When people think of real estate investors, they tend to imagine someone who is older — in their 40’s or 50’s. They also typically imagine someone who is financially well-off. You may be surprised to learn that today’s real estate investors are neither of these things. Young people are learning that real estate investing is a great way to build long-term wealth.
Why Real Estate Investing in Your 20’s Makes Sense
Starting your real estate portfolio when you’re in your 20’s is a good strategy for multiple reasons. First, it’s ideal to put your money into these types of investments when you’re younger and have fewer commitments such as a family or expensive primary dwelling. As you get older and kids, work, and life begins to get in the way, it becomes harder to take the time to properly research and learn all you need to know about real estate investing.
Rental properties are also a great way to earn passive income. In an ideal rental property scenario, the monthly rental payment should cover any expenses related to the property as well as generate some extra cash flow on the side. This can be helpful if you reach a point where you’re in between jobs or transitioning to the next step in your career.
Another reason to start early? A good investment property will appreciate over time. One of the most common regrets voiced by real estate investors is, “If only I’d bought this property ten or fifteen years ago — imagine what it would be worth today!” When you invest in your 20’s, you all but guarantee that you’ll have a healthy amount of equity available by the time you’re in your 30’s and beyond.
Real estate investing is also a great way to avoid stock market volatility. In a market where a few days of meteoric rises can be followed by a sudden free fall, younger people are more hesitant than ever to put their money into stocks. Buying investment properties won’t generate big, sudden returns the way a good day in the stock market can, but it’s a more reliable way to put your money to work for you instead of leaving it sitting in a bank account.
How to Get Started
If you’ve never purchased a property before or don’t have the best credit, you can still start your real estate portfolio. An FHA (Federal Housing Administration) loan is popular among first time home buyers, and especially those whose credit scores could use some work.
With a credit score of at least 580, you’ll only need a down payment of 3.5% of the purchase price. If your credit is between 500 and 579, that amount goes up to 10%. Know that a better credit score means that you’ll pay a lower interest rate to your lender.
The FHA may also allow the home seller or your lender to pay closing costs associated with the appraisal, title transfer, or credit report. Keep in mind that lenders often charge a higher interest rate if they cover the closing costs, so saving a bit up front can cost you more in the long-run.
Building Your Rental Portfolio
If you’re planning to purchase properties in hopes of them appreciating over time, make sure you choose ones that will make good rentals. That way, they’ll generate cash flow right away — provided that the amount of the rent covers the monthly mortgage and other expenses.
Know that certain loans (such as VA and USDA) require you to be an owner-occupant. This means that you’ll need to live in the property for a minimum amount of time (typically a year) to satisfy that rule. After the year is up, you’re free to move and rent the place out. These types of loans call for a bit more pre-planning, but because they often don’t require you to put any money down, they can be attractive for younger buyers who are strapped for cash.
While real estate investing in your 20’s can seem like a pipe dream when you're working to pay off student loans and get your career kickstarted, with a bit of research and strategizing, it can be done!
Smartland helps investors avoid making mistakes when they first get started. Learn how we can help you begin your adventure into the real estate investing world.