How Millennials Can Grow Their Wealth Through Real Estate
Investing, as with most things in life, benefits from an early start. Every day that passes uninvested is a day missing out on compound returns, which can then be reinvested to earn more money. Be it through stocks or real estate, investing at young age is how many of today’s 30-something millionaires got on their road to riches.
The great thing about real estate investing is that you don’t need a massive bank account or decades of experience to make money. If you’re a millennial looking for a stable, steady way to grow your wealth into the future, the real estate market is primed for investing now.
Are Millennials Investing in Homes?
Many assume that millennials are mistrustful of real estate investing. After all, they lived through the housing bubble of 2008, when home prices tanked and there was panic in the industry. The fact is, 85 percent of millennials see real estate as a valuable asset– more than any other age group in the U.S. And while considerable student loan debt has delayed the path to homeownership for many, millennials now represent the largest share of home buyers of any generation.
What Are the Benefits of Investing in Real Estate?
There are many advantages in owning a tangible asset. It’s something you have control over. You can improve it, generate monthly income from it, and after building equity, sell it for a lot more than you originally paid. Here are just a few of the unique financial benefits of investing in real estate:
Leverage – Leverage in real estate means using other people’s money to make more money for you. Say you put down $10,000 to buy a $100,000 home and borrow the remaining $90,000. If the house value goes up 10 percent in a year then you’ve doubled your investment, mostly on the strength of that $90,000 you didn’t have to contribute.
Cash Flow that Grows – After you collect rent and pay off expenses, the rest is pure profit. Plus, as the cost of living goes up through inflation, so does the amount you can charge. Meanwhile, your mortgage payments stay the same.
Tax breaks – One of the biggest benefits of owning rental property is the money you don’t have to pay. Rental income isn’t subject to self-employment taxes, and you can deduct property tax, mortgage interest, operating expenses, depreciation and repairs. It all adds up.
How Much Money Do You Need to Invest in Real Estate?
If you want to start small, you can get into real estate investing for as little as $500 through a crowdfunding company like Fundrise. By choosing the company’s starter portfolio, your money is invested in real estate projects that the Fundrise team identifies, acquires and manages on your behalf. Dividends are paid throughout the year, but these investments are intended for long-term growth – at least five years, in most cases.
If you’re interested in acquiring a property to make money, the first thing to keep in mind is that you shouldn’t rush in. You’ll want to make sure you have enough money to make a down payment on a home in a growing area, make any necessary repairs, and cover your own expenses for at least six months to a year.
How much is enough will depend on your market and the type of home you’re looking to acquire. Ethan Roberts, real estate writer, editor and contributor for Auction.com, recommends having at least $5,000-$10,000 as a general starting point and minimizing your initial investment as much as possible.
“If you’ve been in the military, take out a zero-down VA loan,” Roberts says. “Otherwise, take out an FHA loan with 3.5% down, or a conventional loan with 5% down. Look for a foreclosure or short sale that has some start-up equity in it.”
If you don’t plan on living in the property you’re buying, check out a rundown of options to get financing for your investment in the Quicken Loans blog.
How Do You Start Making Money in Real Estate?
Most real estate investors fix and flip or buy and hold to accumulate wealth over the long-haul. But you may want to rent out your residence through an online marketplace like Airbnb to get your feet wet first.
While millennials may be the largest generation of home owners, they aren’t the largest group of investors in rental properties quite yet. However, they are interested in making money through home sharing companies like Airbnb. In key US markets, 85 percent of millennials support allowing residents in their cities to rent out their extra living space.
Using a company like Airbnb to host guests is a great way to make some income and prepare for being a landlord at the same time. It may not involve collecting rent or fixing leaky faucets for upset tenants, but it can help you learn about what people look for in their accommodations, and help you get comfortable with the idea of using a property to make money.
Fixing and Flipping
The fix-and-flip approach involves buying bargain properties and renovating them to sell at a profit. Sometimes investors use contractors to do the upgrades. Those with experience flipping houses will often do the work on their own. Roberts points out that if you’re just getting started, you don’t need to need to get in and out of your first home within a few months like most fix-and-flippers.
“Fix it up as best you can (you may have to forego saving in order to do this) and live in the house for no more than a year or two,” Roberts says. “YouTube has great videos on how to fix almost anything for which you don’t need a contractor (in other words, everything except a roof or electrical system). After your rehab, sell the house and use the profits to finance your next home, again looking for a distressed property with equity.”
From there, Roberts boils it down to a rinse and repeat approach.
“Repeat the formula several times over the next decade. Sure, it involves frequent moves, but it’s far easier to do that when you’re single and don’t own much, than after you’re married and have children who are yelling at you for moving them away from their friends.”
Buying and Holding
If you’re more interested in managing properties from afar and piling up passive income – meaning you don’t have to put in any labor to speak of – you’ll want to follow the same initial path as you would fixing and flipping. Do some research and search for homes in a growing area, then put down as little as you can with the most cost-effective loan you can come by.
Again, if you take out an FHA loan, this may mean you’ll need to live in the home for a time. But as a buyer and holder, you can rent out rooms while you do some renovations and build up some investment funds to work with. Saving will involve some sacrifices, and some of the smaller luxuries you might be used to should be the first to go.
“Skip the $5 Starbucks latte and buy your coffee from the convenience store,” says Roberts. “Take a bagged lunch to work, rather than dropping $8 or $10 every day at the local cafe. Forego the clubbing on Saturday night for a fun evening at home with friends or your significant other.” Roberts suggests that the best way for Millennials to save is to pay themselves 15 to 20 percent first and then assign the rest of their paycheck to bills and finally to pleasure.
After 12 months of living in your property, considering refinancing to lower your mortgage payment and upping the rent to bolster your savings even more. As soon as you can, buy your next property the same way you bought the first. Rinse and repeat just as you would fixing and flipping. The only difference is that you’ll be pulling in rental income from your original property and every subsequent property you purchase. Your immediate profits will be less since you’re not benefiting from the equity you’ve built by selling a home, but as you acquire more rental properties you’ll be growing a network of income sources and building even more equity over time.
Take the First Step to a Million by Saving a Few Thousand
For a generation that values independence and financial security, real estate is an investment form that makes a lot of sense for millennials. No investment is without its share of risk. But by putting in the time to research properties and the effort to save a few thousand for a down payment, you can start building equity and generating income that will grow exponentially in the years to come.
Portions of this article have been republished for additional educational purposes. This information was originally published on Auction.com, LLC, the nation’s leading online real estate marketplace. This article is not affiliated with any links or products that appear on the same pages. Read more about our editorial policy. This article has been updated from its previous submission on Aug 24, 2018 to reflect updated information.