Investing in real estate in your twenties is not easy, but if you can make it work, it can have big benefits that will set you on a path toward financial freedom. With that in mind, we've created a guide on the topic below. Keep reading to learn about the benefits of investing early, the challenges of being a young investor, and the steps you need to follow to make it happen.
Why start investing in real estate in your twenties
When you're building out your portfolio, you'll want to start investing as early as possible, and your twenties are a great time to learn. Truthfully, there are many benefits to being a young real estate investor, and we've laid them out for you below.
Real estate investment generates passive income
First and foremost, if your real estate investment generates positive cash flow, you'll have the benefit of earning passive income. While the return on one property will likely not be enough to let you quit your day job, that added income can help you build an emergency fund, pump up a retirement account, pay off a student loan, or give you an added sense of security in an uncertain job market.
You'll gain investment experience
If there's one thing all high-net-worth individuals can agree on, it's that investing comes with a learning curve. Not all of your investments are going to generate easy money, and it's up to you to learn how to pick the right investment vehicles and make them work for you. The sooner you can start this learning process, the sooner you'll be on the road to financial independence.
You'll start building a portfolio of assets
As stated above, the passive income you receive from one investment property is not going to be enough to help you achieve financial freedom. For that, you need a portfolio of diversified assets. However, the first step to building that portfolio is buying a single rental property or investing in your first real estate investment trust (REIT). Again, the sooner you start building up your portfolio, the better.
The challenges of being a young investor
That said, being a young real estate investor is not without its challenges. Before you get started on going this route, make sure you're aware of the difficulties you might face along the way. To that end, we've listed some of them below for your consideration.
Property investment has a high up-front cost
Unfortunately, real estate does come with a high up-front cost. Buying a house is about more than just making sure that you can't afford the mortgage payment. In particular, you need to think about how you will pay for your down payment and closing costs.
While it's possible to get a residential real estate loan for as little as 3%-5% down, sometimes mortgage companies require higher down payments from investors. In addition, your closing costs on the property are likely to add up to another 2% - 5% of the home's purchase price.
Property management can be difficult
At its core, being a landlord is not easy. Not only will you be responsible for making sure you have the appropriate permits and rental agreements, but you will also be in charge of marketing the property and screening tenants. Then, once you have someone who has agreed to rent the property, you'll also be responsible for the majority of the maintenance and upkeep for the length of the lease.
Real estate is less liquid than other investments
Finally, it's important to note that real estate is less liquid than other investments, like the stock market. If you think you might need to be able to access your money quickly at some point down the road, you may be better suited to choosing another investment vehicle, such as stock shares or a mutual fund.
How to start investing in real estate in your twenties
Now that you know a little bit more about the benefits and challenges of being a young investor, it's time to get into more detail about how to start investing in your twenties. With that in mind, we've laid out a few practical tips for you below. Use these to help you get started on your real estate investing journey.
Get clear on your financial goals
Ultimately, your twenties are about creating a solid foundation for your financial future. You may not have enough wealth or experience to tackle all of your financial goals at once. It's crucial to get clear on which goals are most important to you in the immediate future before moving forward.
Perhaps it's important to you to work on improving your credit history since having a good credit score is essential in order to be approved for a loan with an affordable interest rate. Maybe you want to work on building up an emergency fund since owning a rental property often comes with unexpected maintenance costs.
Whichever personal finance goals are most important to you, make sure to get them taken care of before you invest. It's only when you feel ready to really invest your time and energy into real estate that you should move on to the next step.
Pick an investment strategy
Once you're ready to get started with real estate investing, it's time to pick an investment strategy. Truthfully, when most people think about real estate investment, they picture buying a rental property and collecting regular rental income. However, this is only one investment strategy that you can choose from. In reality, you can also decide to invest in a REIT, flip properties, or consider real estate wholesaling.
Before choosing a real estate investment strategy, it's a good idea to do some research into all of your available options before getting started. Our investment strategy guide can help you figure out which type of property investment is right for you.
Start saving up for the costs of buying a home
We've already discussed how much you can expect to spend when you invest in residential real estate. (Commercial real estate, on the other hand, is a whole different ball game altogether. It is much more expensive.) However, now that you know roughly how much real estate costs, it's time to start saving.
When you're saving up toward a specific goal, it's a good idea to open up a dedicated savings account for that money. Put simply, when you separate your money into dedicated accounts, it's harder to accidentally spend it on incidental costs.
Research the local real estate market
After you've saved up enough cash, the next step is to research the local real estate market. For your first investment property, local property is usually a good investment because it is easier to care for and manage. A good real estate broker can help you get to know your local market and help you find available properties worth considering.
Consider house hacking
In real estate, house hacking involves buying a multi-unit property, living in one of the units, and renting the rest out to tenants. This is considered a smart strategy because it allows you to use residential home loans, such as an FHA loan, to buy an investment property. Typically, loans used to purchase primary residences come with lower credit score and down payment requirements.
The bottom line
Buying real estate in your twenties may not be everyone's first priority. Some people believe in building up a retirement account while others want to focus on increasing their total income. However, for those for whom it is the right path, investing in real estate early can be a huge step forward toward financial independence. If you're interested in seeing how real estate investment can help you achieve financial freedom, use this guide to help you get started.