Investing in real estate is something that most people don’t think about until late into their careers, if ever. However, getting a head start at a younger age can prove to be very beneficial. While most twenty-somethings are focused on starting their careers and working their way up the corporate ladder, putting some money aside to invest in real estate is one of the smartest decisions you can make.
One of the most significant reasons why you should invest in real estate in your 20s is because with real estate investing, the longer you own a property, the better the investment becomes. So, by starting in your twenties as opposed to in your thirties or forties, you will benefit greatly.
Real estate investing, however, is not for the faint of heart, because it does require a significant amount of capital and time for property management. Additionally, real estate is not a very liquid asset, therefore your money will be tied up, but it is better than most other investments in the long run.
Here are a few reasons to start investing in real estate in your 20s:
Reason 1: Start making passive income at a young age
Passive income is an incredible thing. While you may have the option to work long hours and make more money as a result, doesn’t it seem much nicer to sort of hack the system?
If you can generate positive cash flow from your investments, you can make passive income, which can be extremely beneficial to supplement your salary. If you invest in your 20s, this can help with building an emergency fund, paying off student loans, growing a retirement account, or even providing a budget for those items you might not be able to afford otherwise. The additional income and freedom provided without needing to clock in a ridiculous amount of hours is well worth it. Passive income also provides an added sense of security. With all the uncertainty during these times, it is nice to have an added cushion with passive income.
Reason 2: Starting to invest in your 20s will give you a remarkable head start
Thanks to compounding, the younger you start investing, the exponentially greater profits you will see. Inflation is constantly rising, so even just a few years can make a significant difference. Additionally, cash flow increases over time because rent rises with inflation, while mortgage payments stay consistent. Over time, you will be able to pay off your loan and your cash flow will significantly increase.
Reason 3: Flexibility when you are young
In your twenties, you often have much more flexibility with your time and fewer commitments. If you can start real estate investing while you are young, before you have a family to take care of and important work obligations to attend to, you will have a significant advantage.
One of the most common ways to get involved in real estate investing is by house hacking, or living in the same property that you rent out. If you do this, you can buy the home as an owner occupant and can therefore put only 5% down, or even no money down with certain loans. After a year of living there, you can rent it out. You could even repeat this process every year.
You can also qualify for an owner occupant loan if you buy a multifamily property between 1 and 4 units and then after a year, you can rent out the entire building. This is a great option, but can be difficult when you have a family and have to convince them to move every year, that is why this is a great option for younger people.
Additionally, finding good investments and learning about markets takes time and effort. When you are older, it becomes more difficult to find time to learn about these things due to greater commitments, but it can be easier to find the time if you start investing while you are young.
Reason 4: Gaining experience and building a portfolio
Investing comes with a learning curve. Some investments do a lot better than others and it takes time to learn how to pick the right properties and opportunities – and to understand how to make them work for you. The sooner you can learn this, the better, and you will become a seasoned investor in no time.
Receiving passive income from one investment property will likely not be enough to achieve financial freedom, but this is possible with a diversified portfolio. And the sooner you can start building your portfolio, the better.
Reason 5: Tax Benefits
One of the many advantages of owning real estate is the incredible tax benefits. Perhaps the biggest tax advantage is the various deductions available. You can deduct any expenses that are directly correlated to the operation, management, and maintenance of the property, as well as any costs associated with running a real estate investment business. You can also deduct depreciation on the asset. There are tons of other tax benefits available for real estate investments, making it one of the best investment opportunities.
10 TIPS TO START INVESTING IN REAL ESTATE IN YOUR 20S
Investing in real estate in your 20s is one of the best things you can do, and if you play it right, the benefits you get will heavily outweigh the effort it takes. If investing in real estate sounds like something you could pursue, here are a few tips to help get you started.
Tip #1: Educate yourself and do the research
One of the most important things to remember when investing in real estate in your 20s is the importance of research. Real estate investing is not something to jump into with no knowledge, because it does require a large amount of capital, and there is some risk. Luckily, there are plenty of resources out there to learn everything you need to know.
Some of the best ways to educate yourself are to read books, listen to podcasts, watch videos, and attend online events and webinars.
Tip #2: Build up credit
It is very important to ensure that you have a solid credit score so you can be approved for a loan with an affordable interest rate. To qualify for a mortgage, you will need a minimum credit score of 620, but preferably higher than 760.
Possibly one of the biggest hurdles to buying a rental property in your 20s is having a high enough credit score. The best ways to build your credit are to have multiple lines of credit, make your credit card payments on time, only use about 10% of your available credit limit, only apply for loans that you need, and pay off these loans on time.
Tip #3: Save, Save, Save
Perhaps the most important step to take if you are interested in purchasing an income property at a young age is to start saving. This can be challenging in your twenties because you are likely working with a lower salary and a decent amount of expenses.
One of the best solutions to this is to start paying yourself first. Set aside a reasonable amount of money as soon as you get your paycheck each month. First, see how much you can afford to save after deducting your bills and estimated expenses, and then automatically transfer that amount into a savings account each time you get paid. Make it automatic so you don’t even have to think about it.
Over time, you will be able to save up enough to make your first down payment. And again, the earlier you can start, the better. If you want to start investing as soon as possible, you could even work an extra freelancing job into your schedule, such as food delivery, and save everything you make from that supplemental income into that savings account. You will reach your savings goal in no time and will soon be on your way to passive income and financial freedom.
Tip #4: Figure out financing
Saving enough money for the down payment is only the first step of buying a rental property. While you start saving, the next step is to figure out how you will finance the rest of the payment. There are multiple options for this. The most common is to apply for a mortgage, which usually requires 25% of the purchase price, and payments for 15 or 30 years.
You can also look into private money, which would involve borrowing money from friends, family, or other connections, and then paying them back like you would with a loan – this can be a good option when investing at a young age. Another option is hard money, which means borrowing money from an individual who has enough capital to lend out. This usually comes at a higher rate and shorter terms, so it’s important to make sure that you completely understand the terms of the deal.
Tip #5: Network
Real estate is all about relationships and if you can start networking now, you will benefit greatly. One of the best things you can do to start buying real estate in your 20s is to start connecting with investors, contractors, agents, property managers, and inspectors. Making connections in the industry will present many more opportunities in the long run, and it can also be helpful to have people to share ideas, concerns, and challenges with. The best way to do this is to reach out to people on social media, websites, and forums, or join a network of investors.
Tip #6: Pick a Strategy
There are many different ways to invest in real estate. The most common strategy that usually comes to mind, is to buy a property and rent it out. However, you may find that you prefer a different method. A few options include investing in REITs (real estate investment trusts), flipping properties, short-term vacation rentals, or real estate wholesaling. Some of these options are associated with less risk or higher returns. It is important to research all the options and choose which strategy works best for you.
Tip #7: Consider House Hacking
Househacking is a great option if you are ready to start investing in real estate in your 20s. Househacking is when you live in one of the units of a multi-unit property and rent the other units out to tenants, or even rent out a spare bedroom in the house you live in. This method is where a lot of investors start, because it can provide the least amount of risk, and you can qualify for loans with very little money down. Or if you already have a spare bedroom that you aren’t using, you can get started right away and start earning passive income.
Tip #8: Pick a market
Once you have saved up enough money, it is time to start researching the real estate market. There are plenty of resources to find which markets are the best to invest in. It is best to find high-growth areas that are seeing an upward trend in home prices. This usually depends on a variety of factors, such as job growth and political influence.
For your first investment property, you may want to buy something local so that it is easier to manage and check in on. It can be helpful to find a good real estate broker to help you get an understanding of the market and help you find which properties are right for you.
Tip #9: Set specific goals
Before getting started with real estate investing, it is important to set clear investment goals, both long-term and short-term. Having a clear set of criteria you can use to determine which properties are worth buying, is a great way to assess different property options. You can set specific amounts for cash flow minimums and returns to track your progress.
It is also a good idea to come up with a long-term investment plan. Determine what kind of portfolio you want to build, taking into account your timeline, the amount of time and money you would put in, and how many doors you want. After defining your goals, you can share them with your network and get advice, and possibly a clearer vision for what your goals are.
Tip #10: Consider crowdsourcing
If purchasing an investment property seems like too big of an endeavor, there are other options that require less capital and less commitment. There are many platforms now in which you can become a part of crowdfunding efforts for real estate investments. With this method, you can benefit from having experts do the research for you on which properties are best to buy, and then contribute to the pool of money and get the corresponding returns. This can be a great option to invest in real estate in your 20s.
Real estate investing at a young age is one of the smartest decisions you can make to set yourself up in a great financial position in the future. While it may be tempting to spend your hard-earned money on a new car or at your favorite restaurants, keep in mind that a car is a depreciating asset that you will likely still have to take a loan out for, but it will provide you no benefit in the long run. If you can buckle down at this age and save, you can buy all those things you want in the future, but with passive income.