How to invest in real estate at a young age

Getting an Early Start

Many extremely successful people saw the value of investing in real estate at a young age and are now enjoying the fruits of their labor. One of my favorite stories is the 24-year-old college dropout who bought a 5-bedroom condo for $60,000.

By renting out four rooms to friends for $300, he was able to live for free while working. Mike Henkel scraped together enough money to buy two more properties in the town. Now, after 42 units, Henkel’s properties are worth $4 million.

His story is an extreme one, as he was maxing out his credit cards for each “leap of faith,” as he called. The stress and pressure was enormous, yet it paid off.

You don’t have to be nearly as ambitious as Henkel was in order to successfully invest in real estate. For some, such as Rob Mericle, it was commercial real estate that paid off. For others, such as Henkel, it was purely residential real estate that helped solidify their financial future.

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Can I Invest Small Amount In Real Estate?

As a general rule, no REIT will be allowed to offer less than Rs 250 crore in minimum deal size, and for raising money from the public, they will need to be listed on exchanges as well as making an initial public offering. Thus, investors have a right to invest a minimum of Rs 2 lakhs in REITs in the primary and secondary markets in order to exit anytime and anywhere, regardless of market conditions.

How To Invest In Real Estate At A Young Age

Many young investors will find it challenging to raise financing when they first start; however, this should not signal the end of the road. The key to investing at a young age will be learning how to leverage your time, motivation, and capital you have to your advantage. While it may seem difficult, finding success as a young investor will come down to learning the best ways to work with what you have.

Luckily, several investing strategies are well suited to young investors. As you gain experience (and connections), the best part is you can use the profits from these strategies to continue building an investment portfolio. Beginner-friendly exit strategies can serve as an excellent gateway to more complex investments down the line. Here are three strategies to get you started:

  • House Hacking

  • Multifamily Rental Property

  • Wholesaling

House Hacking

House hacking refers to renting out a room in the property you are already living in. For example, if you have a second bedroom or converted garage space, you could use those rooms to generate monthly rental income. This strategy is a great way to supplement your income without purchasing a property for yourself. House hacking can also be a great way to reduce your overall living costs, as you may be able to split living expenses other than rent with your tenant.

There are a few things to keep in mind before house hacking, like understanding how to be a landlord and setting tenant boundaries. While this is a great way to generate rental income, the situation will involve taking on a roommate. Make sure you are ready to share communal spaces and manage a tenant before you list the space. If you are interested in getting started, read our ultimate guide to house hacking to learn more.

Multifamily Rental Property

Multifamily rental properties can be another great option for those wondering how to invest in real estate at a young age. This strategy involves purchasing a multifamily property and living in one unit while renting out the rest. This can be a great option for investors who like the benefits of house hacking but not the idea of an actual roommate. That being said, multifamily properties offer shared maintenance costs, steady cash flow, and in some cases, better financing when compared to single-family homes.

There are several types of multifamily properties investors can look into. These include duplexes, townhouses, and even small apartment complexes. You should learn how to evaluate different markets, potential cash flow, and financing sources to get started. If you play your cards right, multifamily rental properties can turn out to be highly lucrative for young investors.

Wholesaling

Wholesaling refers to finding properties, getting them under contract, and then assigning that contract to a buyer. Wholesalers will earn money through contract fees. This process does require a strong understanding of your market area and an ability to network effectively. However, it is a great strategy to learn a lot about real estate and fast.

This real estate exit strategy is actually where a lot of real estate investors get their starts. While wholesaling revolves around buying and selling houses, the wholesaler never actually purchases the property. Therefore, it does not require significant capital to get started. If you are interested in learning more about wholesaling, be sure to watch this video.

Is It Worth It To Get Into Real Estate Investing?

Investing in real estate can be worthwhile in the long run, but at its core you are the decision maker. The benefits usually outweigh the drawbacks and risks in most cases. to find a strategy and investment path that helps you reach your financial goals.

The average age of homeowners

If you are looking at homeownership stats, young people unsurprisingly make up the lowest percentage of homeowners. This is due to factors mentioned before like being less financially established at a young age but is also because, from a statistics perspective, people generally tend to age upwards out of age brackets so the number of homeowners will concentrate at the upper end.

According to Statistics Canada from the most recently available census data on the topic, the age breakdown of Canadian homeowners is as follows:

  • From 35 to 54 this figure increases to about 70%
  • 76% of Canadians aged 55 to 64 own a home
  • About 43% of people aged 20 to 34 own a home

The trend then drops off with Canadians 65 years and above owning homes at a rate of 74%. This difference is likely explained by decisions in old age to sell homes or pass on ownership to family members.

Across Canada, around half of first-time homebuyers are under 35, though Statistics Canada also notes that young Canadians are entering the housing market at a lower rate than previous generations when they were the same age.

Investment property

An investment property is a property that you own exclusively for generating rental income and/or an eventual profit on its sale. You typically won’t use an investment property as your primary home. If you are unable to purchase the property alone, the more affordable option is to partner up. 

Owning a rental property is an excellent way to invest in real estate while building wealth and generating passive income. The potential rate of return is strong due to a combination of income and equity appreciation. It is also important to keep in mind that owning an investment property can take on added work, maintenance, and costs that are unexpected and can at times be of inconvenience unless you hire a rental manager. Appliances and other household plumbing could break down at unexpected times, which you have to be responsible for and readily available to fix and pay for. 

 

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 scale and 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.

3. House Flipping

House flipping is for people with significant experience in real estate valuation, marketing, and renovation. House flipping requires capital and the ability to do, or oversee, repairs as needed.

This is the proverbial “wild side” of real estate investing. Just as day trading is different from buy-and-hold investors, real estate flippers are distinct from buy-and-rent landlords. Case in point—real estate flippers often look to profitably sell the undervalued properties they buy in less than six months.

Pure property flippers often don’t invest in improving properties. Therefore, the investment must already have the intrinsic value needed to turn a profit without any alterations, or they’ll eliminate the property from contention.

Flippers who are unable to swiftly unload a property may find themselves in trouble because they typically don’t keep enough uncommitted cash on hand to pay the mortgage on a property over the long term. This can lead to continued, snowballing losses.

There is another kind of flipper who makes money by buying reasonably priced properties and adding value by renovating them. This can be a longer-term investment, wherein investors can only afford to take on one or two properties at a time.

Pros Ties up capital for a shorter time period Can offer quick returns Cons Requires a deeper market knowledge Hot markets cooling unexpectedly

The obstacles young people face

With all those advantages, young investors still face many obstacles. Investing in real estate needs money which young people tend to not have an abundance of. The majority of young people are not financially independent and are still relying on their parents for financial support. This is particularly an issue if you have student debt or start out your career with a low-wage job. So it’s not uncommon to be asking yourself, “am I too young to buy real estate?” or “when will I know that I’m ready to start investing in real estate?”

Young investors also lack life and investment experience, particularly with real estate. They probably have yet to purchase a home, making this type of investment seem intimidating. Learning how to become a real estate investor is less intimidating if they already know how the process of development and home buying works firsthand. Luckily, there are ways to get exposure to real estate investing without needing any prior experience. 

2. Do the math

Not all real estate automatically makes money. Mehta says every investor needs to "become an expert at calculating cash flow and realizing equity potential," which he learned about at his job at Sotheby's.

Cash flow in real estate is the difference between a property's income and any expenses. You might think of this as rent minus the mortgage payment, but that is not the only cost you need to account for in a rental property, for example. There are also operating expenses and savings for future improvements and emergency repairs, Mehta says.

Mehta also considers how much more value he can add to a property through physical improvements. That could include updating the kitchen or remodeling the bathroom. Mehta and his brother are currently adding a second story and unit in the backyard of one of their properties, which he estimates will add around $1.5 million to the total value of the property.

The Bottom Line

Whether real estate investors use their properties to generate rental income or to bide their time until the perfect selling opportunity arises, it's possible to build out a robust investment program by paying a relatively small part of a property's total value upfront. And as with any investment, there is profit and potential within real estate, whether the overall market is up or down.

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