About the author:G. Brian Davis is a real estate investor who has owned dozens of investment properties over the last 15 years. He’s also the co-founder of SparkRental.com, an online resource which provides free landlord education and video series for anyone looking to build passive income from rentals.
Want to get ahead in the financial game in life? Get a head start by investing in real estate young.
You don’t get rich by saving a little and tucking it under your mattress. You get rich by saving a lot, and then investing smartly, for high returns.
Here’s the thing about property investing though – it doesn’t just take money, it also takes time. You need to find houses to flip, renovate, and sell — all of these steps take time and active work.
Nor does investing only take active time spent in research and acquisition. It can also take time for your investments to passively appreciate, to grow, to compound.
Imagine you invest $10,000 every year for ten years, earning an 8% annual return, with the return reinvested each year (i.e. compounded). After ten years, you’ll have $156,455.
But if you gave it 20 years? You’d have $494,229. For twice the time, you actually end up with over three times the payoff.
After 30 years, you’d have $1,223,459. Three times as long as your original ten-year timeframe, but nearly eight times the payoff.
In other words, compounded investments produce exponential growth, if given enough time to work their magic. Which is precisely why you want to start investing at a young age.
Why investing in real estate young works so well
One reason to invest in real estate young is that it gives you the option to hold the properties for decades, allowing them to appreciate.
In fact, buying real estate typically involves a short-term loss, due to closing costs. But over time, real estate owners (including both investors and homeowners) gain equity.
Property owners gain equity in two ways, which happen simultaneously: 1) the property (usually) appreciates in value, and 2) the loan balance drops as the owner makes mortgage payments. The longer you own a piece of real estate, the more equity you’re likely to gain.
Which means the younger you are when you start investing, the longer you can potentially hold real estate and the more equity you can build.
But equity isn’t the only reason to start investing in real estate young.
Advantages to real estate investing at a young age
While you’re young, you tend to have a more flexible personal life, without the time demands of young children or elderly parents. Which is good news, because getting started in real estate investing does take some work!
Beyond flexibility in their free time, younger adults also tend to have more flexible budgets. They don’t need to buy diapers, support a spouse, or pay for a child’s tuition.
In other words, they can put more of their paychecks toward real estate investments.
Nor is it only lifestyle spending that’s usually more flexible among younger adults. They tend to be more open-minded to unconventional housing arrangements than their older counterparts. For example, most 24-year-olds would not balk at the idea of bringing on a housemate to help cover some of their mortgage; or rent out a spare bedroom on Airbnb; or buy a duplex, or live on one side, and rent out the other (AKA house hacking).
Not every 42-year-old feels similarly open-minded.
And whether or not you can teach an old dog new tricks, younger humans definitely tend to be more open to learning new skills. From the fundamentals of how to invest in real estate to learning how to make physical repairs to details like maximizing tax benefits, learning new skills will likely come more naturally to you in your 20s than in your 50s.
Challenges faced by young real estate investors
For all those advantages, investing in real estate young isn’t without its challenges.
Let’s start with the obvious: money. You probably have less of it at 24 than you will at 42.
And yes, getting started in real estate investing takes some capital, despite what the “gurus” may tell you. You’ll need money for the down payment, for the closing costs, for the first round of repairs if you’re flipping a house (more on financing flips later).
You probably don’t have much money as a young adult, and you also don’t have much life experience. In your early 20s, you probably haven’t bought a home yet, which means that you not only have to learn how to invest in real estate, but you also need to learn what the process of buying real estate even looks like. Learning how to become a real estate investor is a little easier if you already know how to work with loan officers, title companies, contractors, realtors, etc.
And speaking of all those people you’ll need on your team, you probably don’t know many (if any) of them. Your network is smaller – not an insurmountable problem, but building relationships with all the right people will still take you time.
Similarly, the people you do know are probably not out there every weekend learning how to get into real estate. They’re probably partying, playing video games, and trying to meet potential mates. Which means you don’t have helpful, motivating social support from your peers.
Then there’s your credit history. Like money, you probably don’t have much of it in your early- or mid-20s. That doesn’t mean you can’t get a loan, but it does make investing in real estate young that much trickier.
How to start investing in real estate
Feeling discouraged? Don’t throw in the towel just yet.
Learning how to invest in real estate is not rocket science. Start with a simple question: How do you want to invest in real estate?
There are plenty of ways to invest in real estate, from buy-and-hold to house hacking to REITs to flipping houses. Decide on your personal financial goals first, and it will be clearer to you how to start investing in real estate.
If you’re looking to build capital quickly, consider flipping houses as a first real estate investing strategy. The turnaround is relatively fast, and it can help you quickly overcome some of the challenges outlined above. (Recommended reading: How to Flip a House in 8 Steps.)
Another advantage to flipping houses when you’re getting started in real estate investing is that financing can be straightforward and relatively easy. Case in point: in addition to quick settlements, LendingHome finances up to 90% of the purchase price on flips, and 100% of the renovation costs.
But whether you finance your flips through LendingHome or another lender, make sure to talk to your lender before you have a contract signed. Line up your financing beforehand, so that when you put a deal under contract, you’re not left scrambling to figure out how to fund it.
Having a lender in place will also free you up to focus on finding deals, finding contractors, and the other fundamentals of learning how to invest in real estate.
How to scale & network as a real estate investor
Once you have your first real estate deal behind you, what’s next?
More deals. Bigger deals. More profitable deals.
In other words, scaling your real estate investing business.
Learning how to become a real estate investor is about more than just working your way through your first deal. It’s about learning how to finance bigger deals, how to find better deals, how to price your property to sell profitably, and perhaps most importantly, growing your network.
Your network should include other real estate investors, contractors, realtors, wholesalers, turnkey sellers, lenders, property managers, and any other local players in the real estate industry. There’s an old saying that your net worth is directly proportionate to your network, and nowhere is that truer than in real estate investing.
Join local real estate investing groups on Facebook (and actually participate in them). Meet people through the local real estate investing forums on BiggerPockets. Attend local real estate investing club meetings.
Most of all, ask for referrals, and don’t be afraid to pick up the phone and call them to introduce yourself. Above we touched on how you should contact lenders before you have a deal under contract – the same logic applies to other people in your network. For example, you should have contractors in mind before you have a property under contract, so you can obtain quotes before closing and start renovation work immediately after settlement.
What’s next for getting started in real estate investing?
Ready to start investing in real estate young and getting a head start on building wealth and reaching financial independence?
Get aggressive with your education, in addition to your networking. Read some of the best books on real estate investing. Listen to some of the best podcasts on real estate investing. Read blogs all about how to get into real estate and real estate investing for beginners.
When you first start real estate investing, you’re at a disadvantage in knowledge and network. Your “job” as a young, aspiring investor is to learn everything you possibly can about how to invest in real estate; to narrow that knowledge gap as quickly as possible.
Because the faster you learn, the fewer mistakes you’ll make, and the more likely you are to walk away with hefty profits rather than losses and regrets.
Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. Please consult your tax advisor. All calculations and information shown here are for illustrative purposes only. All third parties listed above are for demonstration purposes only and are not affiliated with LendingHome. All views and opinions expressed in this post belong to the individuals referenced. NMLS ID: 1125207 Terms, Privacy & Disclosures. Copyright LendingHome Corporation 2019.