Real estate investing in your 20s

When I graduated college I did not have the right education or mindset for real estate investing.  I thought you only bought one house to live in and only rich people could buy investment properties.  I realize now that this point of view was a result of my network and education at that time. 

Fast forward to my first job out of college as an Assistant Golf Professional.  Surrounding myself with members of the golf club, I started paying attention to how these people made their money.  For the most part, they owned businesses or real estate, or were in sales.  So not until I was 22 did I even realize it was realistic to buy real estate as an investment and not just a primary residence.  It took about 10 years for me to actually buy something and dive in.  Here’s what I would tell my 20 year old self from what I know now:  

Why start investing in real estate in your 20s

1. Get a jumpstart on your financial education

Most are held back due to a lack of financial education and literacy.  Gone are the days of relying on a pension, 401(k) and social security to retire.  If your employer offers a 401(k) this should be a supplement to your investment portfolio.  As early as possible, educate yourself on how a business works, what it means to invest in real estate, different types of assets & liabilities, taxes, and credit.

2. Learn how the business works

Real estate itself is a business with its own language and process.  Learning the business of real estate involves knowing about the parties involved, how transactions work, and what it has to do with building wealth.  Real estate agents, lenders, appraisers, contractors, escrow officers and developers are a few examples of who is involved. 

3. Make mistakes with lower risk

You may have heard the ‘make mistakes when you’re young’ phrase.  There’s no such thing as a bad investment.  It is either a good investment or an education.  You might as well take this risk when you’re single and have less financial/personal responsibilities.

4. There’s no best time to start, so start now

The best time to start investing is the same as the best time to plant a tree….that is NOW. Having gone years without taking action, I can tell you first hand that you’ll never feel ready.  Listening to 1 more podcast or reading 1 more book doesn’t help you learn as much as spending your own money on a real property.

How to start investing in real estate in your 20s

1. Get educated

There are plenty of free resources to start educating yourself on real estate investing.  Start with sites like this where my purpose is to document my journey to help others fast forward their progress.  Listen to podcasts, read books, watch YouTube and attend local real estate investment associations.  

2. Start taking action

Introduce yourself to investor-friendly real estate agents.  It may be a surprise to learn that most residential agents are not savvy in helping people buy investment properties.  This is a completely different purchase than a primary residence and I want to be working with an agent who knows how to run numbers.  I’m a licensed agent in Michigan and have purchased rentals myself, as well as helped clients do the same.  This credibility goes a long way in having conversations with buyers and sellers.  

3. Network with others in the industry

Agents can connect you with good local lenders, title companies, inspectors and contractors.  In real estate, like other industries, you don’t need to know how to do everything.  You just need to know WHO to contact throughout the process.  

4. Evaluate your own financial picture

If you choose to jump into real estate investing, you are forced to look at your financial picture.  A lender is going to pull your credit, ask for job history, tax returns, bank statements, assets and liabilities.  Simply deciding you want to invest is not enough.  You need to start paying attention to your credit, reducing consumer debt and putting money in the bank.  A lender needs to qualify you by making sure if they lend you 80-95% of a purchase price, it is low risk for them. 

5. Develop your ideal criteria

Ok so you’ve gotten in touch with a good agent and lender and you find out you’re preapproved.  Now you need to decide which type of property will fit your goals. An example would be: Duplexes on the west side of town, under $175,000 with a cash on cash return of 12%.  Or, 2br single family homes on the north side of town, under $120,000 with a square footage of 900+ to see if an additional bedroom could be added. There are no wrong answers here.  Start with SOME type of criteria and tweak it based on your comfort level.   

6. BUY SOMETHING

Now it’s time to dive into the deep end.  I tell younger first time investors all the time, just get into the game.  You will not be able to apply all the knowledge from podcasts, books and YouTube unless you have a real property.  

Best real estate strategies to get started

1. Wholesaling

This is probably the strategy with the lowest barrier to entry.  Gurus on social media make it sound easy but it takes a lot of work to wholesale real estate.  The value in wholesaling is being the source of the deal.  Through a number of ways you get in touch with distressed sellers and put their property under contract to sell. Then, you assign that contract to an end buyer, or house flipper who will actually do the work.  In theory, you collect a fee for middling the deal. 

Pros:

1. Low barrier to entry

2. Cheap to get started

3. You are the source of the deal

4. You’re not dealing with tenants

Cons:

1. No equity build up

2. It is hard to build trust with end buyers 

3. Scaling your marketing can get very expensive

2. House hacking

House hacking is a great way to start real estate investing in your 20s or 30s.  This is where you buy a duplex, triplex, or fourplex.  You live in one of the units and rent out the others.  In most cases you will be able to live for free, if not, make money each month.  After living there for 1 year, you could move out, refinance into a conventional loan and repeat the process as a low money-down way to acquire properties. This works for a duplex, triplex or fourplex because you can still get owner-occupied financing on 2-4 units, to get a low down payment and low interest rate. 

Pros: 

1. Acquire properties with a low out of pocket cash to close

2. Potentially live for free

3. Low risk since tenants are helping you pay the mortgage

4. Equity build up

Cons:

1. You are the landlord and responsible for maintenance

2. Difficult to distance yourself from tenants

  3. Multifamily

Multifamily real estate includes anything with more than one unit.  Anything ranging from a triplex to a ten unit apartment complex.  Most large investors and companies will stay away from anything less than 20-30 unit complex.  Keep in mind if there are 4 units or less you can get owner-occupied financing.  Anything 5 units or more requires non owner occupied, i.e. at least 15% down.  

Pros: 

1. Opportunity to scale-many units under 1 roof

2. Value is based on Net Operating Income, not comparable properties

Cons:

1. High competition 

2. More expensive, requires a larger down payment than owner-occupied financing

4. Real estate license

It is relatively simple to acquire your real estate license.  This is a low barrier way to get into real estate to learn the ropes on how transactions work.  This was the first thing I did to get started.  I would only recommend this option if you actually have an interest in selling real estate and working with buyers and sellers. 

Pros:

1. Learn how transactions work 

2. Industry networking

3. Access to off market deals

Cons:

1. Costs associated to acquiring & maintaining license

2. Broker compliance 

3. Could be a potential distraction to your investing goals

5. Crowdfunding

Real estate crowdfunding has become very popular in the recent decade.  Up until recently, you had to be an accredited investor to have access as a limited partner in larger real estate deals.  To participate you choose an investing platform and start an account similar to a stock market brokerage account.  The asset type in this case is real estate, investing in assets ranging from debt to equity, commercial, and residential projects. 

Pros:

1. Low barrier to entry-start with as little as $10 

2. Access to larger deals across the country

3. Passive

Cons:

1. Minimal upside per deal since you have a limited partner role

My recommendation for real estate investing in your 20s

If I were just getting started the first thing I’d do is get educated through podcasts and books for a few months.  I would combine crowdfunding with house hacking since these are both simple, low risk ways to get started.  I would house hack for 1 year then repeat the process so I can acquire 2 properties in a short period of time with little risk and low money out of pocket for acquisition.