It may feel like just yesterday you were living the dorm life. Thoughts of mortgages, appreciation and the real estate market probably weren’t what kept you up late at night, tucked away in that extra-long twin bed. Then bam, you enter the real world and housing becomes a hot topic of discussion. Your 20s and 30s are exciting and challenging. They are the building years with foundational pieces being set, such as starting a career, a family and buying that first home. In terms of real estate, most young people’s first purchases are primary residences. But, what about investing in real estate at a young age — what is it like to own rental properties in your 20s or 30s?
Understanding the Value of Time
First off, why would you want to be a landlord before your 40th birthday? Starting early gives you a major advantage: time. If you studied finance, you may remember the term time value of money, which is the underlying concept of long-term investing. The idea is that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. One of the major benefits of buying real estate is appreciation and by holding onto a property you can accrue value over time. Wondering if you ever witnessed appreciation at play? Just ask your parents what your childhood home was worth and compare it to today’s value — it’s probably made a big jump!
How to Get Started: Entry-Level Investing Strategies
Appreciation aside, real estate can be a powerful investment due to its income producing potential. While both a primary residence and an investment property can be considered assets, a rental property ups the ante by actually producing cash flow. Building a large portfolio of rentals is no easy task, but there are ways to get started on a small scale. What are some entry-level strategies?
One of the easiest ways to dip your toe into real estate investing is by “house hacking.” The basic concept is that you purchase a property and rent out parts of it to collect income and help offset your housing expenses. This strategy kills two birds with one stone by providing you with a primary residence and an opportunity to make money. Examples of house hacking include purchasing a two-bedroom condo and renting out one of the rooms or buying a multi-family and living in one unit and leasing the others. If you’re looking to build your real estate portfolio, house hacking is a great way to gain experience with landlording and property management. Since you’d be living on-site, it makes it easier to keep tabs on what’s going on. Think of it as landlording with training wheels!
Purchasing a property in an area that attracts tourists or receives an influx of seasonal visitors can be quite profitable. If you buy in a vacation town, you can get a premium rental rate during peak season. As long as you’re willing to stay on top of the high rental turnover you can make a pretty penny. Some savvy homeowners are even finishing out sections of their homes and leveraging platforms like Airbnb to bring in additional income on their primary residences. One word of caution: Airbnb is certainly a popular platform, but has seen its fair share of controversy. As a homeowner, you would want to do your due diligence on how renting your property impacts your insurance and taxes.
Investing in REITs
If being a landlord doesn’t seem like a good fit, another more passive approach to get some skin in the game is to purchase REITs. A REIT (Real Estate Investment Trust) is a company that owns, operates or finances income-producing properties such as apartment complexes, offices, shopping centers, hotels, etc. Modeled after mutual funds, REITs allow individuals to tap real estate the same way they would other industries — by investing in stock. As a REIT stockholder, you earn a share of the income produced through the real estate investment without actually having to go out and buy and manage property.
What’s It Like Being a Young Real Estate Investor?
It doesn’t matter if you’re 28 or 88, investing in real estate is time-consuming and can be stressful at any age. Having owned rental properties for the better part of my adult life, I can tell you that it’s no cakewalk. It can be a rewarding experience, but it comes with great responsibility. Here’s what questions you’ll want to ask yourself before taking the plunge.
Are you comfortable taking on risk?
Of course, with any investment, there is a level of risk. With no risk, there’s no reward. Are you comfortable tying up your cash in a house? Historically, the real estate market has followed an upward trajectory, but there are ups and downs. Will you be able to ride out the low points?
Are you ready to be a business owner?
Aside from monetary risk, are you okay with being accountable for managing a property and keeping it safe for your tenants? Many states have strict laws that regulate the business of landlording.
Are you willing to make sacrifices?
Getting started can be a drain on resources like time and money. Sacrifices will need to be made. For example, you may need to put off buying your dream home so that you can afford the rental property. You’ll need to rearrange your schedule to accommodate real estate-related responsibilities. It’s a lot to juggle!
Do you have financial reserves?
Property management is filled with costly surprises. You can’t always predict when a system will fail or when a tenant will stiff you on rent. Do you have reserve funds to get you through these hard times?
Are you ready to have tenants?
Owning rental properties is a “people business.” To make real income, you need tenants paying rent. Conflicts will arise and being a landlord is a thankless job that requires tact and interpersonal skills.