How to Invest in Real Estate: A Simple Guide for Beginners.
Some people hear the word “investing,” and automatically think of people with lots of money to burn. The truth is, even millennials can get in on the investing game, especially if it’s real estate. Here’s an essential guide on how to invest in real estate even if you know next to nothing about real estate investing.
Right now it’s hard for many millennials to imagine investing in anything. Student loan debt is overwhelming and many feel like they’ll never escape it.
So it’s easy to see why investing in real estate isn’t high on people’s minds. It seems impossible.
It’s not, though, and it’s a great idea. Real estate gains value over time, unlike cars or things that depreciate. Buying real estate or investing in at as early as possible only gets better results.
Not satisfied with those vague answers? There are plenty of specific reasons why you should invest in real estate, even as a millennial. We’ve got reasons why you should and how to invest in real estate below.
#1 Rent Vs Mortgage
First off, let’s talk about what a mortgage is. You’ve heard your parents talk about theirs, but do you know how it works?
A mortgage is a home loan. You put down a certain amount of money (your down payment) then pay off the rest monthly over time.
It’s like your down payment is the security deposit and your rent you pay every month went into your pocket years down the line. Some properties offer rent-to-own, which is exactly this principle.
The reason people buy houses over renting? When you rent, you don’t earn anything. You’re giving money to your landlord who does whatever they want with it.
With a mortgage, you build equity. Equity is like a line of home credit. When you pay the bank back the mortgage loan, you will own the house when it’s all said and done.
You save money by getting a mortgage in the long run, though it doesn’t seem like it in the beginning.
There are grants for young people buying houses that can make mortgage payments cheaper than rent in most places. See if there are real estate grants available in your state.
#2 Favorable Tax Benefits
When you own a house, the government doesn’t tax you on your mortgage payments. It’s not that straightforward, so here’s how that works.
You declare to the government how much your house costs you a year, mortgage, property taxes, and interest. Then you can declare that amount as tax-free and it’s not considered taxable income.
If you sell your home, whatever profit you make is taxable, but not if you meet certain criteria. We’re not tax accountants, so we won’t get into the details.
#3 Less Risky Than Business
When you invest in a business, there’s risk involved. That business has a high chance of failing (depending on the business) and you don’t get a return on your investment.
If you buy a house or property, it’s not going to fail. Sure, things could happen to it, but there’s insurance for that. You don’t get investor’s insurance for picky a shaky business plan.
#4 It Gains Value
Unlike that iffy company you invested in, real estate gains value over time. Instead of depreciating the minute it’s used (like a car), it’s worth more the longer you keep it.
To understand this think of things like inflation and the rise in population. There are more and more people who all need a place to live. If you can provide a needed item in a high demand low-supply environment, you’re golden.
#5 It Makes Banks Trust You
If you’re in your early 20’s, you may feel like adults don’t take you 100% seriously. Especially adults at the bank when you’re trying to get a home or car loan.
Don’t depend on your parents for that co-signature. Instead, show up with an investment portfolio. It’ll show the bank you’re serious about building your wealth and that you’re responsible.
Nothing says no, this isn’t a whim, like preparation.
Where to Invest
Before you run off and buy a house or invest in a mutual fund (more later), let’s talk about location.
In real estate, there’s one rule: location, location, location. So where should you look to invest?
For most millennials, the answer isn’t a high-rent place like Boulder, CO or New York City. Most people can’t afford to invest there when they start out, but if you can, do it! For tips on high return properties, view here.
Instead look for a place where there’s constant need. College towns are a good example.
College sizes are growing, which mean more people need housing in a small area. If you can snap up an investment property or invest in a college town, it’s low risk.
You’ll also have an easier time finding tenants if you choose to buy then rent. They just might not be the cleanest, imagine if you were financially responsible for the messy roommate you had in college!
Do you have a bunch of friends moving to one area? That’s a good sign of where to invest. Paying attention to trends is essential for building an investment portfolio.
Years ago, no one would tell you Tampa Bay was the new place for young people. Now it is! As a millennial, you have an ear to the ground for that kind of thing, so use it!
How to Invest in Real Estate
Finally, the part you’ve been waiting for. There was no way we could jump right in, investing is a complicated animal.
The first thing to do when you want to invest in real estate? Check your credit score. If you have bad credit, no bank is going to lend you money to buy a house.
That doesn’t mean you can’t invest, but it tells you where your starting point is. Pay off your credit cards or your debt and build your wealth in other ways.
You want a credit score above six-fifty, if not in the seven hundred. For most of us, a low credit score means we have a high debt ratio. You can check your score for free here.
Non-Buying Investment Options
Now if you know you can’t put down a down payment or get a loan, there are still options.
A lot of them you can do from home and without going to any intimidating meetings. You may want to ask your banker or financial advisor what they think, but it’s ok if you don’t have one.
Do you have a relative or a friend who has property? Run your choices by them. Even if you don’t end up making the choices they suggest, it’s good contextual knowledge.
Option 1: A Starter Portfolio
There are websites whose sole purpose is to get millennials to invest in real estate. Fundrise Starter Portfolio is one of those sites.
For just five hundred dollars (that’s low in investment terms), they invest for you. They can’t buy you a house for $250 each, obviously, but they’ll put your money into two properties.
Your money goes in with other investors and you all own the property together. You get payments from quarterly dividend payment, share appreciation, interest, and rent.
You may not see an immediate return on investment, but these things take time.
There are low fees associated with Fundrise, like a 0.85% management fee. They have specials sometimes, so get on their email list to keep in touch.
Option 2: Mere Pennies
Your spare change can help you invest. Most of us use Acorn, an app that makes micro stock investments by rounding up purchases to the next dollar.
The Stash App is like that, but it invests in real estate properties. These micro investments go into real estate investment trusts or (REITs).
The spare change or small contributions from thousands of investors go into one property, like a living mutual fund.
You’re not going to buy the property when its over and done, you share that with other people. But, it is some passive income you can make by investing your spare change.
Option 3: Empty Land
There are places in large or rural states, like Florida, where people sell land on eBay. Seriously! You can bid on empty land along with that custom-designed Xbox controller.
It’s not going to make you much now, but keeping it under your belt means it’ll gain worth. One day you may get a call that someone needs to buy that land to build a house and you sell it at profit.
You will have to pay things like property taxes and title transfer fees, but we’re still talking an under $500 investment. Depending on the lot size.
Option 4: Rent to Own
Rent to own properties is hard to find. They’re kind of like the investment unicorn.
If you find a place you want to live and it offers rent to own, go for it. Make sure you’re not signing your life away. What happens if you move? Do you lose all that cash investment?
Talk it over with a lawyer or at least someone at your bank before you sign anything.
In twenty years, landlords will be selling to millennials. We’ll have the opportunities to buy them, but at higher prices with inflation.
Why not buy now? If you don’t have five hundred dollars, sign up for an app that does the investing for you. You won’t miss that five dollars a month or so.
Plus you can tell your parents you’re preparing for your future, a phone call they’ll be glad to get.
For more awesome content about adulting and general life tips, check out our site. We update content weekly, if not daily!
Share this post with your friends to impress them with your how to invest in real estate knowledge!