Many young people aspire to begin investing in real estate because everyone has heard that classic quote, “95% of all millionaires made or keep their money in real estate.”

It’s true that substantial wealth can be generated in your spare time just by making smart and patient real estate decisions, but the real trouble today is financing investment properties.

The first hurdle new investors face is the down payment. In the past few years, investment property down-payment requirements have taken a jump from a low of 5-10% of the purchase price to around 25% today. Lenders are understandably in a fearful mode so down payment ranges on non owner occupied real estate are quite high. Thankfully, there is a silver lining even in today’s mortgage environment – the FHA loan.

Step 1: FHA Loans

Much of the general population thinks that FHA loans are for “poor people” and most are not aware of the fact the the government considers anything under four units to be a single family residence. Why is this good news for you? Well, it means that you can buy a multi-unit property, live in one unit, and rent the remaining units out for a profit!

FHA loans are no doubt the best option for a savvy young person looking to begin investing in real estate. One of the best plans I’ve seen is to buy a duplex as soon as it is affordable, live in one unit, and rent out the other. There may be a stigma attached a duplex for some people but it’s really surprising how many great multi-unit homes are on the market. In the Midwest, you can find a nice new duplex in most areas for around $250,000.

The monthly payment on a $241,250 mortgage is $1,798.24. This figure includes taxes estimated at 1.25% of the property value and insurance of around .5% of the property value. The down payment amount is a paltry 3.5%, or $8,750. This is the real draw of FHA loans. It’s 99% impossible to buy an investment property with this little down utilizing any other loan program and you are even allowed to use the income from the rental unit to help qualify for an FHA loan.

Step 2: Profit

I have yet to get to the best part of this whole situation; your next door neighbor will probably be paying around $1,000 in rent each month. That means the real cost of the mortgage is only going to be about $798.24 per month. So, to recap, you get to enjoy a nice home for less than rent would be and realize the equity gain of the entire property!

Let’s say you live in the property for five years and at that time decide to evaluate your situation and determine whether to sell or keep the duplex. Since you bought a high quality property in a good area, it has appreciated at 5% per year. The market value is now about $320,000. The remaining principal balance on the mortgage is around $236,000, which leaves you with a possible payday of $84,000 (not including the taxes you’ll owe). At this point you could sell for a nice return on your investment or keep it and earn a monthly cash flow of $500 or so. Sounds like a rough decision, right?!

If you’re a young person looking to build a solid financial future, I highly encourage you to look for multi-unit (four units or below) properties in your area and see if you might qualify for an FHA loan to make the purchase. It’s a pretty darn simple (but not necessarily easy) way to start building wealth!