I just have to say it.
CONGRATULATIONS!
If you’re thinking about real estate as an investment strategy at a young age like your 20s, you’re already a step ahead of many. Being conscious of your financial future at an early age, especially at an age when many people are recklessly spending and stuck in “party mode,” sets you up for a healthy financial life.
Take advantage of your head start now, because as one of my favorite sayings goes…
“Time in the market is more important than timing the market.”
Read that again.
Getting into investing early, and staying with it long term, is the most important strategy. So, let’s get started on learning how to invest in real estate in your 20s.
Education
Although I always preach the power of “jumping in” and taking immediate action, there’s a level of education needed to get off on the right foot. You and I both know there’s no worse feeling than getting caught completely off guard, especially when it involves thousands of your hard-earned dollars. The first step to mitigating risk up-front is through education.
If you feel like real estate investing is your next step, it’s time to completely immerse yourself in this world. Listen to podcasts, read books, follow blogs, attend meetups (virtual now due to COVID), and connect with people online through Twitter, Facebook, and Instagram in this industry.
Not only will you start to get a feel for the various strategies, vocabulary, and business, you’ll also see for yourself if it’s an industry and investing strategy that you actually enjoy and want to pursue.
Education is the foundation of investing and here are some of my favorite resources:
Blogs
I personally got my feet wet by following the BiggerPockets blogs and forums religiously when I started out. It’s a great combination of valuable articles mixed with a strong community that provides insight, opinions, and advice.
Another blog I have to give a shout-out to is Afford Anything by Paula Pant. Not only does she provide amazing general financing and investing advice, she also dives deep into the world of real estate investing where she built a substantial portfolio that brings in monthly recurring income.
I have to give love to the Roofstock blog, and not because I write for it, but because they’ve done an amazing job of curating some of the best writers and educators in the long-distance single-family real estate investing world. If you’re looking to invest remotely in single-family properties, this is the educational resource for you!
Podcasts
I have to go back to my bread and butter, Biggerpockets, because they also produce a number of valuable podcasts for investors with varying experience levels. With hundreds of episodes, they offer a plethora of topics, stories, and strategies. You may not believe it, but I’ve listened to nearly every single one of their episodes and make sure I don’t miss their weekly release.
Roofstock also produces a great podcast that specifically caters to out of state investors, called The Remote Real Estate Investor. I love that they narrow down the subject content to those investing remotely and that it’s more niche than the Biggerpockets podcast. I was a guest on episode #43 where I talk about my journey, struggles, and learning moments of investing in properties thousands of miles away from my home in California.
Books
I have to admit, I’ve never read a ton of real estate books. I’m usually consumed by reading business or nonfiction and a lot of my learning came from real experiences. But, here are a couple of books that will get you started:
The Millionaire Real Estate Investor - By Gary Keller
Long-Distance Real Estate Investing - By David Greene
Both books are highly recommended and have received tremendously positive reviews.
Underrated Resources
Social media platforms like Twitter, Facebook, and Instagram are vastly underrated when it comes to educational value. Many people view these platforms only to be used for news, showing off, and politics, but when you find the right investing corner, it’s a game-changer.
Start by following a few investors on each platform and you’ll quickly find your way into a new world of free investing education and new connections. I’ve personally met some great friends and business partners through these platforms.
Know the Risks of Real Estate
Throughout the education process, you will learn about the pros and cons of investing in real estate. It’s important to know exactly what you’re getting into before taking the leap and jumping in. Here are some of the risks of real estate:
Low Liquidity
Compared to other investing options like stocks, bonds, mutual funds, and ETFs, real estate is rather illiquid, meaning it’s very difficult to convert it to cash within days. My advice to combat the challenge of low liquidity is to ensure you aren’t investing money you foresee needing in the short-term.
Opportunity costs
When buying real estate, a 20-25% down payment is often required if you’re getting traditional financing. Let’s say you buy a $100,000 house…well, then you just “tied up” around $25,000 in cash.
Yes, it’s for an investment and I’m all for it, but you have to realize that’s still $25,000 you could have invested elsewhere or saved for something else, like an emergency fund, a college tuition, or a vacation.
The Challenges
Yeah, yeah, yeah, everyone’s fear is the 2 a.m. “my toilet is clogged” phone call from tenants. While that may never happen, and I hope it never happens, challenges will arise in real estate investing.
On the tenant side, you may have someone who’s notoriously late on payments or someone who skips them entirely. On the property side, you may have a few trees fall down after a windstorm that have to be cleaned up immediately. Heck, it happened to me on New Year's Day 2019. What a way to start the year!
However, there are always solutions to these risks and challenges in real estate. Having plenty of cash reserves and accurately analyzing each property up-front will mitigate risk and ease your stress.
Know The Rewards of Real Estate
Now, on to the fun stuff. Why am I, and so many others, interested in real estate investing? Cash flow, tax benefits, and gaining experience running a business are some of the greatest rewards that real estate provides.
Cash Flow
Cash flow is the amount of profit you bring in each month after collecting all income, paying all operating expenses, and setting aside cash reserves for future repairs. For buy-and-hold real estate investors, cash flow is one of the primary reasons for entering the world of real estate. Monthly recurring revenue can lead to many opportunities and freedoms in your life.
Tax Benefits
The tax benefits of real estate could be its own dedicated article, but just know that there are amazing advantages to owning real estate. Depreciation and various deductions, like mortgage interest, cost of repairs, and travel costs are just a few of many to name off.
Experience of Running a Business
Many of the world’s wealthiest individuals were able to reach their financial freedom goals by starting and running businesses. There’s no denying the impact and power of understanding business, income, expenses, markets, building a team, and strategy. You get all of this in real estate investing.
Now that we’ve tackled some of the baseline context to begin your investing career, let’s move on to the nitty gritty leading up to your first real estate investment...
1. Start by Tackling your Personal Financial Health
Before buying your first property, I highly recommend you have a firm grasp of your personal financial health. After all, if you can’t manage your personal income and expenses it will be difficult to manage those of a property.
The first step is to review the last six months of your bank/credit card statements and understand exactly how and when income comes in and where it goes out.
Implement strategies where you can cut expenses so you can increase savings, which will ultimately help you invest more when ready.
It’s also helpful to review your credit score, as that’ll come in handy if you need to line up financing for a deal. Many credit card companies and banks offer complimentary credit score tracking, but if you don’t have access to that, there are a number of other free platforms online that will assist you.
2. Build an opportunity fund for a downpayment
After reviewing your personal income and expenses, you’re going to need to have some cash available to invest (unless you partner up). I personally have a savings account that I call my “Opportunity Fund” where I stash my cash for the next real estate investment.
Cutting expenses and increasing income are ways to accelerate the growth of your Opportunity Fund. If you’re really motivated to get into real estate, it may require you to work side-hustles on nights and weekends like I did.
Once you get ~$20,000 saved up, there are plenty of markets that you can afford to buy your first rental property and be on your way toward passive income. A small multifamily property like a duplex, triplex, or quad, will require a little more capital. It may be a slow process and take years to save enough for a down payment, but progress is progress. Keep pushing forward and saving money!
3. Line up Financing
When you have enough capital for a down payment, or even while you’re saving for one, you need to figure out how to finance the rest of the deal.
Of course, if you plan to buy all cash, you can skip this section, but most people will use some type of leverage. There are a few types of financing I’d recommend looking into: traditional mortgage, private money, hard money.
A traditional mortgage is a great way to invest in real estate and it’s how I started buying properties in my 20’s. Depending on the bank you use, the down payment requirements will vary, but you’ll probably have to put 25% of the purchase price down and decide on terms of 15 years or 30 years.
If your goal is to eventually pay off the property and own it free and clear, you’ll accelerate that with shorter terms. I personally choose 30 year fixed mortgages, which help with immediate cash flow since they have lower monthly payments.
Looking into private money involves reaching out to friends, family, and connections and allowing them to “be the bank” in a deal. Essentially, you’d take on a loan from a close connection and you’d work on crafting the interest rate, payment schedule, and terms together.
Lastly, hard money is usually financing from an individual who is a business connection that has capital to lend out. Hard money usually comes at a higher rate and shorter terms than private money, so if you go this route, make sure you completely understand the terms and factor them into your investment analysis. Hard money is also often used for a short-term infusion of capital for a property that is then refinanced with a traditional bank later.
4. Pick your market
My first piece of advice for picking a market to invest in? Don’t get stuck on this step! I see too many new investors fall into “analysis paralysis” when trying to evaluate markets.
Yes, do some research -- review market metrics, talk with individuals that have experience investing in those markets -- but you have to pick one eventually. Remember, there is no such thing as a “perfect market,” but here are my favorite metrics to look at when evaluating a city:
- Population growth
- Job growth
- Diverse economy
- Occupancy rates
- Landlord friendly laws
- Acquisition prices
- Lifestyle amenities
5. Pick your buying strategy
Now, let’s determine the best way for you to purchase a property. A few options to look at are:
Buying on your own
Buying investment property on your own can be very rewarding and valuable, but it’ll take more time, effort, and work to build a portfolio. With the added responsibility, it may be hard to juggle your investing ventures if you have a full-time job and family priorities at the same time.
When buying on your own, you’ll want to start by finding a property manager and a dealfinder (real estate agent, broker, wholesaler) in your market to help you source deals. Then it’s up to you to analyze, perform due diligence, and manage the property. It’s rewarding, there will be plenty of learning moments, but it can be challenging if your time and resources are limited.
Buying through a platform like Roofstock or through a Turnkey provider
Using Rooftstock or working with a turnkey provider are great options for someone who may lack the time needed to close on a property themselves, but still wants to pursue the investment strategy.
This route also provides a way to ease into investing if you’re a little hesitant or if you’re stuck in the “analysis paralysis” stage. These platforms and companies help you immensely through the whole process of buying rental property and it’s how I started my career in real estate investing.
Support on acquisition, financing, closing, and property management is their specialty. Their pre-vetted real estate agents, property managers, insurance agents, and lenders come in handy when you’re trying to build the best team!
6. Sharpen your property analysis skills
In order to find a good deal to invest in, you’ll have to actually know how to analyze it.
Cash flow, cash on cash return, cap rate, Net Operating Income (NOI), appreciation, and internal rate of return (IRR) are all analysis metrics you should become familiar with.
A great starting point is to read the article I wrote on How to Calculate ROI on a Rental Property to Find Great Investments.
7. Set specific goals
If you’re in your 20’s right now reading this article, I ask that you think about both short-term and long term investing goals. I’ll also ask that you define specific investment criteria to help you determine what properties are worth buying or which are not.
For example, a good rule of thumb I was taught is to buy properties that cash flow at least $100 per door. I also buy properties that return at least 8% cash on cash returns (not including appreciation or principal pay down). That’s my criteria, but yours could be very different.
Also, lay out your long-term investing plan. Think about the type of portfolio you want. How many properties? How many doors? How much cash flow? What’s the timeline? Single-family or multifamily?
Now, write out your goals, share them with others, and review them routinely. All of this will help you in your growth and progress as an investor.
8. Network and form connections
I always preach this, but real estate is a relationship business and the best time to start networking is now. Never stop connecting with investors, agents, contractors, property managers, and inspectors.
Forming strong connections with people in the industry not only leads to more opportunities and knowledge, but to friendships and an outlet to bounce ideas and challenges around for feedback.
Connect with people on blogs, social media, and through Roofstock. Roofstock will even help put you in front of their vetted partners.
9. Be ready to take action
Arguably the most important step you need to follow when investing in real estate, can be seen as the most obvious. You must take action and move forward in this journey to make progress. You could be the world’s best property analyzer, but without taking action, there’s no way you become an investor.
If you follow the steps I laid out, you’ll be on your way and on the right track. Educating yourself, knowing the risks and rewards of real estate, buttoning up your personal finances, lining up financing, picking a market/strategy, setting goals, and finally taking action is what it takes to invest in real estate in your 20’s.
It’s up to you to take the next step. You can start by browsing the Roofstock marketplace.
Final Thoughts: Getting Rich Slowly
The last thing I want to touch on and remind you about, is that real estate is a long game and not a get rich quick strategy. The amazing thing is that you’re already ahead of many people by starting down this path in your 20’s.
Don’t expect to reach your end goals immediately because it’ll most likely take years. But, keep this up and let’s talk in 10 years. Because the decisions you make now, will have a profound effect on you, your life, and your family for years to come.
