How to Invest in Real Estate as a Millennial
Millennials who want to invest in real estate have it harder than many other generations. Real estate prices are at record or near-record highs in just about every major market in the country, and even though employment is good, wages still haven't kept up with the home price increases, making it tougher than ever to start building a real estate portfolio -- especially on an entry-level income.
Rest assured that doesn't mean the American Dream is dead for millennials. In fact, many millennials have an advantage when it comes to real estate investing: They are more tech-savvy than any other adult generation to date, and new tech-driven methods and strategies of investing are supplementing traditional investment methods and strategies.
So how does a millennial get a foot on the property ownership and investment ladder?
Make your credit shine
Investing in real estate often involves borrowing money, usually from a bank or a nonbank lender. That means convincing strangers that you are trustworthy and will more than likely pay back the money you owe, and in this day and age, their inclination to trust you will depend heavily on your credit score.
So take all the appropriate action to polish up your credit. Pay off as much debt as you can, always pay your bills on time, maintain old lines of credit, and try not to use too much of your available credit. You can request your own credit report from the major credit bureaus once each year for free, and a credit counselor can help you identify which debts to pay first and how to improve your credit score if you're feeling stuck or overwhelmed.
Once you start seeing that score increase, resist the temptation to use it to buy something big. It's only natural, but if your goal is to start building wealth using real estate, then you're going to want to keep increasing your credit score -- and a big purchase will definitely ding it for a spell.
Save whatever you can
The less money you have to borrow, the less overall interest you'll pay, and the bigger reward you could reap from your investment. If you want to buy property yourself, you'll also discover that the more you bring to the table in terms of a down payment, the lower your monthly payment will be. Mortgage loan borrowers who don't have at least 20% of the home's sales price will usually have to pay mortgage insurance every month, so whenever you are buying property, having at least a 20% down payment is an excellent rule of thumb.
Saving can help you in other ways besides a down payment. Lenders are going to want to see evidence that you can be responsible with money, and saving money over time is an excellent point in your favor.
And even if you don't plan on investing in real estate directly, instead going the route of a crowdfunding or real estate investment trust (REIT), saving a lot of money is still going to give you a lot more flexibility and more options than saving a little money. No matter what your investment strategy, a comfortable nest egg can only make it stronger.
Networking feels like a dirty word to some people, conjuring up images of stale pastries, lukewarm coffee, and insincere handshakes. But no truly successful real estate investor is an island -- to flip a house and make money doing it, for example, you will need to know and trust an electrician, plumber, general contractor, inspector, supplier ... the list goes on.
Not every real estate investor is going to require an entire posse, of course, but it's still a good idea to spend some time getting to know people who may be part of a long and beautiful business relationship. If you really don't enjoy traditional networking events and aren't your best self when you attend them, then don't. Instead, find some online communities where you can ask questions and learn. Grab a group of friends who you know have an interest in real estate investment and coordinate a meet-up in your living room. Strike up a conversation with the person you're always seeing at the home improvement store.
Relationships are key in every business, and real estate is no exception. Investors who have been in the business for years can tell you that some of their best deals emerged because they knew the right person at the right time. Be friendly and interested in what other people are doing and try to attune yourself to their needs, and you will be pleasantly surprised by the opportunities and offers that unfold as a result.
Don't be afraid to start somewhere ...
The big problem with making a decision to invest in real estate is that it feels like a very big decision. It can be paralyzing. Would-be investors who are afraid of making a mistake with their money instead make the very big mistake of not doing anything at all. As Wayne Gretzky told us, "you miss 100% of the shots you don't take."
Investing in anything can be risky -- there is always the chance that you'll lose the money you put into the venture. And real estate feels especially risky because the purchases are significant and you're often borrowing money to make them. The good news is that there are many less-risky options than buying a house by yourself and trying to flip or rent it, so explore the avenues open to you and consider taking a few small steps before you jump in with both feet.
But don't make the mistake of waiting forever to get into the game. You're missing an opportunity to learn more about the business and hone your strategy until it's perfect.
... But don't let your emotions take control
Homes can be very emotional places for us humans, who spend thousands of vulnerable moments in homes every day. It's absolutely normal and natural for some of those feelings to overflow into a real estate investment deal, especially if you're walking through a house that you're thinking of buying and suddenly some detail brings back your childhood home in full force.
Emotional responses to homes can range anywhere from "I've always wanted to live in a home just like this!" to "This place reminds me of So-And-So's house, and So-And-So did me wrong." If you find yourself having a strong gut reaction one way or the other to a real estate opportunity, don't make any sudden movements or rash decisions. Ask yourself why you reacted that way and try to figure out whether that information has any logical bearing on the deal before you proceed either way.
Study the market
It's easy to be distracted by national headlines about real estate prices, but real estate is an intensely local business, and a market trend that's clearly evident in most of the country might not apply to one small area that you know intimately. Paying attention to national stories is always useful, but smart real estate investors spend more time examining the local market.
Some of that market research should be data-driven, but don't discount anecdotal evidence from your network, either. If the local multiple listing service (MLS) reports that home prices have stopped creeping up, and your favorite mortgage broker revealed over lunchtime that it's become much harder to find loan origination clients and his business has decreased as a result, those two pieces of evidence could give you an early indication that home prices are going to drop in the near future (and you could get some deals out of it).
Multifamily? It's an option!
It doesn't occur to most people to buy a duplex, triplex, or four-unit apartment for their first home, but it can make a lot of sense, especially for millennials. The cost is usually higher than a typical entry-level home, which is definitely a barrier, but if you buy a building with two to four units and live in one of the units, you can often qualify for better loan terms, and your insurance and tax rates will also be lower.
Taking this route requires a lot of planning and a solid budget. You'll want to make sure you have a cash reserve for any repairs you have to make, or for apartment vacancies. You'll want to have a plan for how to find and evaluate prospective tenants. But the benefits are also excellent: You'll have regular help paying off your mortgage and a lot more equity in your home when you eventually do sell it.
A REIT is a real estate investment trust, which typically involves commercial real estate. Usually, a trust owns and/or manages commercial properties that are rented to tenants, so a REIT can be a relatively hands-off way to dabble in real estate without having to own or manage anything yourself.
Investors can put their money into a REIT either individually and directly, or through a fund like a mutual fund or exchange-traded fund, further removing the investor from direct involvement with the REIT. Some REITs are publicly traded, so anybody can invest in them -- just like any other stock offering.
One other advantage to investing in REITs instead of buying real estate yourself is that REITs are liquid; they can be bought and sold quickly, especially compared to a home sale transaction.
Team up with friends and family
There's no rule that says real estate investing has to be a solo entrepreneur activity. If you have friends or family members who are also interested in real estate investing and want to try pooling resources with you, this can be a great way to increase your price range or even buy a house with all cash if you have enough partners or enough money available.
Some groups of investors in larger markets where real estate is expensive will look to less expensive markets where they can realistically bring an all-cash offer to the table. It helps to know something about the area where you're investing, of course, but the other advantage to teaming up with other people is that their networks and their experiences will vary. Your office coffee buddy might know about a great vacation rental spot where she went to college. Companies like Roofstock are making it easy to find rental properties with tenants already living in them all over the country.
Could crowdfunding be for you?
It seems obvious that there are huge opportunities for crowdfunded real estate, but many would-be investors don't even know it exists. The idea is similar to teaming up with friends and family, only on a much bigger scale, which increases your options.
Crowdfunded real estate comes in all shapes and sizes. A REIT is a form of crowdfunding that's been around for a long time, but there are also crowdfunding platforms for commercial, multifamily, residential, rental, and even for down payments on homes. There are dozens of websites with lots of options, and you don't need thousands of dollars to jump in -- usually a few hundred will work just fine.
Building wealth through real estate is an accessible avenue to financial independence for everyone, even (especially!) millennials. By researching and exploring all options, then jumping in with both feet, you'll find that it's a wide-open opportunity for you, too!