After one of the largest housing crises in history a decade ago, we have witnessed over the last few years a real estate market that has featured soaring home prices, in part because of a lack of inventory. A recent study found that 63% of millennial homebuyers had regrets about buying their first home. This, in my opinion, is a result of a lack of options caused by a shortage of homes available. Most of these buyers have been forced to settle and, most likely, pay a premium to do it.
I am not a millennial, but I bought my first home about 17 years ago at the age of 23 and felt some form of remorse — because I was inexperienced and so anxious to buy that I did not research my decision well enough. My next step played a major part in what has shaped my real estate investment career: I sold that property and purchased a multifamily home. My first mistake gave me the knowledge to ensure I was making smarter choices to meet all of my real estate goals.
So what is the best way for younger buyers not to miss the opportunity to buy real estate, but also be satisfied with their choices? Here are three tips I believe will help.
1. Purchase a multifamily home.
A multifamily home is any property with between two and four units. In some cases you are able to live in a property and collect enough money from other units’ rent, costing you little to nothing to live there yourself. These types of homes also will afford you various options. If you are not satisfied with living in the home you can keep ownership of it, rent it and create a useable income-producing investment. Multifamily homes are one of the best ways to grow long-term wealth through real estate.
2. Create your own happy home through rehab.
A big issue I see as a mortgage banker is that many younger buyers want something renovated and like new. What’s worth noting is that, with home flipping at all-time highs, we have seen more and more inexperienced buyers rehabbing homes to sell. According to Attom Data Solutions, over 207,000 homes were flipped in 2017, the highest amount in a decade, which gives us some idea of how many of these were sold over the last few years. In many of these flips, there is a good chance of sub-par quality because of a lack of experience of the seller who is flipping the property. Why not buy the fixer-upper yourself and control your own vision for your home?
Now more than ever, banks are making it easier to obtain a mortgage that allows you to finance your proposed construction costs. Currently all three mortgage agencies (Fannie Mae, Freddie Mac and the FHA) offer programs that allow homebuyers to put down as little as 5% on a home purchase and finance desired repairs to the property. Lenders may also help you research the contractors to ensure prompt completion and reputable work. If you want to buy a property and ensure your homeownership needs are met, consider creating your dream home yourself.
3. Generate real estate profits without owning real estate.
Real estate investment trusts (REITs) allow investors to buy into residential and commercial real estate they would normally not be able to access. REITs use investor money to purchase properties and then pay dividends from money earned on these properties. Investors are able to buy into REITs through online brokerage accounts, just like an ETF, with a minimum upfront investment and do not need great credit or consistent income — requirements for a mortgage. What most first-time real estate investors do not know is that REITs have outperformed the stock market over the past 50 years. They also provide significant tax benefits and, unlike owning your own home, ease of liquidating your capital. But it’s worth noting that REITs often move in the opposite direction of an up stock market, which under current conditions makes them a riskier investment.
Crowdfunding for real estate has also become a new trend that has showed consistent profit gains over the last five years. Like REITS, crowdfunds allow you invest in properties you may not have been able to on your own. Some crowdfunds allow as little as a $500 investment to get started. Unlike REITs, this option does not make it so easy to liquidate your funds if needed — most funds restrict when you can take your money out or may issue a penalty. Profits are earned through rental income on the properties as well as sale of the property. Crowdfunds are still very new and relatively untested, so there’s not a breadth of historical data to analyze.
But what both investment vehicles do offer is an option to make a smaller, lower-risk investment into real estate without actually owning property, providing more options for younger investors who want to start somewhere.
There are many ways new investors can get involved in real estate without becoming frustrated over their purchase. These are just a few. A major key to entering the real estate market, no matter which path you take, is to not rush into the market. Be patient, do your research, make a budget and choose which option works best for you.