Millennials and real estate investing. It’s not a combination you see often these days. The slowing economy has put a serious dent in the millennial’s ability to get started in the property market. Even those that have the capital and a decent income are scared to dip their toes in a potentially volatile market.
But making real estate investing work is not impossible. In the following guide, we give you what you need to know before hitting the property market.
Be Financially Aware
The first step in the road of real estate investing is assessing your personal financial situation. Before you start looking for properties and dreaming about the potential of your new venture, consider the following:
Savings. Even with a nice salary and a solid credit score, you won’t get a loan without a deposit. Consider your savings account; is it ready to jump into real estate?
Prequalify for a loan. Before you even think about making an offer, ensure you can get a loan in the first place. Today’s marketplace has numerous lenders and brokers offering all kinds of useful tools with which you can assess the amount you can borrow. Fintech companies are appearing all over the world, and all you need to do is have a working internet connection to get the full benefit of the various calculators available to consumers to aid their home loan application process.
Think of the extras. Buying a house is more than just the list price. There are a bunch of other costs attached. Talk to a real estate agent to get an idea of what you’ll have to pay. As you’re a potential customer, they’ll be happy to talk you through the nitty-gritty.
Know the 1% Rule
This is as close to a ‘golden rule’ as you’re going to get when it comes to real estate investments. It’s incredibly simple, yet most people make the mistake of ignoring it completely.
Here’s the gist of the 1% rule: if you can rent the property for a minimum of 1% of the total acquisition cost, then it’s worth considering the property as an investment. If not, discard it. It doesn’t matter that it’s a gorgeous house, in a nice neighborhood, and that it’s a ‘bargain’ for the price.
The key word you need to keep in mind here is acquisition. The difference between this and the sale price of the house is important. The acquisition price also includes any other costs that get the house ready to rent out, whether it’s remodeling or otherwise.
Let’s look at an example. Say you buy a house for $90,000. You spend an extra $10,000 making a few improvements. The total acquisition cost is $100,000. If you’re a follower of the 1% rule (and you seriously should be!), then your rental price needs to be at least $1,000 per month.
Are You Really Making Money?
We see people making this mistake all the time. Investors think that just because their rental property is bringing in money, they’re making a profit. The reality is that you may just be breaking even. Worst case scenario, you’re actually losing money.
Let’s introduce you to another mantra to live by: for the average family home, half of the rental will cover expenses. These include insurance, repairs, management, taxes (you’ll need to calculate this based on your state), etc. What it doesn’t include? The mortgage.
With the remaining 50% of your rental income, you pay off the mortgage on the property. Whatever is left is your actual profit. If the maths don’t quite work, think of doing the following:
Save until you have a large enough deposit to lower the mortgage payments.
Look for a cheaper property investment (and follow the 1% rule).
Don’t use third parties. Manage everything yourself to lower costs.
The Risk is Real
Most people that get into real estate investing think about the profits they’re going to make. The cushy retirement, the ‘sure thing’, the vehicle that will pay for holidays and martinis, you get the drift. But that doesn’t paint the real picture. In 2018, for example, 4.3% of homes were in delinquency.
Listen, real estate investment is a serious risk. If it was easy money, everyone would be doing it. Markets these days are volatile and can change super quick. You can do all the research in the world and still end up with a dud.
Come to terms with the risks involved. Don’t go in blind, and don’t spend more money than you can reasonably afford. If you go in with a steady hand and a little bit of patience, real estate investment is usually a solid financial option. But it’s not a guarantee.
Finally, we’ll end with a wee disclaimer. We’re not your personal financial advisers. This is just advice, nothing more. The ball is in your court otherwise. Do your due diligence, consider the risks, and start investing in what could potentially be a very profitable venture.