the four-unit in Vermont. I was able to pay the $60,000 bill to reconstruct the bottom unit in cash because of my income from my recruiting business allowed me to take this instead of trying to leverage or take out a HELOC.
“Thankfully I had a really low cost of living due to my house hacking so I was able to live in Brooklyn comfortably while continuing to build my real estate experience and portfolio. I also invested in crypto around this time which helped me pay for some of the losses the tenants incurred.”
Continuing to Build Her Rental Portfolio
“I continued building my real estate portfolio and purchased a four-unit property in Vermont for the insanely cheap price of $145,000. I used the last savings I had from my corporate job to finance this deal and took $10,000 from my cousin who was a cosigner on the loan.
“I bought this property with tenants underpaying rent at $650 a month, which I moved up to $900 over time. The other three units I eventually converted to short-term rental properties, now earning over $15,000 per month in the winter season and about $6,000 in the offseason.
“From 2018-2022, I sold my Massachusetts and New Jersey condos and bought several other properties. I bought one in DC (cash purchase), bought and quickly sold a property in Denver (cash purchase), bought a duplex in Vermont (cash purchase), and then just bought another fourplex Airbnb property (cash purchase) that’s waiting to be renovated this year in order to get on the market. I also bought a lake house in upstate NY (cash purchase), that I looped my domestic partner in as well.”
The HOA Disaster
“My Massachusetts condo gave me extreme stress and headaches due to a horrific homeowners association leader who had her children on the board and totally dominated everything.
“While that property was profitable each month with minimal tenant issues, she made my life miserable and eventually impeded new buyers from getting my condo at market rates and instead came in to swoop in and buy my condo significantly under what it could have been.
“I still made money — but it was a lot less than what other buyers would have paid.”
I personally avoid rental properties in homeowners associations or condominiums for this very reason. It adds to the monthly expenses, and also adds risk.
Lessons Learned & Experience Gained
“When I started to gain experience I started to understand how important it is to have really great margins to make real estate worth it, which is why I’m focusing more on multifamily long-term rentals and Airbnb holdings now as the only assets worth looking at.
“Some of the speculative condo buying I did in the past were very stressful due to the HOA being really awful and there being majority stakeholders which offset the control I had on my properties. This was a huge lesson for me. The appreciation can be insanely good — my Brooklyn condo went from $340,000 to $615,000, and the Jersey property went from $180,000 to $279,000 when I sold it in 2020. But the reality is that the rental cash flow yield is not great and the appreciation is iffy, especially if there are some serious condominium association issues.
“So I either buy multifamily properties to increase cash flow spreads, or maximize rental values by Airbnb-ing properties out in locations where there are significant tourist attractions.
“My mistakes were being too speculative and buying all cash deals which carry a lot of risk as it relates to condos that are financeable by the bank. If you buy all cash condos in buildings that are heavily investor-owned, banks will not lend to it, which drastically limits the buying pool. Most buyers still use loans to purchase homes so you have to buy a home that is easily lendable by 99% of mortgage companies and banks. That’s the issue I ran into with my DC condo, Denver condo, and Massachusetts condo, all leading to lower returns compared to the lendable condo investments I made in Brookly and Jersey which yielded significant profits.
“Condo investing is tricky. You have to play by the rules with which mortgage companies will lend to it as a great clue as to if it’s a good investment or not.
“Also, I learned that Airbnb investing is awesome. I love it. This is a huge opportunity in areas that encourage and are looking for airbnb investment professionals and entrepreneurs. But you must do your research on the town and city if they’re Airbnb-friendly or not!”
What’s Dandan Doing Now?
“Now that I have multiple homes, buying and selling, some of the properties are completely financed by appreciation from previous properties, or I’m using loans and credit cards where it makes sense or bringing in cosigners as needed or investing partners if I need additional capital and/or labor support.
“Since most of the homes I buy are in or around $90k-150k, I’m also using creative financing such as credit card debt to bridge the gap while I earn more cash income through rental properties and my recruiting company which I created in 2018 in order to continue driving liquid income to finance more property purchases and to pay for construction/renovation costs.”
Wondering how to finance rental properties with credit cards? You can raise $150,000-250,000 in unsecured business credit lines and cards through Fund&Grow. Check out this video explaining how it works if you’re interested.
“I also invested more into cryptocurrencies last year which gave me significant gains. I put those into buying my lake house and the second four-unit Airbnb in Vermont that I’m renovating this year. I have more crypto that I’m ready to sell in order to access that money to use for construction and renovation costs, in addition to my recruiting company.
“Currently I have a two-unit property in Baltimore, two fourplexes and a duplex in Vermont,a lake house in upstate New York, and a condo in DC.
“As a woman in my 30s, because I have been investing since I was 25, it gives me a lot of bandwidth to have a 6-figure+ income from real estate while running my own recruiting business, but it’s not too hard now because I’m so used to it. That frees me up to work on other passion projects, my other businesses (I love to work if you can’t tell!), and also spend lots of time with my family and friends.
“Because I have a great portfolio that took me ten years to accumulate, now I am definitely on a great trajectory to enjoy what I built over the years.
“Through the ups and downs, real estate has given me so much and now I’m entering this next phase of doing more short-term rentals and potentially moving on into building rental villages or housing developments in the future. Who knows what the future can provide, but I know one thing for certain: real estate has taught me so many skills and lessons that will aid me into whatever I do next!”
Dandan has a Youtube channel where she teaches recruiting and wealth building. You can also learn more about Dandan’s projects on her LinkedIn page.
Dandan’s Final Words Of Advice
“My advice for someone who is looking to reach financial freedom through real estate is that it is COMPLETELY doable under these conditions:
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- You have at least 10 doors that cash flow well, with great tenants and minimal turnover/eviction/nonpayment issues,
- You have a job or cash-flowing business in order to build up your financial nest egg in case of emergencies that insurance won’t cover,
- You have a low cost of living so you don’t have to worry about financial pressures in case any domino in your life/business falls, so it doesn’t topple your whole chain, and
- You don’t have high financial liabilities in the short or mid-term — if so, you risk foreclosure or having to sell a property prematurely to cover for financial losses
“Finally, you have to possess the people skills required to run a real estate business. That hinges on you being a tough person who is good at negotiating with contractors, finding information, building a network, leveraging others’ skills, managing people to help you do things, and dealing with the stress of belligerent, unreasonable, mentally unstable, fiscally irresponsible, and/or straight up bad actors who are tenants with truly the worst of intentions. Even tenants who pay on time may have horrifically entitled attitudes towards you. Be very wary of professional tenants who can hold your home hostage and wreak havoc on your finances and personal mental health.
“If you can take managing bad actors in stride, you’ll be very much in a good position to be a sane and fair landlord and be ready for the issues that will inevitably rise when managing properties.”
This article originally appeared on SparkRental and was syndicated by MediaFeed.org.
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12 ways to invest in real estate without a lot of cash
With inflation soaring at levels not seen since 1981, everyone wants to invest in assets that protect against inflation.
Assets like, say, real estate.
But real estate is expensive, costing hundreds of thousands for a single rental property. You can take out an investment property loan of course, but you still need to come up with a 15-30% down payment.
Which begs the question: What are some creative financing strategies to cover the down payment too?
If you’re new to financing investment properties, start with the standard options: traditional mortgages and portfolio loans.
Traditional mortgage lenders pick a Fannie Mae or Freddie Mac loan program for you, and then bundle and sell your loan right after you settle. They’re cheaper than most options, but they only let you have a few loans reporting on your credit before they stop lending to you. That usually means a maximum of four mortgages total, including your home mortgage. Four loans won’t take you far as a real estate investor.
Portfolio lenders keep their loans on their own books — within their own portfolio — rather than selling them off. That makes them far more flexible; in fact, many portfolio lenders also lend hard money loans for buying and renovating properties. They don’t report to the credit bureaus, and they don’t limit how many loans you can have. Try LendingOne, Visio, or Kiavi as strong options.
But that still leaves you to come up with a down payment.
Try these creative financing ideas, as you explore ways to minimize your down payment on a rental property.
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In investing as in life, you don’t get what you deserve; you get what you negotiate. So as you make offers, feel out the seller on whether they’re open to owner financing.
That could come in the form of a seller-held second mortgage. Or, if you can’t get financing for an investment property through a conventional lender or portfolio lender, you can try negotiating seller financing for your primary loan. Anxious or motivated sellers may consider financing your deal themselves in order to settle fast.
You and the seller can negotiate everything from the loan term to interest rates and beyond. Usually, seller financing involves a balloon: you have to refinance the loan within a few years, to pay off your remaining balance in full. That gives you time to build your credit, and the property time to appreciate in value.
Downsides: The only downside to owner financing is that it’s not a reliable source of funding for investment properties. The seller must agree to it, and some sellers refuse to consider it.
Still, many do, especially if it means a quick settlement. Push that angle as you negotiate with sellers, and consider combining business credit lines (more on them shortly) with seller financing so the seller gets to walk away from the table with a hefty paycheck even if they finance the rest.
Related Slideshow: 9 ways to lower your tax bill
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Also known as a contract for deed, installment purchase contract, installment land contract, or bond for deed, installment contracts work similarly to owner financing, except the seller keeps legal ownership until you’ve paid off the balance in full.
Deni and I use installment contracts in our land investing business. We offer parcels of land for sale in two ways: a traditional purchase price, or a slightly higher total amount financed over several years.
Contracts for deed can either be amortized like a mortgage loan, can involve a set margin over the cash price which is then just divided by the number of months of installment payments, or they can feature a balloon payment. Again, all terms are negotiable with the seller.
If you go this route as a buyer, make sure you record the contract for deed among your local land records, so you can enforce the contract if the seller tries to pull out or otherwise misbehaves.
Alternatively, you could sign a lease-option agreement with the ability to sublet. You lock in a future purchase price, and you can rent it out to start collecting revenue now. Many investors use this strategy for Airbnb arbitrage, where they sign a long-term lease agreement and then rent the property out short-term on Airbnb.
Downsides: Installment contracts come with risk, since you don’t actually take title to the property. The seller could fail to pay the property taxes, and the property could end up in tax sale. Or they could try to renege on recording the deed, after you pay off the balance in full. Or, if you fall behind on payments, the seller may not have to foreclose on you to reclaim possession — in some states, they can simply file for eviction.
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The beautiful thing about most business credit lines and business credit cards is that they are unsecured: they don’t attach a lien against your home or rental properties.
And yes, real estate investors qualify for them. Real estate investors are entrepreneurs, after all!
Creditors typically set limits on your business credit lines and credit cards based on your personal credit score, your income and revenue, and your business credit (if established). We work closely with Fund & Grow to help real estate investors get business credit lines totaling between $50-250K, with the average investor getting $150-200K in total credit lines and cards. They also show you how to use credit cards to fund real estate transactions without paying a cash advance fee.
You can use these rotating credit lines for down payments, renovation costs, or to buy properties outright. From there, you can pay them back on your time, however quickly or slowly you prefer.
Once you have the credit lines, you can keep using them repeatedly, forever. That makes them an excellent ongoing source of funds for deals.
And hey, you might even rack up some credit card reward points!
Downsides: While you could probably get one or two unsecured business credit lines on your own, most real estate investors need help with these. They need help negotiating higher credit limits, scrubbing the credit pulls from their credit reports, and going through multiple rounds of account opens.
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One of the most common ways to finance a down payment on an investment property is to take out a home equity loan. A home equity loan is essentially a loan that is funded by your current investment in your home — you use the equity in your home as the funding source for a new down payment or entire loan.
A home equity loan is a mortgage you take out against your current home. It could be a second mortgage, if you already have one mortgage in place. Or it could be a first mortgage, if you own your property free and clear. Like all mortgages, you can take out home equity loans at a fixed interest rate.
Alternatively, a home equity line of credit or HELOC is a rotating credit line. You can draw on it as needed for uses like buying investment properties, usually at a variable interest rate during the draw phase. After a certain number of years, the HELOC switches over to the repayment phase, when it converts to a fixed loan that you make regular payments against like a mortgage.
Bear in mind that you can take out both home equity loans and HELOCs against rental properties as well, not just your primary residence.
Home equity loans and HELOCs work well for investors who do not have much liquid cash on hand, but have money tied up in real estate, such as a home or perhaps a vacation rental. They make real estate investing a more achievable dream for current homeowners.
Downsides: A home equity loan is secured by assets such as your home, which makes it great for finding a funding solution, but you risk losing your home if you’re unable to repay the bank. In addition, if you currently have a property that you are just needing cash to renovate and fix-up, a home equity loan may not be necessary while a personal loan or unsecured business line of credit could meet your needs.
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If you have equity in another property, you can put it up as additional collateral when you apply for an investment property loan. The lender takes first lien position on the new property you’re buying, and second lien position on your existing property.
In exchange, they lend you 100% of the purchase price, so you don’t have to come up with a down payment.
Imagine you have a property worth $250,000, and you only owe $100,000 against it. Sure, you could take out a second mortgage or a HELOC against it to tap into that equity, but you’d have to pay for a new round of closing costs.
Instead, when you find a new property you like, you approach a lender like Patch Lending and say “Rather than a 20% down payment, I can give you a second property as additional collateral on the loan.” They get two properties as collateral to protect them, and you get 100% financing.
Downsides: First, you have to have significant equity in an existing property. Not everyone does.
But you also add to your risk. If you default on the loan, you risk losing not just the main property, but also another unrelated property of yours.
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Personal loans are a great option if you need funding quickly. Many personal loan companies can provide funding as quickly as the next business day to those who qualify. You can typically use your personal loan for whatever you like, which means that you can consider it as an option to help you invest in real estate or make renovations on a current investment.
With a personal loan, you can expect a traditional lending agreement. The lender sets the loan limit, interest rate, and fees, and you sometimes get a few options on the loan term. Your credit history matters, so work on improving your credit if you want the best rates and terms.
Downsides: Personal loans typically only lend, on average, up to $50,000 max. A few personal loan companies lend closer to $100,000, but for many real estate investors that still doesn’t cover their purchase price or even down payment.
Also, personal loans are notorious for high interest rates compared to a traditional home loan: the average personal loan rate is around 10%. That can leave you with a high monthly payment on top of your mortgage payment. If a personal loan seems like it could be the right direction for you then compare personal loan companies here.
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Have some funds in your IRA, that you’d rather use to invest in real estate?
You can create a self-directed IRA to use for tax-free real estate investing. It diversifies your investment portfolio while giving you even more tax advantages beyond rental property tax deductions and ways to avoid capital gains tax on real estate.
Many people start contributing to IRAs when they first enter the workforce, making this a great option for those far enough along in their career to have contributed significantly to their IRA fund. Check out this case study on investing in rental properties with a self-directed IRA.
Downsides: Dipping into your IRA does come with complexities. The tax and legal red tape that can make the process confusing, and you’ll need to hire an SDIRA custodian. If you only have enough in your IRA to cover the down payment, you only get tax advantages proportional to the amount you invested from your IRA rather than through financing.
Bear in mind that all ongoing expenses must also come out of your IRA, no other funding sources. Make sure you have enough funds in your IRA to comfortably invest.
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Have a 401(k) through your job?
While you can’t use it to invest in real estate, you can borrow against it. As a general rule, you can borrow up to 50% of your 401(k) balance, up to a maximum of $50,000.
You can use that loan for a down payment on a rental property, or for renovation costs on a flip or BRRRR deal. Or, for that matter, for anything else, such as a direct mail campaign.
These loans typically come with low interest rates, since they’re secured by your 401(k) account with a low loan-to-value ratio (LTV).
Downsides: If you screw up, you risk your nest egg. ‘Nuff said.
Beyond the risk to your financial future, 401(k) loans do charge interest and come with fees. Also, not all 401(k) administrators allow loans, so you may not have the option even if you have a hearty 401(k) balance.
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Some lenders offer to cover your down payment on an investment property — for a steep price.
That price could come in the form of sky-high interest and fees. Or they may require a piece of the action, in the form of an ownership share in your real estate deal.
Why do these loans cost so much? Because they come with extremely high risk for the lender. They not only take a second lien position behind your main investment property loan, but they’re also lending you the entire down payment. That leaves you with no skin in the game.
As the saying goes, a piece of something is better than all of nothing. If you don’t have enough money to close a good deal, gap lenders can cover your shortfall to let you do so. You won’t earn as much as you would have otherwise, but that’s the cost of not having the cash needed for the deal.
Check out Tony Javier as an example of a gap lender.
Downsides: Expect high interest rates and lender fees, or a partial stake in the deal.
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Government funding is an option if you are looking to invest in lower-income real estate. Select government programs are looking to offer grants to real estate investors, hoping that the construction of a new home can bring more employment opportunities in that community.
Besides a grant, the Economic Development Association (EDA) will help provide other technical assistance if an investor meets certain criteria. The hope is that real estate investors and communities will benefit from the government intervention.
Downsides: This option can work well for investors in a lower income community, however you must apply for a grant which can take several weeks to review and the grant is not guaranteed to everyone that applies. Grants also don’t finance all or even the majority of the property – you still have to come up with most of the money yourself, in most cases. Make sure to look at all the details of a government grant before you rely on this option as a source of funding.
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Private money lenders are individuals, not banks, that loan out money to real estate investors. In most cases, they are people you know: friends, family members, acquaintances, and others who feel confident enough in your track record to fork over their hard-earned money.
Because the money comes from individuals, rather than institutions, it comes fast. Theoretically, friends and family members could send you money on the same day you request it!
You can also negotiate your own terms with private lenders, and typically pay lower fees than corporate lenders charge. That frees up more capital to pour into your actual investments, and raises your cash-on-cash returns.
You may generally pay high interest rates on these private promissory notes however, which affect your monthly costs when you calculate rental cash flow.
Downsides: New investors can’t raise private loans, because they have no track record. It’s not only difficult to ask friends and family for money if you don’t have much real estate investing experience, but it’s irresponsible. New real estate investors make mistakes, sometimes costly ones, and you need to earn the right to raise money privately from friends and family.
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If you have expertise in real estate investing but you’re strapped for cash at the moment, you can always bring on a silent partner to provide the capital.
Say a deal comes across your desk that you like, but all your money is tied up in other projects. So you call up your friend Wendy and explain the deal, and offer to split the profits if she provides the cash. You arrange an investment property loan to cover 80% of the costs and oversee the renovations, she provides the 20% down payment, and you split the profits 50/50.
She gets to invest for truly passive income. You earn a return without having to invest a penny.
Downsides: To begin with, you need rich friends. Not everyone has them.
Additionally, you risk someone else’s money on the deal, which means you also risk your relationship with them if the deal turns sour. Imagine how awkward Thanksgiving will be if you blow $75,000 of your father-in-law’s money on a bad real estate investment!
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I once bought and renovated a property with a credit card.
On the plus side, I didn’t have to use much of my own cash, racked up some credit card rewards, and paid no cash advance fees on the material costs. But I did pay cash advance fees for the rest — although you can reduce these by going through a service like Plastiq.
I also paid extremely high interest until I paid off the balance. Which took me about six months to do, putting every spare penny I had into it.
You have plenty of options for creative financing for real estate investment properties. Just beware that every one of them comes with a cost.
In particular, watch out for overleveraging yourself and ending up with negative cash flow. An investment that costs you money every month isn’t an asset — it’s a liability.
This article originally appeared on Sparkrental.com and was syndicated by MediaFeed.org.
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Featured Image Credit: SparkRental.
