The earlier you invest in real estate, the greater your returns will be by the time retirement rolls around. If you can muster it, starting a real estate investment portfolio as early as your 20s and 30s is ideal. It’ll give you plenty of time to realize massive returns over the decades, which will provide you with a comfortable financial cushion to rest on when you reach the Golden Years.
But when you’re that young, money is usually tight, credit is almost non-existent, and investment experience is nil. So how can you mitigate these issues and get your feet wet in the world of real estate investing?
Be Smart With Your Savings
Investing in real estate doesn’t mean you have to plunk down all-cash offers to get your hands on a property. The beauty of real estate investments is the opportunity to leverage other people’s money in order to grow your own. However, you still need some of your own cash to get started, which means you’ll need to save up.
The sooner you start accumulating these funds, the sooner you’ll be able to get your investment portfolio off the ground. Lenders will want to see evidence that you’ve been making an effort to consistently save over time, so start setting a percentage of your earnings aside each week or month as soon as you start working.
Keep a Lid on Your Debt
If you’ve some debt on the books – including student debt – it’ll be more challenging to get approved for a mortgage. Lenders want to make sure your debt-to-income ratio isn’t too high, which is the percentage of your monthly gross income that is dedicated to paying off debts.
Before you approach the bank for a home loan, make a valiant effort to pay down your debt. And whatever you do, don’t add to it. The more debt you have on your records, the lower your credit will be.
Build Up Good Credit
Speaking of credit, you’d be well advised to make an effort to get it as high as you can. If you don’t have any credit at all, start building it up. Apply for a credit card, and make sure that you pay it off on time and in full each month.
If you’ve got bad credit, take steps to improve it. Get a hold of your credit report from one of the three major credit bureaus, including Equifax, Experian, and TransUnion. That way you’ll be able to find out exactly what your score is, and if there are any mistakes on it that may be pulling your credit down. If that’s the case, request to have an investigation opened to rectify the situation. Even one small mistake on your credit report can really pull down your score.
Make sure to pay all your bills and loan repayments, and if you have trouble, try to make alternative arrangements with your creditor. The more hits you have on your credit, the more likely your lender will deny your mortgage application.
Apply For an FHA Loan
Borrowing money to finance a real estate purchase means that you’ve got to come up with a down payment for a mortgage. Typically, conventional loans require a minimum of 5% down, and as much as 20% in order to avoid private mortgage insurance (PMI).
But there are other low-down payment options to get you started. Government-backed mortgage programs, such as those insured by the Federal Housing Administration (FHA), allow buyers to purchase properties with only 3.5% towards the price of the property.
The FHA also has another program called the 203K loan, which allows buyers to incorporate any necessary repairs that a property requires into the loan, while still only putting 3.5% towards the entire mortgage amount. Not only does this help you get started with minimal funds, it also provides you with just enough money to upgrade the property, which inevitably helps to bring its value up.
You don’t necessarily have to buy a detached home to start your real estate investment journey. Start off with something small, like a bachelor pad or 1-bedroom apartment. There are always people looking to rent small units like these, including singles and college students, since they’re typically the most affordable option for housing.
The best places to look for units like these are in working class neighborhoods or near schools where rents are very common. Check into the area to find out what the proportion of renters are; this will help ensure that you’re buying into an area where finding a tenant won’t be a problem.
Consider Buying a Duplex
One of the best ways for young investors to start making money in the world of real estate is to buy a duplex or small multi-family complex. This option will allow you to live in one of the units, and rent out the other. You’ll also learn how to be a landlord and deal with tenants since you’ll always be on the premises.
A similar option would be to purchase a single-family home, whether it’s a detached, semi, or townhouse. You can live on one floor, and set up the basement to be rented out. Alternatively, you can rent out the entire premises – either to one renter, or split the unit up into two or more units – and stay in your parents’ home a little longer while you’re bringing in the rental income.
You will be much more likely to get approved for a mortgage for properties like these if you approach your lender with a lease agreement already signed by a prospective tenant. Income from a rental property will help you qualify for a home loan, and sometimes for better loan terms.
Your income is a key factor in the lender’s consideration of your ability to pay the mortgage and your risk of default. A higher income will make you less of a risk in the eyes of the lender, and will help you increase your chances of getting approved for a mortgage.
Learn From the Pros
Don’t be shy about reaching out to real estate experts in your community. Look for online groups, or join a real estate investing club. Team up with a seasoned real estate agent who is well-versed in buying and selling investment properties. In order to be successful with real estate investing, working with other real estate investors or brokers is extremely helpful.
The Bottom Line
Investing in real estate is a process, but if you’re patient and do what needs to be done before you make your first investment, you can be well on your way to building a sizeable real estate portfolio and plenty of wealth.