As a parent of three young adults I often think back to when I was their age considering what I could have done differently to have positively impacted my financial portfolio today. The two things at the top of that list would have been to avoid accruing debt and to begin investing early, and specifically real estate investing.
As a real estate professional, I like to counsel high school and college students and grads on what they can do now to begin building a wealth plan for the future that includes “real estate investing” in their portfolio. I’ve done this with my own three boys, now in their late teens and early 20’s, and I’d like to share what I’ve taught them with others in their generation.
[Note: Although the overall theme of this article is about real estate “investing”, everything you will read here also applies to first-time buyers, regardless of whether you have any aspirations to become a future investor.]
Before I get into the “Six Tips for Young Adults on Real Estate Investment” section I think it’s important to understand what will be required before you can purchase your first home. This may sound over-simplified, but all you really need are these three things:
1) a down payment
2) a good credit score
3) a stable job with sufficient income
Ideally you also want very little debt, although that’s not always the case, especially if you have college loans. Let’s discuss each of these necessities in a little more detail.
Down Payment – A down payment is a requirement by every lender. A down payment is the amount of cash you will pay up front when you purchase a property. This is your initial investment in the property you’re about to purchase. Typically, as a first time buyer you can qualify for a mortgage with as little as 3.5% to 5.0% down, but I would suggest shooting for 10% to 20% if possible. The more you put down the better, especially since this will be a future investment property. The more you put down up front, the lower your mortgage payment will be and the faster you’ll make your investment a true money maker.
“A down payment is the amount of cash you will pay up front when you purchase a property.”
You should also know that if you get to a point where you want to purchase a second investment property, which would actually be your third property (one home and two investments), your lender will most likely require a 25% down payment. So buying your first property with a lower down payment is always attractive to first-time buyers.
Good Credit – A good credit score is essential to being able to qualify for a mortgage. A good credit score can also help you to qualify for a lower interest rate, which will reduce your mortgage payment, and accelerate your ability to increase the equity in your property. Equity is the market value of your investment less any debts on the property. Equity is always your goal. It gives you buying power and is what creates wealth.
“You’re never too young to start building your credit and establishing a good credit score.”
While it is possible to qualify for a mortgage with a 680 credit score, you will most likely end up with a high interest rate, which means higher mortgage payments. The higher your credit score is the lower your interest rate will be. Ideally you want a credit score that is 720 or higher, which is totally feasible by the age of 20 with the right strategy in place.
Stable Income – Having a solid job with a consistent and reliable income is extremely important to a lender. Your salary is important as well, but demonstrating that your income is stable will help the cause immensely. Lenders will often say you should be working for the same company for at least two years before they consider approving your mortgage. That is not always necessarily the case, but that is a good rule to follow. Lenders are always evaluating their risk before deciding to approve your mortgage loan.
“Your mortgage lender will want you to demonstrate that you have a stable job with consistent income.”
The amount of your salary is important as well. Lenders will actually look at both your salary and your debt, and the ratio between the two, so if you have minimal debt then your income is less important. Without going into details, it is important to understand that your debt-to-income ratio is vitally important when it comes to qualifying for a mortgage, especially as a first-time buyer. Less debt and more income is always ideal.
“6 Tips for Young Adults on Real Estate Investment”
Now let’s talk about what you can do now to start working towards your first real estate investment and buying your first home. I should emphasize that it’s never too early to start learning and to begin planning for your future.
Below are my six tips for developing a real estate investment plan. Ideally this should begin around the age of 18, but as I mentioned, it’s never too early to get started. If you’re in your early to mid-20’s and you don’t currently have a plan started you can certainly still implement a plan at any age. Everything you read here still applies to you.
Tip 1 – Set An “Age-To-Buy” Goal
The very first step is to set an age (or year) goal when you would like to purchase your first home. This property will most likely be a one or two bedroom condo or apartment where you’ll live for a few years until you’re ready to purchase your second home. Once that happens your first property will become an investment property and you’ll begin implementing your wealth plan as you simultaneously build equity in the property, as well as generate monthly income using your new investment.
“In what year would you like to purchase your first home?”
My recommendation for most young adults is to set a goal of buying your first property at or around the age of 25. This is achievable for almost anyone with an established goal and a solid commitment to accomplish that goal. You must be disciplined and willing to work hard. Setting the goal early is absolutely essential and the key to buying your first home early.
Tip 2 – Let People Know About Your Plans
Achieving big life goals usually requires support from the people around you. Once you have your plan written down, and your goals are set in stone, it’s time to announce your plans to your family and close friends so they can help keep you on track.
“Let your family and close friends know about your plans to become a homeowner and a real estate investor at an early age.”
Keeping in mind that you need to save money for a down payment on your first home, you will need to live modestly for the next few years. Buying expensive cars, dining at expensive restaurants and traveling the world are all great things in life, but financially speaking these are best suited for your wealthier future. When your close friends and your family tempt you to spend more than you can afford now, they will be more understanding when they know you have investment goals established early in your life. In fact, they’ll admire you for it!
When the time comes to bite the bullet and buy your first home, you never know who might be willing to help you financially when that time comes. There may be someone in your life who’s willing to help invest in your future, perhaps by helping with your down payment. If you keep your plans to yourself you may never know who those people are. Let everyone know your plans and do it early!
Tip 3 – Start Saving Early
So you’re making minimum wage and barely able to afford the gas you’re putting in your car that gets you to and from your job or classes. How can you possibly save money now? Well wait until you have real financial obligations; phone bills, car insurance, food, rent, utilities, etc… It may be difficult to believe this, but you probably have a greater ability to save now than you will in a few years. Believe me, I wish I had saved some of the money I made when I was a teenager and even after college.
The key to saving money with just a few bucks in your pocket is to start early. Imagine if you begin putting $20 into a coffee can every week starting on your 18th birthday. How much would you have when you turn 25? Let me do the math for you. Without factoring in any interest, that adds up to over $7000 saved by your 25th birthday. If that were all that you saved you could buy a $140,000 property with a 5% ($7000) down payment. Hopefully that’s not the only savings plan you have. You will likely need more $$$.
This was a simplified example, but perhaps this illustrates this isn’t as difficult as you mighty think. Imagine if you increased that $20 by $10 in each of those seven years between your 18th and 25th birthdays, ending with a weekly contribution of $80 per week in that last year. And that doesn’t include any interest or dividends you could have been earning if you put that money somewhere other than a coffee can.
This is where your savings plan begins.
Tip 4 – Start Building Your Credit Early
This is simpler than you might think. All you need to start building credit is a credit card. A single credit card – not 2 or 3 or 5 – just 1 card is all you need. Once you turn 18 apply for your first credit card. You may only get approved for $200 when you first start, and you may need to provide a security deposit, but that is all you will need. Start with your bank. Hopefully you already have a checking account, and if you don’t then now’s the time to open one. Do that first and then apply for a credit card. I recommend going with an online bank, one without any branches. These banks typically have no fees and they boast excellent apps and websites, and even customer service when you need assistance over the phone. We use Capital One, but there are others.
“Use your credit card instead of a debit card and pay the full balance immediately or on a weekly basis.“
Here’s the quandary that gets so many people into trouble when they’re young. You’re probably wondering how can you build credit without building up debt too? It comes down to having a little discipline! Actually… a lot of discipline!
Here’s how you do it. Use your new credit card to pay for gas and basic incidentals (ex coffee, sandwiches, etc…). Just use your credit card instead of your debit card. Then as soon as you charge your credit card log into to your bank app and pay the balance in full. You might find you can do this weekly – it doesn’t matter as long as you do it before they charge interest. If you do this routinely you’ll find you’ll have a good credit score within just a few months. Don’t ever be late and don’t ever pay interest.
Warning! Resist the temptation with buy BIG things with your credit card. You won’t be able to in the beginning with only a $200 spending limit, but that will go up as your credit improves. This will destroy your future investment plans if you buy anything you can’t afford on your credit card. Just don’t do it.
Bonus tip! If there is something you want to buy that’s bigger than your credit card, get a second coffee can, or a few of them. Even better, if you open a checking account with one of those online banks, you’ll be able to set up multiple savings accounts where you can drop some money to save for specific purposes (i.e. cloths, road trips, gifts for mom and dad, etc…).
Tip 5 – Meet with a Mortgage Lender
It may seem too soon for this, but it’s not really. You’ll soon learn in life that if you’re working with the right people you’ll learn a lot about finances, and you’ll find that you have a new supporter. And this is who will most likely be approving your loan in the future as well.
“Your mortgage lender will be an important partner as you develop a strategy to purchase your first home and any future investment properties.“
My recommendation is to find a mortgage broker or perhaps a local bank, rather than a large national bank. Mortgage brokers tend to be much more resourceful for borrowers and from my experience they’re more likely to still be around in a few years when you’re ready to apply for your first mortgage. Most of the brokers I work with have been in the same role at the same company for many years. Bankers tend to move around a lot.
Ask around and you’ll find someone who can recommend a local mortgage broker or bank. Give them a call and set up an appointment. Be honest and let them know your goals and your plan for the future. They’ll admire you for it, I promise.
(By the way, I work with many lenders and have a few favorites. If you need a recommendation give me a call and I’ll gladly point you in the right direction).
Tip 6 – Talk with a Real Estate Professional
Alright, so you probably already know that I’m a real estate agent. This is where I come in. If someone in their teens or twenties approached me saying they have a goal of wanting to buy their first home by the time they turn 25 you better believe I would make the time to talk with them. That’s kind of where the motivation for this article comes from.
With all the planning and discipline your’re going to need over the next few years you’re going to need some motivation. That motivation begins with looking at properties to buy. It may be mostly online, but it certainly doesn’t hurt to ask to go see a couple of places in person as well. When you’re ready to buy it’s important that you have a pulse on the real estate market and how it’s always evolving. You’ll want to know when its a good time to buy and your real estate agent can help you with that.
It starts with a simple conversation, and once you have a relationship started, you’ll have a wonderful resource as questions come up over the next few years.
Are you motivated? Let’s get started now!
Jeff Wirz has been a licensed real estate agent in Connecticut since 2012 and works with buyers, sellers, investors and tenants throughout Fairfield County, Connecticut. He is based in Stamford where he and his wife Antonia have raised their three boys to become young adults. Jeff enjoys working with first-time buyers and is especially interested in talking with teens and young adults hoping to become homeowners, as well as potential future real estate investors. He provides free 1-on-1 consultations for buyers and sellers, and is always available to talk about real estate as a public speaker for local community organizations.