Every retiree I’ve spoken too has said something as in “I wish I started investing earlier.” I’ve heard this since I was younger without much context to what it actually meant or how to do it. Millennials hear marketing messages that tap into that desire. The desire to build wealth and start investing and build wealth for the future.
“Start learning Forex, Set your IRA on Auto pilot, Trade Bitcoin today!”
With all the options available today it can be confusing what you which is for you. There is one that stands out. The most time-tested method of investing is in real estate. It’s a long-term asset that has made plenty of millionaires through history. You may be looking to replace your salary with passive real estate rental income. Or you may want to build assets for retirement using Real Estate. This article is a great launch point.
In the rest of this article, we are going to talk about the first steps to building wealth through real estate. There are many ways to do this and we are only going to dip our toes in the water. You can find sites online that will allow you to invest a few hundred dollars into a real estate backed fund. That’s not what we are going to go over in this article.
There are two tracts for Millennials that want to get into investing in real estate. Those that already own their own home and those that do not. If you already own your own home you’ve already made the first step into the world of real estate investing. Your current home is your first investment! Congrats! Regardless of whether you own your current home or are renting the first two steps are critical.
The most important thing you can do is spend time investing in education. There are free resources available out there. There is no need to pay for courses or any one’s service to get started. Check out YouTube and Biggerpockets.com for tons of great free resources.
Before beginning any type of investment plan you should create a budget. By looking at your income and expenses you can see how much room you have to invest. If you are only saving a couple hundred dollars a month. It might be wise to focus on paying down debts/increasing your income. The number you want to calculate is your current debt-to-income Ratio. For example, if your monthly debt (credit cards, student loans, car payments) equals $1,500 and your gross monthly income is $6,000, your DTI ratio is about 25 percent. (1,500/6,000=0.25). A mortgage lender won’t let your total DTI go above 49% when calculating what you can afford in a home or investment property. Your goal is to begin saving for your down payment on your first investment property. Then the fun begins!
Buy Your First Home
The best way to start investing in real estate is with a personal house for yourself. My recommendation for anyone who has not yet purchased a home yet is to do some form of house hacking. That is a pretty broad term that can mean a lot of thing. I am going to talk about my favorite option, but there are others that could work for you as well. Most Millenialls can find at least one of these strategies a great option to get started. None of these are easy, but they are short term and will help get you on the right path.
- Buying a multi-family home and living in one of the units.
- Renting out rooms in a house
- Pooling money with friends to buy together.
This is my favorite way to get into real estate investing because it has the lowest barrier to entry. Not only is it the lowest barrier to entry, but it allows you to get multiple units. The most common instance of this is buying a duplex and living in one side of the duplex while renting the other out. When buying a duplex for owner occupied usage you can do it with only 3.5% down with an FHA loan. If you were buying a duplex as a non owner occupied investment you would need 25% down payment. That is a huge difference. This is what gives you the leverage to get into owning multi-family properties by living in it.
Here is an estimate of what it could look like buying a duplex with a 3.5% down loan: (All numbers are estimates and not exact figures).
Purchase price: $300,000
Total cash to close (including down payment): $18,000
Interest Rate: 3.5%
Gross annual household income required to afford this: $45,000 with no debt.
Monthly Principle & Interest Payment $1323
Monthly Property taxes $177 (This is a tax write off!)
Monthly Mortgage Insurance $209
Monthly Homeowners Insurance $60
Total Monthly Payment: $1768
Rent out one unit $900 (Depending on condition)
Your out of pocket expense is now: $868 a month.
When you decide to move out you’d have ideally updated the units and can get higher rents for them. Now your gross rents are $2,000 a month and your expenses are still $1768. This creates a net positive cash flow every month for you. Remember your payment is paying down the principle of the loan! This is my favorite way to get started in real estate investing.
If you already own a home, have a larger family already, or just don’t think that option will work to get you started in investing I have another suggestion for you!
No I am not chilly. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat! This method takes a little more upfront cash and is a lot more time intensive, but it pays dividends.
This strategy is pretty self explanatory as the name is the process. it is executed in the exact order its stated above. It is like those who want to “flip” properties, but flipping a property doesn’t add it to your portfolio.
First, you want to find a property that could use some rehabilitation or is under duress of some kind. You buy the property and fix it up. The property is now worth more than what you purchased it at. You find a renter for the newly revitalized property at a premium rental rate. After some time of having the tenant you can refinance the home and get all if not more than all your original cash out. Then the most important part of this….repeat!
Here is an example for you to help it make more sense. (These are numbers off a recent deal I analyzed in Oklahoma)
Purchase Price: $70,000
Down Payment: $15,260 (25%)
Total Initial Investment: $20,260
Rents after repairs: $950/month
Monthly Cash flow (after mortgage, taxes, management, insurance): $255
Refinance: New appraised value $100,000 at 75% Loan to Value.
New loan amount: $75,000
Old loan amount: $54,740
Cash out net to you: $20,250
Total Cash Invested: $10
Yearly Cash Flow W/New Loan: $1,822
You now have acquired a new rental property that cash flows you almost $2,000 a year! After the refinance you got almost your ENTIRE initial investment back. That is what the BRRRR is all about.
There are so many different ways to get started in real estate investing. The best way to start is by listening to some podcasts, reading books, and learning from people who have done it successfully. My biggest piece of advice is don’t get bogged down in trying to time the market or thinking you will outsmart it. It is unlikely you will do so and instead might miss out on some great gains and opportunities. I suggest you connect with an expert in the area you want to buy whether it is local or out of area. Ask them for advice on how to start with your specific financial situation.
About Jesse Sheldon
Jesse is the Director of Operations and Broker on the Gordy Marks Real Estate Team in Seattle WA. By 25 Jesse has bought his first home, acquired investment properties, and done fix-n-flips. He loves everything Real Estate and helping others understand how to use it to build long term wealth. You can connect with Jesse on LinkedIn , Facebook and Twitter.