When it comes to investing, you can never start too early. The reason that real estate is such a prime investment is that the market is going inexorably upwards. So the earlier you get in, the more appreciation you’ll be able to take advantage of; getting started in your twenties instead of waiting until your thirties can mean hundreds of thousands of dollars of profit you might have missed out, if you’d sat on your hands.
So what does it take to start investing in real estate in your 20s? Here are nine easy steps that’ll help you get in the game, and maximize your future prosperity.
Real Estate Investing Guide
Step 1: Do Your Research
Knowledge is power, and the inverse of that is that ignorance is the shortest route to bankruptcy. But educating yourself doesn’t have to mean sweating it out in an MBA program, or even shelling out for one of those expensive weekend investing seminars. There are some amazing, reputable, free resources that’ll get you up to speed on the fundamental principles of investing, and even some of the advanced ones.
In investing, there’s the smart money and the other kind of money. Make sure you’re the smart money.
Step 2: Is Crowdfunding Right for You?
There are many innovative ways to invest in real estate that don’t necessarily involve buying property. One of the most popular innovative investment paths is real estate crowdfunding. How’s it work? Think of it like GoFundMe for a real estate project or, if you’ve already advanced to a moderate level of expertise, a REIT for the social media era.
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Through real estate apps like Fundrise or EquityMultiple, pre-vetted developers allow investors like yourself to buy shares of their projects for very accessible amounts of money; Fundrise, for example, has only a $500 minimum buy-in. Once you choose your investment, all you have to do is sit back and monitor its progress. While it lacks the security of knowing you own something concrete, as in traditional real estate investment, you’ll still be sharing in the profits of the market. You can read a full Fundrise review or EquityMultiple review to learn more.
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Step 3: Consider Taking on a Partner
Two heads are better than one, as the saying goes, and that’s definitely true when it comes to real estate investing. That’s not only because two people bring twice the smarts and experience to the table, but also because the risk is divided between two people.
Life is far more unpredictable than the real estate market, and if you ever run into cash flow problems, having a partner can be the difference between default and keeping those profits rolling.
Step 4: Picking the Perfect Location
It’s easy to look up which neighborhoods are “hot” right now, but once you narrow your search down to a general location, you’ll want to visit specific sites to evaluate them or take advantage of virtual tours. A method one successful investor uses is to check the area out during all hours and conditions, to see it as an actual neighborhood occupant would.
How far is the nearest park and grocery store? How’s the noise level during the day and night? How are the schools and access to mass transit? Even details as small as how the streets drain during a rainstorm can help you decide if an area is ripe for investment or not.
You’ve probably heard that the three most important things in real estate are “location, location, location.” Well, it’s true. Choose the location of your first investment wisely.
Step 5: What Kind of Properties Are You Interested In?
The kind of property you invest in is going to have a big impact on your experience as an investor. Single-family homes are easy to rent, and can be great, stable long-term investments, but you’ll have to either act as landlord, or hire a management company.
Buying a multi-unit complex allows you to use the “house hacking” strategy, which essentially gets you free rent, while accelerating your wealth curve, but living next to your tenants can be challenging. And if you invest in a large complex, or a commercial property, there will be even more work to be done.
Choose the right type of property is going to depend not only on your financial means, but also on how much day-to-day effort you want to invest.
Step 6: Partnering with the Right Agent
Having the right real estate agent to help guide your investments can save you a huge amount of legwork. Let’s say you and your partner have targeted 4-10 unit properties, and you’ve narrowed the potential location down to a couple of specific areas. Now what?
A great agent will already be familiar with all the properties on the market that meet your specifications, and they’ll have insight into the mindset of the sellers. Through their network, they’ll also know of properties that are listed off-market, which is where some of the best deals are to be found.
And of course, they’ll negotiate the best possible price for you. Don’t underestimate the value of a hardened, experienced negotiator, especially in a phase of your investment career when a few percentage points can make the difference between a successfully closed deal and a missed opportunity. A good agent is worth every penny you pay them.
Step 7: Secure Financing
If you’re a novice investor in your 20s, you’re probably not going to be doing any all-cash purchases. So once you settle on a property, you’ll want to get financing lined up.
You have a ton of options here, from FHA and VA loans, to hard money loans, to conventional mortgages. The best option for you is going to depend on your credit rating, how much cash you have on hand, and what you plan to do with the property.
Step 8: Raise Cash
Unless you line up a zero down payment mortgage, you’ll need some cash for the down payment. Even if it’s only a 3.5% down payment, as you see in common FHA loans, that’s still going to amount to several thousand dollars.
Where will this come from? If you’ve been saving, you may already have it on hand. If not, you can borrow it, or rely on your partner for a cash infusion to get things off the ground. (Remember when we said a partner would come in handy?)
Step 9: Draw Up a Roadmap for the Future
Once you’ve closed on your investment property, it’s time to think about what you want to do with it. Do you want to sit on the property and let it appreciate? Do you want to do a quick fix and flip? What are you going to do with the profits?
Long term, you’ll want to consider strategies like the 1031 exchange, that allow you to avoid capital gains taxes, and parlay your initial investment into an even bigger one. Once you’ve got your foot in the door, there’s really no limit to how much you can make, if you make wise investment choices. All you need is a plan.
4 Mistakes Real Estate Investors Should Avoid
Starting to invest in real estate? Real estate investing is a fantastic way to supplement your income or make a career, but there are many stupid mistakes that 20-year-olds make that can torpedo their dream before it gets off the dock.
Legions of experts and books are ready to tell you what to do, but what you don’t do can be just as important.
Like all investments, property finance involves risk. By avoiding some common missteps, you can save yourself some headaches or even free yourself from tragedy.
1. Using Your Name
Purchasing an investment property in your actual, personal name is a risk you don’t have to take. If an investment goes bad or a lawsuit comes your way, your personal finances are protected. You’ll lose the money you invested but won’t get put out on the street.
Instead, purchase real estate investments through a legal entity like an LLC (Limited Liability Company). There are more legal entities under which you can hold investments, so consult a lawyer (which you can even do online) to find out which fits you best.
2. Not Doing the Research
There are all kinds of websites and personalities claiming to have hot tips on investment properties out there. Someone thinks they have found the next hot property and go all in only to go bust a little while later. There is no magic answer as to what to invest in and where.
The less glamorous truth is, trends differ from place to place and it takes research to find out what is going to work in your area and what isn’t. Find a niche, study, and do the homework. Knowledge is still power.
3. Going Big Right Out of the Gate
A lot of real estate investing novices see real investment as a wealth multiplier and a quick way to amass a fortune. The fastest way to get rich? Invest in large properties as soon as you can right? Wrong. Enthusiasm is great, but don’t quit your day job.
Without a safety net of previous successes or the knowledge that comes with them, going too big too fast can leave you broke just as quickly. There’s nothing wrong with starting small, building up some equity to release, and then repeating the process. Rome and your investments weren’t built in a day.
4. Giving Up
You can read as much on real estate investment as possible and do your best to avoid mistakes, but you will still make them. Not learning from your mistakes and letting them defeat you is worse than the mistakes themselves. Property finance can help you achieve financial freedom, but it is still a process that requires determination, perseverance, and sacrifice.
How to Build Passive Income with Rental Income
Wouldn’t it be great if you could become a landlord of single-family rental properties without dealing with all the hassle of buying, improving, and re-selling real estate?
You don’t have to be a millionaire to invest in these types of properties. You can now find your inner property owner with Roofstock.
As with any other rental property, investors earn returns from the rental cash flow and any appreciation in the property value when it’s sold, and all without painting a wall or getting your hands dirty.
There is a reason why the number of investors on its platform increased 126% last year, the sector is booming with investors clamoring to get a return outside of stocks and bonds.
If you’re interested, I recommend you sign up for more information from Roofstock by clicking here.
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