If you’re in your 20s, the idea of investing in real estate probably seems like a fantasy. Between skyrocketing student loans, COVID-19, and a generally crazy economy, putting together enough money to get your foot in the real estate market may appear to be an insurmountable obstacle.
It doesn’t have to be this way!
You don’t need to have a six-figure salary and mountains of cash to begin reaping the benefits of real estate investing. In this article, we’ll discuss a variety of ways that young investors can begin their real estate journeys, regardless of situation.
While some of the following are more active investment strategies and others more passive, each option represents a potential path for people in their 20s to being investing in real estate:
- Form a partnership
- House hacking – single family
- House hacking – the duplex option
- Look for off-market properties
- Geographic arbitrage
- Become an AirBnB host
- Buy REITs
- Work at a real estate company
- Bonus: use the VA Loan
- Closing thoughts
Tip #1: Form a Partnership
If you poll a group of investors, they’ll likely say that the largest obstacle to real estate investing is the initial capital. These initial funds to buy an investment property just seem too difficult to generate. This reality is why partnerships are so appealing.
With a partnership, multiple people combine their funds and/or services into a single investment. Typically organized as either a limited liability company (LLC) or a limited partnership (LP), partnerships provide a legal vehicle to pool funds and invest in a project.
Here’s a basic example. If you want to use a conventional, 80% loan-to-value mortgage to purchase an investment property and have a $20,000 down payment, you can purchase a $100,000 property.
On the other hand, if five partners each invest $20,000, the combined $100,000 down payment would provide access to $500,000 properties at the same, 80% loan-to-value. While the initial investment of $20,000 is the same for each investor, pooling funds in a partnership provides access to far more properties (and potentially the amplified returns of multifamily properties).
Tip #2: House Hacking – Single Family
It seems like there’s a “hack” for everything these days, and housing is no different. With house hacking, you use part of your primary residence as an income-producing property. For property owners who want to make the jump into investment real estate, this is an outstanding bridging strategy.
In a single-family home, especially if the homeowner is either single or a couple without kids, there’s likely an extra bedroom. While you can use this extra bedroom as storage or a guest room, you can also turn it into rental income.
With house hacking, this extra bedroom can be rented out to a tenant – either a friend or a screened applicant – to generate income. The ultimate goal is for this tenant’s monthly rent to cover your monthly mortgage.
Once someone else starts covering your monthly mortgage payment on your primary residence, all the money that you would have paid to the bank can now be used to save or invest in other properties.
Tip #3: House Hacking – The Duplex Option
This is simply the more common variation on the above strategy.
At a certain age, family status, or just general change in situation, you want the comfort and privacy of life without roommates. There’s a real estate investment strategy that accommodates this development.
When house hacking with duplexes (or three- and four-plexes), an investor still looks to purchase a primary residence. However, in this situation, the investor’s residence becomes one of the units of the larger property, with the remaining units rented out for income.
For investors with limited funds – and who want to hedge their bets – duplex-style house hacking is an outstanding option.
For example, say a young couple has saved $30,000 and wants to buy their first home, but they also want the long-term benefits of investing in rental real estate. With a conventional loan, they could buy a single-family home and delay the benefits of rental real estate until saving enough for another down payment.
Or, they can use that $30,000 to buy their first home and a rental property. By buying a duplex, this couple would live in one unit, and rent paid by the tenant in the other unit would pay their monthly housing expenses.
As with its single-family counterpart, duplex house hacking allows investors to use the money they would have spent on their primary residence mortgages for other investments.
Tip #4: Look for Off-market Properties
As stated above, saving enough money for that initial rental property investment poses a major obstacle to most new investors. And, this reality isn’t made any easier by skyrocketing real estate prices across the country.
When you look at properties reflected on a multiple listing service, or MLS, you’ll likely experience some serious sticker shock. These are the properties promoted by realtors for their respective clients, with the goal of connecting sellers and buyers.
Due to their visibility on the market-based MLS, most of these listings will pretty closely reflect market value, as comparable properties for comparison are just a click away. However, at any given time, local markets also have plenty of properties for sale that aren’t listed on the MLS, often at a significant discount.
For a variety of reasons, many sellers choose not to list their properties on an MLS, choosing instead to work directly with buyers. Frequently, these listings require serious renovation work, which doesn’t make them a good fit for the MLS, but sometimes homeowners simply choose to sell themselves, eliminating realtor commissions.
Whatever the reason, finding an off-market investment property can be a great way for young investors to get their feet in the real estate door, and here are some awesome strategies the Do Hard Money team has used to find these sorts of deals.
Tip #5: Geographic Arbitrage
In investing, arbitrage is the practice of buying and selling the same commodity in separate markets to make a profit. For example, if you could buy carrots for $1/pound in Town A in the morning and sell them for $2/pound in Town B that same afternoon with limited transaction costs, that’d be a pretty good opportunity.
While you can’t just buy a house in one part of the country and sell it in another for a quick profit, the general concept of arbitrage can be applied to real estate.
For many young investors, despite making plenty of money in their day jobs, they simply can’t save enough to purchase a property in their town (e.g. nearly anyone in their 20s living in San Francisco or New York). With geographic arbitrage, you use the salary from your high cost-of-living area to purchase a property in a lower cost-of-living market.
If you live in a major city, particularly along the coasts, your salary likely reflects the high cost-of-living expenses necessary to live in those expensive cities. And, while this salary bump may not provide the opportunity to buy where you live, you can use that extra money to buy where you can afford.
Throughout the United States, there are plenty of real estate markets with high cap rates and low valuations. For investors, this reality means that, while you may not be able to buy a rental property in your city, you can still find plenty of great markets to buy an affordable property that commands great returns.
Tip #6: Become an AirBnB Host
This may not be a traditional path to real estate investing, but it’s a potential opportunity for young investors to begin receiving rental income prior to actually owning a property.
With AirBnB (and other short-term rental platforms), people rent out either their whole home or just a room of it via a third-party company. Though many investors have institutionalized this practice by purchasing dozens of properties and using management companies to rent and manage them, the benefits are available to young investors, too.
If you’re a young professional living in a big city, you likely can’t afford to buy your own place and need to share an apartment with a roommate (or two). Each of the bedrooms in this apartment has the potential to bring rental income via AirBnB.
Depending on how creative people want to get, you can tailor an AirBnB strategy accordingly. For example, in a two-bedroom, two-roommate apartment, if either roommate travels for work periodically, his or her room can be rented while travelling.
Or, if roommates want to get really aggressive, they can bite the bullet and split one room while renting the other on AirBnB full-time. Whatever path you take, this is an opportunity to have someone else pay your rent for you (and potentially generate a little excess cash flow on top).
However, before diving into this strategy as tenants, it’s important to confirm that A) it doesn’t break the terms of your lease, and B) it’s allowed in your city (many municipalities have cracked down on non-hotel, short-term rental services).
Tip #7: Syndication
This is an option for young investors to enter the real estate world with a passive investment strategy that still provides ownership in a project.
In real estate syndication, the project syndicator, or sponsor, plays the role of general partner and drives the development and operation of a property. Investors, on the other hand, play the role of limited partners, providing capital without actually needing to worry about the daily operations.
For young investors without the time, experience, or money to undertake their own project, syndication is a great strategy to begin investing. In this model, the sponsor finds and runs the deals (receiving some sort of fee in the process), and the investors provide the capital, receiving an ownership interest in the project.
Similar to the partnership model, syndication provides ownership stakes for young investors to reap the benefits of rental real estate without needing to provide all the capital themselves.
Tip # 8: Buy REITs
When young investors begin thinking about investing in real estate, they typically have the image of buying, fixing up, and managing their own property. Real estate investment trusts, or REITs, offer a far more passive – and accessible – opportunity for young investors to enter the real estate field.
A REIT is a company that invests in income-producing properties – typically focused on a particular real estate niche – and are mandated by law to return a certain amount of their profits to investors as dividends. Shares of most REITs are publicly traded, which means they can be bought and sold on national exchanges, like stocks in public companies.
Similar to mutual funds, REITs combine the capital of numerous investors to fund projects, with each individual investor receiving a dividend from the underlying project or projects.
For young investors, investing in REITs has two primary advantages:
First, it allows you to begin receiving returns from investments in real estate without needing to fully fund your own property. Many REITs have a minimum investment of $1,000 to $2,500, far less than a down payment.
Second, and more importantly, investing in REITs is a great opportunity to educate yourself on a particular real estate niche. Choose a REIT in a niche (e.g. multi-family properties, commercial properties, hospitals, data centers, etc) that interests you, invest, and read every single informational document published by the company (as publicly-traded companies, REITs have significant reporting requirements for investors).
If done properly, young investors can use REITs to generate savings for their own properties while also educating themselves on a particular niche they’d like to enter.
Tip #9: Work for a Real Estate Company
While this isn’t a real estate investing strategy, per se, it’s a path into the real estate world.
For many people in their 20s, finding a job – any job – is far more of a concern than developing a real estate investing strategy. If you find yourself looking for work, or just not satisfied with your current job, working for a real estate company (development, construction, or property management) are all indirect paths into real estate investing.
Most people pay money to learn about real estate investing. By working at a real estate company, young people have an opportunity to be paid to learn about real estate.
So yes, a job is not the same thing as real estate investing. But, if you approach your work with a learn-everything-I-can philosophy, working at a real estate company can A) provide you an income to start saving for future investments, while B) giving you the experience to drive your own real estate investments.
Tip #10: Bonus: use the VA Loan
We list this strategy as a “bonus,” because it’s not available to all young investors.
The VA Home Loan is a zero-down loan provided by private lenders but partially guaranteed by the Department of Veterans Affairs for military veterans and their families. What this means is that young investors can buy a home without the massive hurdle of saving 20 percent for a down payment.
And, so long as one of the units is occupied by the veteran, this strategy can employ the house-hacking model for multifamily properties (up to a four-plex).
While not for everyone, young veterans who want to begin investing in real estate can use this as a phenomenal opportunity to purchase properties with low-interest, no-down payment, and no-PMI loan terms.
As the above sections illustrate, people in their 20s have a variety of options to begin investing in real estate. While having a ton of money certainly doesn’t hurt, plenty of paths exist for young people at all levels of the income/wealth spectrum to invest in real estate.
Here are some final thoughts:
Learn from your mistakes
As a new real estate investor, you’ll make plenty of mistakes. Don’t let these dissuade you from continuing to grow. Instead, use each deal – and the mistakes you made – as an opportunity to learn, make yourself better, and accept greater challenges.
Learn from others
If you’re thinking about a particular real estate investing strategy, know that plenty of other people have, too. Take advantage of personal relationships, books, blogs, and any other source to absorb as much information from others as you can. Ideally, the mistakes and lessons learned from others serve as a successful foundation to your own real estate investing career.
The compounding value of investing young cannot be emphasized enough. Regardless of where you are in life, the key is just starting. Not being able to buy a 10-unit apartment building shouldn’t prevent you from investing in real estate in some capacity. The earlier you start, the more wealth you’ll build. For example, a $100,000 property appreciating at 3 percent per year will grow to a $180,000 valuation after 20 years and $326,000 after 40 years.
No matter what path you take as a real estate investor, financing is king. Without access to reliable financing, the best deals remain nothing more than wishful thinking. As such, one of the most important relationships you can build as an investor is with a reliable, trustworthy lender.
The Do Hard Money team would love to help with your education or financing needs for real estate investment. Regardless of your situation and experience as a real estate investor, we can help you meet your goals. Drop us a note, and we’ll figure out the best way to support you on your real estate investing journey.
We look forward to working with you!