It’s never too early to start thinking about saving for retirement and your future. There are always traditional retirement funds and savings accounts, but did you know that investing in real estate can be a great way to save for the future? If you’re smart about it and have a great real estate agent to help you along the way, you can get a better return on investment than many other ventures. The best thing about getting started in real estate investing when you’re young is that you have more time to buy multiple investment properties over the years. Here’s how to go about buying your first rental property in your twenties.
Have a plan. As with most things in life, buying an investment property takes a certain amount of planning. It doesn’t have to be a meticulously detailed plan, just a loose outline. When do you want to purchase a house—in the next five years? The next eight months? Will you live in the house for a while before you rent it out, or will you rent it right away? What is your ultimate goal? Do you want a house that you’ll keep for years, or will you sell it once it appreciates in value? These are all important questions to address before you even think about looking for investment property.
Don’t wait until it’s time to “settle down.” Lots of young people wait until they’re married, in a long-term relationship, or having a baby to buy a home. A little hint: don’t combine buying a home—whether it’s residential or for investment purposes—with another major life milestone. Planning for a wedding or a baby can be stressful enough. You don’t want to put more on yourself than you can handle. Also, don’t think that you first home has to be
Clean up (or establish) your credit. Two common problems with younger generations is that they don’t have a good credit history, or they have no credit history. Consult your bank or a mortgage lender for advice on how to establish or repair credit in order to obtain a home loan.
Hire a real estate agent. Did you know that there aren’t any fees associated with hiring an real estate agent? Agents make a certain commission (usually about 6%, but that number can vary) based on the total sales price of a house. This commission is normally built into the closing costs. But you don’t have to wait until you’re absolutely ready to buy to consult a real estate agent. Johnson & Wilson agents are always willing to work with you from the early stages to get you ready to purchase a home. Professional, personalized advice is way better than anything you’ll find by searching online or reading books on investing.
Save, save, save. Unless you qualify for a 100% loan (e.g. if you qualify for a VA or FHA loan and the home will be your primary residence for a while before you turn it into a rental), you’re going to need to save up for a down payment. Not only will you need cash to close on an investment home, but you’ll also need to keep an emergency fund for things like repairs or covering the mortgage payment if/when the house isn’t occupied. One of the easiest ways to save is to set up weekly or monthly transfers that get automatically deposited into a high interest savings account. This is even easier if you have direct deposit. Simply have your employer deposit a certain amount from each paycheck into a separate account from the one the rest of your paycheck goes into.
Do some preliminary research. Don’t start your home search until you know exactly what you’re looking for. As a younger person, you have the advantage of knowing where people around your age really want to live. Make a list of the most desirable areas in your city, followed by the best neighborhoods, the types of amenities people want, and how many bedrooms and bathrooms renters in your area typically need.
Don’t use television as a measure for success. Most TV shows that feature home buying and selling, flipping, and renovation are the exception to the norm. There are a lot of factors behind the scenes that you don’t get to see that guarantee the success of those projects.
Start your search. When it’s time to start actively searching for an investment property to buy, it’s important to be logical. Don’t go with a “gut feeling” or get too personal. Remember, unless you’re going to live in the house initially, it’s not going to be your “home.” Keep to your plan, consult your research, and listen to your Realtor. They know what’s up.
Buy less than you can afford. The last thing you want is to be stuck with a mortgage payment you can’t cover if the house is unoccupied for a month or two. Figure out what you’ll be able to cover from month to month and go from there. Don’t forget that monthly payment includes the principal mortgage payment plus interest, taxes, insurance, and perhaps an HOA or regime fee. Don’t go too low on the totem pole, though. That brings with it a whole other set of issues.
Find a good property manager. Of course you can take care of leasing, maintenance, and other issues yourself, but it’s so much easier to hire a reputable property management company to help out. They’ll take care of marketing, leasing, maintenance, and in unfortunate cases eviction and other legal actions, all for a reasonable fee. Ten percent of the monthly rent is a pretty common amount to pay a property manager. If they charge 10% and you charge $1,000 a month for rent, you can expect a check for $900 each month (minus any incidental expenses like repairs) after your property manager takes their cut. It’s a small price to pay for peace of mind and less work on your plate.
Once you’ve bought your first rental property, you’ll want to keep an eye on the market. Even if things are going smoothly, you don’t want to be caught by surprise. Keep in touch with your real estate agent to make sure values in the neighborhood are still increasing, or at least holding steady. If you keep up a good relationship with your agent, they’ll keep an eye out and let you know the perfect time to cash in on your investment by selling.