There’s this old saying that says the best time to plant a tree was twenty years ago. The second best time is now. That especially applies to investing. It’s never too late to begin investing and planning for the future, but the sooner the better. This is true in real estate, as buying a house, an apartment or whatever other type of property you’re looking for can pay off big time if you invest wisely in your 20s.
Owning a house rather than renting is often a good way to save money and set yourself up with a valuable asset in the future. However, renting it out can be even better as it’s a guaranteed source of income that can pay off your mortgage while also earning you some extra money on top.
Getting an Early Start
Many extremely successful people saw the value of investing in real estate at a young age and are now enjoying the fruits of their labor. One of my favorite stories is the 24-year-old college dropout who bought a 5-bedroom condo for $60,000.
By renting out four rooms to friends for $300, he was able to live for free while working. Mike Henkel scraped together enough money to buy two more properties in the town. Now, after 42 units, Henkel’s properties are worth $4 million.
His story is an extreme one, as he was maxing out his credit cards for each “leap of faith,” as he called. The stress and pressure was enormous, yet it paid off.
You don’t have to be nearly as ambitious as Henkel was in order to successfully invest in real estate. For some, such as Rob Mericle, it was commercial real estate that paid off. For others, such as Henkel, it was purely residential real estate that helped solidify their financial future.
Whether you’re looking for that dream home to live in or a good property to rent out, you’ll likely have to work with a bank to get a mortgage unless you’re blessed with heaps of cash. Regardless of which type of loan you want, the bank will take a look at your credit history, which probably isn’t the strongest when you’re only in your 20s.
Your score will impact the interest rate of your loan. Fortunately, interest rates have been low for the past few years, with 30-year fixed loans typically at around 4 percent. Low interest rates make buying an even sounder investment, as it means you’ll be able to spend more on the principal of the loan rather than the added interest.
An obstacle to all potential property buyers is the down payment. This is typically 20 percent of a home that needs to be paid upfront. A smaller down payment is possible, but this likely means higher interest rates or paying private mortgage insurance.
However, as a younger person, you may qualify for first-time home buyer loans. Other loans allow you to put as little as 5 percent down if you plan to live in the home, which is a great way to make money on a property.
Renting Out Your Property
To make money off your real estate, which you want to do when you consider it an investment, you’ll likely be renting out your properties. Here are a few things to keep in mind as a young property owner:
- You can do without a property manager, which requires you to pay them, if you live close by and can handle any issues that may come up with the property yourself. This is a nice cost savings.
- That being said, you should protect your investment property by having a real estate attorney you can trust. They can assist at any stage in the transaction, including negotiating lease terms, drafting documents, handling closing, etc. Make sure to include legal fees in your budget when underwriting your investment.
- Make sure to add up your cash flow correctly. You need to account for things that aren’t immediately obvious, such as downtime between rentals and upkeep on the property.
- Vet your renters carefully. You want responsible people who will pay their bills and won’t require any effort from you to oversee.
Making the Right Financial Moves
Buying makes financial sense. In addition to making money, you’re also learning fiscal responsibility at a young age. You’ll be far ahead of your peers, who probably don’t know an accelerated amortization from an all-in-one mortgage.
But most of all, investing in real estate while you are young gives you an education. The money is great, of course. Yet real estate investment teaches you to think in new ways. It requires problem solving and grit and determination to wait for the best deals. You will learn to assess things differently and understand money isn’t always the most important factor in an investment. Sometimes good investments require time, too.
Investing in real estate while you’re young will carry benefits that can last a lifetime. Do your homework, be aggressive and open your eyes. This will be a fun and rewarding path.
This article comes from our friends at Phroogal. It was originally published on January 20, 2016, and can be found on their website here.