Investing in real estate could be your missing link to creating financial security. Here’s what you need to know before getting started.
By Hiranmayi Srinivasan
Plenty of us have heard (and/or been) a jaded millennial talking about how they will never be able to own a home—but that’s hardly the case any longer. In fact, a 2021 report by the National Association of Realtors studying generational real estate trends found that millennials (both young and old) are currently the largest group of home buyers at 37 percent. And while a 2020 survey by Apartment List found 18 percent of millennials do not expect to own a home, half of the millennials in the U.S. are also looking to invest in real estate instead of the stock market, according to a 2017 report by Harris Interactive. Gen Z is also looking to get in on the action, with 83 percent of Gen Zers looking to buy a home in the next five years, according to a survey conducted by real estate research blog PropertyShark in 2018.
So why all the interest in real estate? Monick Halm, founder of Real Estate Investor Goddesses, a program dedicated to educating women on real estate investing, says it is the key to true financial stability. “I think of financial stability like a table. And income is the legs of the table. Most people are taught to have a table with one leg, and that’s your job,” says Halm. “True financial stability is when you have multiple legs on your table. Real estate is one of the best ways to give you that because you’re getting these passive income streams that are not connected to your time.”
Low interest rates as well as the financial setbacks people have faced this past year have actually increased opportunities in real estate. “I think that all of this stress on all of the people who have lost jobs and aren’t able to pay their mortgages that’s actually going to provide a lot of opportunity to get properties at a severe discount…help people get out of situations that they’re in and get in at a good time,” says Halm. Here are ways to set yourself up for success in real estate investing to create financial stability and freedom.
Make sure you have good credit.
Before you get started in real estate, make sure your finances are in good shape. A good credit score and low debt will help you get approved for loans faster. “Keep your FICO scores up,” says Vera Barnes, a realtor of 16 years at Urban Nest Realty in Las Vegas. “A lot of people don’t understand how important the credit is. Your credit is the key to actually acquiring property. Unless you have a lot of money in the bank and you can go pay cash.”
But since that’s not the case with most people who are just starting out in real estate, a good credit score will help get you better financing options that require little to none of your own cash. “Most people are familiar with bank loans as a strategy,” says Halm. “There is seller financing where the seller is essentially the bank, or there are hard money lenders. Those types of institutions are a lot more flexible than banks, they tend to have higher interest rates and shorter terms, but they move faster.”
Keeping your debt low is also important to qualify for properties and financing options. “You want to have as little debt as possible. Many people are in credit card debt. Credit card debt is just not a powerful tool to build wealth,” says Barnes. “When you have a lot of debt-to-income ratio, which means the amount of income you have coming in to the amount of debt you have going out, all your payables, which include credit cards, car notes, house notes; that has to be fairly low so that you can qualify for a property. And you can qualify for a larger amount of money if your debt-to-income ratio is low and your income of course supports that.”
Another tip? File your taxes. Barnes also recommends spending two years or more at a job before trying to invest in real estate. “If you can’t show you make any money on your taxes, then you’re not going to qualify for a property with a reasonable interest rate,” says Barnes. “There are companies that can qualify you, but the interest rates can be really high. Hard money loans can have 10, 15 percent interest rates.”
Figure out what your goals are.
When it comes to choosing the type of property you want to invest in, there are a lot of options depending on the time and money you want to put in, as well as your long-term goals. “It could be that you want passive income…so figuring out what that number needs to be. Either replacing your work income or getting enough passive income to replace your expenses.”
Others have a goal to set themselves up for retirement. “People can use a retirement fund to invest in real estate,” says Halm. “They would have to put it in a type of retirement account called a self-directed retirement account so that they’re not limited to the mutual funds and stocks that we often have. You can self-direct it and put it into real estate and other types of assets.”
Choose a type of real estate and a location.
After you figure out your goals, think about the type of property or asset class, you want to invest in. Single family or multifamily homes, retail or office buildings, industrial or commercial properties, mobile homes, land, student housing, and short-term rentals are all types of assets you could potentially invest in.
“You just do one project at a time or one purchase at a time. It could be a small townhouse or a condo,” says Barnes. “And then you get that financed. Then of course the objective would be to put a tenant in it, or if you’re going to live in it yourself, you can live in it for a few years and build your credit score higher and any finances you want to save. You want to save as much as you can during this period.”
Once you have an idea of the type of asset you want to invest in, think about the location. When Halm first got started in real estate investing, she used to think she could only invest where she lived. “One of the things that I learned, I live in a very expensive market and that was very limiting to me at the beginning,” says Halm. Then a mentor told her, you live where you want to live, you invest where the numbers make sense, which allowed her to “quantum leap” with real estate investing. “For the price of one house in L.A., I could get 20 houses in Jackson, Miss.,” says Halm. “Find the right property market where the numbers will make sense for what you’re trying to do.”
Barnes suggests looking at growing cities, too—unless you don’t have a property, in which case she recommends doing what you can to secure a property even if you have to pay a little bit more at first.
“Smaller cities where the property prices are lower, it might be a good investment to invest in those areas,” says Barnes. “If you’re considering somewhere like California, Las Vegas, New York…where they’re getting over market value in most instances, I don’t know that that would be a wise time to start investing. Unless, of course, you don’t have a property. Then I always advocate that you buy yourself a property. Even if you have to pay little bit over.”
Look into online real estate investment funds.
If you want to invest in real estate but don’t want to actually buy a property or want to contribute a smaller initial amount, look into online real estate crowdfunding platforms.
“There are online real estate investment trusts that you can get into, some for as little as $100, some a minimum of $500,” says Halm. “You can get into these funds and get 10 percent back on your money, or more. There’s one called the American Home Preservation fund, they invest in properties where people aren’t paying their mortgage. You can get in for $100, and get 10 percent back on your money.” Halm also recommends DiversyFund, which has a $500 minimum and deals with multifamily apartment buildings, and Fundrise which has a $1,000 minimum and offers different asset options from apartments to single family homes.
These platforms make getting started in real estate easy because they handle the vetting of the properties, and work with the property managers for you. You can also manage and track your investments online, which offers more flexibility.
The current low interest rates make it a great time to invest in real estate. “Interest rates are at record lows, they are so low,” says Halm. “When you’re borrowing money, you are borrowing it less than the cost of inflation right now and then you have these tenants that are paying it off.”
“You can look at properties as a retirement vehicle, or money in the bank, because it is continually appreciating,” says Barnes. “Home ownership is key to building your wealth; the market will go up and down over the years forever. That’s just the way the market is.” Bottom line: Despite changes in the market, investing in real estate is almost always a good idea, and could be your key to financial stability.
SOURCE : https://www.realsimple.com/work-life/money/money-planning/real-estate-investing