Getting started investing in real estate at a young age is a great idea for several reasons. First, you can build significant equity in about 10 years (more or less) from owning a home. If you buy your first house while you’re still in your 20s, for example, you’re still young enough in 10 years to carve out a career investing in real estate, starting by tapping into your equity, perhaps to buy more properties.
Also, you have time to try different investing methods to determine what works best for you. And people are generally more flexible before they start a family, which opens up more opportunities. Once people have children, it’s more difficult to move to a more favorable state for homebuying or opening your home to renters.
All that said, there are obstacles young people face, mostly having to do with financing a deal. This is a particular problem for young people with student loan debt that puts their debt-to-income ratio too high for most conventional mortgages, but there are solutions for that too.
Determine your real estate investing method
Common ways for young people to get started investing in real estate include house hacking, house flipping, a buy-and-hold investing strategy, renting out property, and investing in real estate investment trusts (REITs).
House hacking involves buying property and renting out rooms in it or buying a duplex, triplex, or quadplex and living in one of the units and renting out the rest. The idea is to have other people pay your mortgage.
House flipping involves buying a fixer-upper home, such as a foreclosure, improving it, and then selling it for a profit.
The buy-and-hold strategy is similar to house flipping, but it doesn’t necessarily require fixing the property. Investors buy at a low price and simply hold onto the property until prices go up in the area, and then they sell for a profit.
Renting property is often combined with the buy-and-hold strategy. While you’re waiting for the market to warrant a sale, you can earn money by being a landlord. You don’t ever have to sell if your goal is to rent property, but you have the option.
Investing in REITs is a way to get into real estate investing without having a lot of money. REITs are companies that own income-producing real estate. This includes apartments, warehouses, retail stores/malls, hotels, self-storage facilities, and collections of single-family homes. Investors earn dividends and buy and sell REITs through a brokerage account, just like a stock.
How to overcome the financial challenges
If you want to buy property instead of investing in REITs, look for a lender that matches your investment strategy. For example, if you want to buy a primary residence to build equity, look into first-time homebuyer programs many states offer. You might qualify for a down payment and closing cost assistance program or for a loan with reduced interest rates.
Some investors use hard-money lenders, particularly for flipping property. These are short-term loans backed by private lenders. What’s good about these lenders is that the loan isn’t based on your credit score or your debt-to-income ratio, but rather the value of the property. In the case of a flip, the loan is based on the after repair value (ARV), or what the property will be worth once you repair and renovate it. The drawback is the interest rate and fees will be high.
Learn as much as possible
If you know a real estate investor, ask for advice or for networking recommendations. Study all the investing options, pick one, and act when everything falls into place. New investors often don’t research at all, or they research too much. The former could lead to a costly error by making an uninformed decision. The latter could lead to a common situation called “analysis paralysis,” meaning you get stuck analyzing everything and never acting.
Keep in mind that young people have time on their side. If you make an error, you have plenty of time to get it right the next time.