I have learned from growing up with parents who made most of their money from real estate investing that it is one of the smartest ways to create financial freedom, especially if you can start investing in real estate in your 20s. Working yourself into exhaustion or going to school for years might make you money, but at a significant cost to your well-being. What you want for your life and how you want to live matters. Investing in real estate is one of the best ways to achieve your desired lifestyle.
After witnessing its benefits firsthand through my parents and attending real estate investing events, I know that the passive income you receive is well worth it. Real estate investing in your 20s may feel like a distant goal as it requires a large amount of capital. However, if you take the time to learn about it and set a path to invest, you will reap tremendous benefits by getting ahead of the curve and starting young.
Why You Should Start Investing in Real Estate in Your 20s
Investing in real estate is something that most people don’t think about until late into their careers, if ever. However, getting a head start at a younger age can be very beneficial. While most twenty-somethings are focused on starting their careers and working their way up the corporate ladder, putting some money aside to invest in real estate is one of the best decisions you can make.
One of the most significant reasons you should start investing in real estate in your 20s is that the longer you own a property, the more you’ll capitalize on compound appreciation. To put this into a tangible concept, we’ll use the Home Appreciation Formula: FV = P * (1 = I)ⁿ .
Home Appreciation Formula
- FV=the future value of the home (the number you want to figure out)
- P=the current value of the home
- i=the annual appreciation rate
- n=the number of years
For an example, we’ll use these numbers:
- P=$300,000
- i=5% (.05 when using the formula)
- n=10 (what the property will be valued at in 10 years)
The formula looks like this: FV=$300,000 * (1 + .05)10. (You can also use an online appreciation calculator to do the math.)
The future value in 10 years is $488,688.39. In 20 years, it’s $795,989.31!
Imagine if you bought this property at age 25. At age 45, you’d be sitting on almost 800k of equity! That doesn’t account for the cash flow you’d earn from rent or the tax benefits.
Plus, with the passive income, you could build up reserves to buy an additional investment property or implement the 10/10 strategy of buying one rental property per year for 10 years. With time and appreciation on your side, you can see how investing in real estate in your 20s instead of your 40s or 50s is a huge benefit.
Real estate investing, however, is not for the faint of heart. It requires a significant amount of capital to start and time for property management (if you decide not to hire a professional property management company). Also, real estate is not a very liquid asset so you won’t have easy access to your capital. However, in the long run, real estate has proved to be a much better investment.
5 Reasons to Start Investing in Real Estate in Your 20s
1. Start making passive income at a young age
Passive income is an incredible thing. While you may have the option to work longer hours and make more money, doesn’t it seem much nicer to sort of hack the system without the extra work?
If you can generate positive cash flow from your investments, you can make passive income, which can be highly beneficial to supplement your salary. If you start real estate investing in your 20s, the passive income you earn can help you:
- Build an emergency fund
- Pay off student loans
- Grow your retirement account
- Buy more investment properties
- Budget for luxury items
The additional income, without the need to clock in and work a ridiculous amount of hours, gives you more freedom and time to do the things that are important to you. Passive income also provides an added sense of security. No matter what the economy is doing, be it up or down, it’s always nice to have an added cushion with passive income.
2. Investing in real estate in your 20s gives you a remarkable head start
Thanks to the magic of compounding, the earlier you start investing, the exponentially greater your profits will be. With real estate, cash flow increases over time because rent rises with inflation, while mortgage payments stay consistent. Over time, you’ll pay off your loan, and your cash flow will increase significantly.
3. More flexibility when you are young
Most people in their twenties have more flexibility and fewer commitments. If you can start real estate investing during this time, before you have family commitments and the pressure of important work obligations, you’ll give yourself a significant advantage.
One of the most common ways to get involved in real estate investing is by house hacking, which is living in the same property that you also rent out, like renting out a bedroom or quarters of your house. Using this strategy, you buy the house as an owner-occupied property, which reduces your downpayment, typically 3-5%. With some loan times, there may be no money down.
After living there for one year, you can rent out the entire property. This strategy is nice because you can repeat the process every year or two. It’s a good way to build a portfolio with less money down.
You can also qualify for an owner-occupant loan if you buy a duplex, triplex, or fourplex (properties with 2 to 4 units), and then after a year, you can rent out the entire building. This is a great option, but it can be difficult when you have a family and children you must convince to move every year. That is why this is an excellent option for younger people with fewer commitments.
Additionally, finding good investments and learning about markets takes time and effort. When you are older, it becomes more difficult to find the time to learn about these things due to greater commitments, but it can be easier to find the time if you start investing while you are young.
4. Gaining experience and building a portfolio
Investing comes with a learning curve. Some investments do a lot better than others. It takes time to learn how to pick the right properties and opportunities and understand how to make them work for you. The sooner you can learn this, the better, and you will become a seasoned investor in no time.
Receiving passive income from only one investment property will likely not be enough to achieve financial freedom, but this is possible with a diversified investment portfolio. And the sooner you can start building your portfolio, the better.
5. Tax benefits
One of the many advantages of owning real estate is the incredible tax benefits. Perhaps the biggest tax advantage is the various deductions available. You can deduct any expenses directly correlated to the property’s operation, management, and maintenance, as well as any costs associated with running a real estate investment business. You can also deduct depreciation on the asset. Many other tax benefits are available for real estate investments, making it one of the best investment opportunities.
10 Tips on How to Start Investing in Real Estate in Your 20s
Investing in real estate in your 20s is one of the best things you can do, and if you play it right, the benefits will heavily outweigh the effort it takes. If investing in real estate sounds like something you want to pursue, here are a few tips to help get you started.
Tip #1: Educate yourself and do the research
One of the most important things to remember when investing in real estate in your 20s is the importance of research. Real estate investing is not something to jump into with no knowledge because it does require a large amount of capital, and there is some risk. Luckily, there are plenty of resources available to learn everything you need to know.
Some of the best ways to educate yourself are to read real estate investing books, listen to podcasts, watch videos, and attend online events and webinars. At RealWealth, the company my parents Rich and Kathy Fettke founded, offers members a ton of free resources and connections to property teams selling turnkey investment properties. You can join RealWealth here.
We also have two of the best real estate investing podcasts, The Real Wealth Show and Real Estate New for Investors. Plus, Kathy Fettke hosts the BiggerPockets On the Market podcast with co-hosts Dave Meyer, Henry Washington and James Dainard. These podcasts are packed full of helpful tips, industry-pro insights, and inspirational success stories. If you prefer getting your information via podcasts, check out our best real estate podcast list.
Tip #2: Build up credit
A solid credit score is crucial for being approved for a loan with an affordable interest rate. To qualify for a mortgage, you will need a minimum credit score of 620, but preferably higher than 760.
One of the biggest hurdles to buying a rental property in your 20s is having a credit score that is high enough. The best ways to build your credit are:
- Have multiple lines of credit
- Make your credit card payments on time
- Only use about 10% of your available credit limit
- Only apply for loans that you need
- Pay off these loans on time
Tip #3: Save, save, save
The most important step to take if you are interested in purchasing an income property in your 20s is to start saving early. This can be challenging in your twenties because you are likely working with a lower salary and a decent amount of expenses.
One of the best solutions is to start paying yourself first by setting aside a reasonable amount of money as soon as you get your monthly paycheck. To do this, calculate how much you can afford to save after deducting your bills and estimated expenses. Then, automatically transfer that amount into a savings account each time you get paid. Make it automatic so you don’t even have to think about it. Having a separate savings account you can’t easily access can also be helpful.
Over time, you can save enough to make your first down payment. And again, the earlier you can start, the better. If you want to start investing as soon as possible, you could even work an extra freelancing job or side gig, such as food delivery, and save everything you make from that supplemental income into that savings account. You will reach your savings goal in no time and will be on your way to passive income and financial freedom.
Tip #4: Figure out financing
Saving enough money for the down payment is only the first step of buying a rental property. While you start saving, the next step is to figure out how you will finance the rest of the payment. There are multiple options for this. The most common is to apply for a mortgage, which usually requires 25% of the purchase price (if you choose not to house hack) and payments for 15 or 30 years.
You can also look into private money, which would involve borrowing money from friends, family, or other connections and then paying them back as you would with a loan. This can be a good option when investing at a young age. Another option is hard money, which means borrowing money from an individual who has enough capital to lend out. This usually comes at a higher rate and shorter terms, so it’s important to make sure that you completely understand the terms of the deal.
Tip #5: Network
Real estate is all about relationships, and the sooner you start, the more connections you’ll make over time. One of the best things you can do to begin investing in real estate in your 20s is to build connections with investors, contractors, agents, property managers and inspectors. Making these industry connections will present many more opportunities in the long run. Plus, it can be helpful to have people with whom to share ideas, concerns and challenges. The best way to do this is to reach out to people on social media, websites, forums, real estate investing groups like REIA, or join a network of investors like RealWealth.
Tip #6: Pick a strategy
There are many different ways to invest in real estate. The most common strategy is to buy a property and rent it out. However, you may find that you prefer a different method. A few options include investing in REITs (real estate investment trusts), flipping properties, short-term vacation rentals or real estate wholesaling. Some of these options are associated with less risk or higher returns. It is important to research all the options and choose which strategy works best for you.
Tip #7: Consider house hacking
House hacking is a great option if you are ready to begin investing in real estate in your 20s. With this strategy, you live in one of the units of a multi-unit property and rent the other units out to tenants or even rent out a spare bedroom in your house. This method is where a lot of investors start because it can provide the least amount of risk, and you can qualify for loans with very little money down. And, if you already have a spare bedroom that you aren’t using, you can get started right away and start earning passive income.
Tip #8: Pick a market
Once you have saved enough money, it is time to start researching the real estate market. There are plenty of resources to help you find the best markets to invest in. It is best to find high-growth areas with an upward trend in home prices. This usually depends on various factors, such as job growth and political influence.
For your first investment property, you may want to buy something local so that it is easier to manage and check in on. A good real estate broker can help you understand the market and determine which properties are right for you. If your market is out of your price range, consider out-of-state investing. When you work with an investment club like RealWealth, we help you connect with top-performing turnkey providers in the best markets nationwide, which allows you to find a variety of investment properties and price ranges.
Tip #9: Set specific goals
Before getting started with real estate investing, it is essential to set clear investment goals, both long-term and short-term. Having a clear set of criteria to determine which properties are worth buying is a great way to assess different property options. You can track your progress by setting specific amounts for cash flow minimums and returns.
It is also a good idea to develop a long-term investment plan. Here are some questions to ask yourself:
- What kind of real estate portfolio do you want to build?
- What is your timeline? (10 years, 20 years, etc.)
- How much money do you want to invest?
- How much time do you want to dedicate? (learning, networking or managing properties)
- How many doors do you want?
After defining your goals, share them with your network or a real estate mentor to get advice and possibly a clearer vision for your goals.
Tip #10: Consider crowdsourcing
If purchasing an investment property seems too big of an endeavor, other options require less capital and less commitment. There are many platforms where you can join crowdfunding efforts for real estate investments. With this method, you can benefit from having experts research which properties are best to buy and then contribute to the pool of money and get the corresponding returns. This can be a great option to invest in real estate in your 20s.
Ready to Start Learning & Investing?
Investing in real estate in your 20s is one of the smartest decisions you can make to set yourself up for financial success. While spending your hard-earned money on a new car or at your favorite restaurants may be tempting, remember that a vehicle is a depreciating asset. You will likely have to take a loan out for it, and since it loses value, it provides no long-term benefits. However, buckling down at this age, saving, and investing in real estate puts you on a path to buying all the things you want in the future with passive income.
Are you ready to get started? Membership to RealWealth is 100% free and includes access to hundreds of educational resources, webinars and connections with trusted turnkey providers, lenders, and more. Learn how to start investing in real estate in your 20s by joining RealWealth today!
