For many people, the idea of investing in real estate in your 20s sounds absurd. After all, most people in their 20s are just starting out and may not have large amounts of money needed to invest in properties. In fact, the majority of those in their 20s are focused on finding a solid job and finding immediate security.
However, investing in real estate in your 20s is perfectly feasible and actually can be a very smart financial decision. Property is one of those solid investments that generate consistent solid returns over the years. Investing in real estate young is a great way to set yourself up for your future.
Of course, investing in real estate is not easy. It takes a lot of time, effort, planning, and discipline. It also takes a smart approach to saving money so you can get the most out of your investments.
Worry not though, we’ve put together this comprehensive guide on real estate investing in your 20s. We will cover the basics of investing in real estate and give some tips from real estate investors on how to best maximise your property investment yields. These tips will help you get your financial future on track for retirement.
Why Invest In Real Estate?
First, though, we should answer the main question: Why should you invest in real estate in your 20s? There are a ton of reasons, so we will cover just a few of the most obvious and pertinent.
Time to Build Wealth
The single most important reason to invest in real estate in your 20s is time. Investments take time to really build up value, and investing early ensures you will see better returns in the future. Holding investment properties for a longer time lets them appreciate more so you can get more when you sell those properties in the future. The longer that you hold rental property, the easier it is to make mortgage payments on time and the better tax advantages you receive.
You Have a Safety Net
Job security is a major concern in today’s economy. Many people focus on having a second stream of income in case they find themselves unemployed. Investing in real estate can provide that extra source of income that you might need. The best part of real estate investment is that it generates income even if you do not have a job. So, if you do unfortunately find yourself unemployed, you won’t be completely out of luck and will have a safety net to fall back on.
You Gain Investment Experience
Property is just one kind of investment. There are many other kinds of investments, each with their benefits and drawbacks. Investing in property early is a great way to learn the ropes about investing in a relatively low-risk format. Property has a generally steady return rate so you can invest with relatively little risk, as long as you choose suitable properties.
The general investment principles behind real estate investing are the same behind investing in securities in general. Learning the ropes of property investments and skills such as diligence, discipline, and long-term planning are beneficial and can be applied to every area in your life.
How Do Property Investments Generate Income?
It is well known that property investments can generate money. But how, exactly, do property investments generate money that you can use? There are 3 major ways that property investments can generate income.
Real Estate Appreciation
The most obvious way that homes gain value is from appreciation. Property naturally appreciates over time due to a changing real estate investment market. According to historical data, since the 1970s, real estate investments have had an average return of 5.4% each year.
Also, many homeowners make upgrades and renovations to their homes which further increases their fair market value. Appreciation is not entirely linear though, and homes can actually depreciate in value depending on current market conditions.
Cash Flow Income
The next most obvious kind of income real estate properties can generate is rental income. Properties such as homes, apartment buildings, hotels, storage units, office buildings, and other kinds of physical residential spaces can generate a set amount of rental income each month. This kind of cash flow is great as you get a steady stream of cash income regardless if you have a job or not. In fact, many people are able to live off just cash flow from rental income alone.
Depending on the type of real estate, ancillary income can be a major source of cash flow. Things like vending machines or laundry facilities can generate a ton of income. In fact, those things are basically small businesses within your investment property so it’s like you have your own pool of customers.
Pros of Real Estate Investing
- Property is regarded as a more stable investment than stock
- Rental properties are a great source of cash flow
- Property investments get you some nice tax benefits
- Properties have the potential to generate stable long-term income
Cons of Real Estate Investing
- Returns are not as aggressive as stock
- Investing in property has a high upfront cost
- Real estate investments have relatively poor liquidity
- Dealing with maintenance and issues form renters can be difficult
7 Tips For Investing In Property in Your 20s
Being a real estate investor is no walk in the park! So, here are a few tips on how to get started investing in real estate. Real estate investing might seem like it is out of the reach of most people, but most real estate investors are not fabulously wealthy. Don’t get it twisted — you can be a real estate investor even if you don’t have a lot of money.
1. Start Saving
The very first thing you need to do is build up the capital to invest in real estate in the first place. As is always the case, starting to save earlier is always better than saving later. The earlier you start saving, the more likely it is you will be able to invest in real estate in your 20s. Cutting back expenses and saving the optimum amount each month is the best way to build up enough to put down that first down payment.
2. Learn From the Experts
Even though you might feel like you have all the knowledge you need to invest in real estate in your 20s, it is always a good idea to listen to the experts. It’s important to recognise your limitations of knowledge so you can better make adjustments to your approach. Fortunately, there are a lot of resources where you can get advice. The internet is an unlimited resource where you can find guidelines and tips from some of the most successful real estate investors of the modern age. You can find loads of educational resources to learn how to get started in investing in real estate. Talking to other real estate investors can help clarify your real estate goals.
3. Clarify Your Investment Goals
You should also take the time to sit down and figure out your specific investment goals. When it comes to clarifying your long term goals, specificity is key. A goal should not be “I want to save for retirement” but should be something specific and trackable, such as “I want to have $50,000 saved up for a down payment in 4 years” or “I want an investment property that can generate at least $2,000 a month“.
Remember: the more specific your investment goals, the easier it is to see whether you are on track to meeting them in the set time frame.
Here are some questions you can ask yourself to help clarify your real estate investment goals:
- When do I want to retire?
- How much money do I need for a down payment?
- Do I need immediate cash flow or a long term investment?
- How much money am I willing to put into real estate?
- What is my credit score?
- What kind of tax advantages am I looking for?
Each question should have a determinant answer with a time frame. That way you can best plan how to meet your goals.
4. Research the Market
Real estate investing is difficult and requires a lot of knowledge. You must be willing to do in-depth research in your market. This includes researching things like current/historical trends, current mortgage rates, unemployment rates, and more.
Investment property values are affected by an almost innumerable amount of variables so there are a lot of metrics to keep track of. If you have a better grasp of the state of your market, you can plan for the future and make decisions more efficiently when circumstances change. If you want to invest in real estate, then you need a large knowledge base.
5. What Kind of Investment Property Do You Want?
There are several different kinds of real estate investment, each of which with its own benefits and drawbacks. Real estate investments could include:
- Single-family homes
- Multi-family homes
- Apartment complexes
- Commercial properties
There is a lot of variation here. You also need to determine if you want to buy a new or old real estate investment property. You could even buy run-down places, fix them up, and sell for a profit. The kind of investment property that you can invest in will likely be constrained by how much money you have and your investment goal timelines.
6. Figure Out Your Finance Strategy
Investing in real estate in your 20s requires a large upfront cost. You need to figure out your net worth so you know how much you can invest in properties. If your net worth is too low, then you need to work on either increasing your income or reducing your amount of debt. Your net worth is important because it will determine how you can finance your investments.
For example, do you plan to pay for your investment entirely in cash upfront? If you choose this option then you need to have a substantial amount of liquid assets. Another option is acquiring a loan. If you decide to get a loan, then you need to factor in the repayment scheme into your investment projections.
Figuring out your financial strategy will also help clarify which properties would be best to invest in. If you can only amass a small amount of capital, then you most likely need to lower your investment expectations. If you can get together a large amount of money, then you can go for something larger and nicer.
6. Purchasing Strategy
The next thing to figure out is your purchasing strategy. There are a lot of different ways you can invest in property. Depending on how much money you have, there are some options available to you. For example, say you can put together £150,000. You could then either:
- Purchase one investment property outright with cash
- Buy multiple properties with a 25% down payment on each
From here, you can make further purchasing decisions about paying off your mortgage, or paying for renovations. In general, the better idea for long term investments is to invest in multiple properties. That way you have multiple streams of income in case one of them fails.
7. Assess Your Credit History
Credit history is an extremely important part of investing in property. Loan issuers will check your credit score to make sure you have a good history of repayment and can pay back the terms of your loan.
The exact specifics vary depending on the specific loan, but in general, a conventional 30-year home loan requires a credit score of at least 620. There are special home loan programs that are geared towards those with lower credit scores though.
If you have a low credit score then you need to shore up your debts and bills. Missing payments on your debts will lower your credit history, so you need to stay on top of your other accounts. Fortunately, paying off a home loan in the determined time frame is generally good for your credit history.
Real estate property investment is almost always a solid decision, even if you are young. Investing in property in your 20s is one of the best ways to start saving for retirement. Despite what many think, real estate investing in property in your 20s is feasible and can be an excellent decision to set up your future. It can be difficult figuring out how to start real estate investing with little money, but it is possible for real estate investors.