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How to Successfully Invest in Real Estate in Your 20s

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How to Successfully Invest in Real Estate in Your 20s

When you are in your 20s, it's pretty natural that you may think or act like a rookie, but if you educate yourself properly in the field of real estate investment, you surely will come out victorious.

Let's check out how you can prepare yourself with these nine steps to successfully invest in real estate if you're in your 20s –

  1. Understand Your Personal Financial Health
  2. Build Your Funds for Down-payment
  3. Figure out how to finance the rest
  4. Pick Your Market
  5. Choose your purchase strategy
  6. Hone Your Property Analysis Skills
  7. Set specific goals
  8. Network and Connect
  9. Take that first step

1. Understand Your Personal Financial Health

This is much more important than choosing good properties. Why? Because a financial health check is a brief examination of one's financial situation to determine one's capacity to meet current financial obligations and preparedness for unexpected adverse economic events.

Identifying cash flow issues is one of the first steps you should take to ensure your ability to meet your financial obligations. This means making sure you have enough income to cover all of your expenses when they are due.

Understand Your Personal Financial Health

A good way of doing this is to prepare a budget. As part of the budget, list expected income and expenses over the next few months to a year. Make sure to include irregular costs such as annual insurance fees and consider unexpected expenses such as a sudden drop in income.

Your budget will tell you whether you have a surplus (your income is higher than your expenses) or a deficit. If you identify a potential financial emergency in your budget, it's essential to develop possible solutions quickly.

One way to mitigate an upcoming cash shortage is to reduce or deferral expenses like bills or mortgage payments. You also should protect your current income and build an emergency fund to protect your imminent investment. A sufficient insurance cover will resolve your sudden financial stresses.

You could also consider opening up new sources of income such as interest from savings or returns from other financial investments such as shares or property. So before making any significant investment like real estate, you must understand your financial health for purchasing or retaining your property.


2. Build Your Funds for Down-payment

downpayment

Coming up with a sizable down payment is one of the critical barriers to affording any real estate.  

On the one hand, you want to invest in increasing your funds because, with a more significant down payment, you can lower your monthly payments or buy a more excellent house.

The main variables in your down payment investment decision are time, return, risk, existing cash, and cash flow. Here are some assumptions to think about:

  1. The closer you are to buying a house, the less risk you should take.
  2. The lower your risk tolerance, the lower risk you should take.
  3. The better your investing insight, the more risk you can take.
  4. The higher your existing cash balance (down payment or full payment), the more risk you can take.
  5. The higher your cash flow, the more risk you can take.
  6. The higher the mortgage interest rate, the bigger the down payment you should make.
  7. The higher you expect mortgage rates to go, the pickier you should be.
  8. The more bullish you are about your financial future, the more leverage you may take.
  9. Investments should be made in assets that can become liquid by the time you want to purchase.

Everybody is at a different financial stage in their lives. Therefore, the one absolute variable we should focus on is the timing of your house purchase. Regarding the minimum down payment amount, everybody should have a minimum of 20% down payment plus a 5% – 10% cash buffer after the down payment.

So if you do not have between 25% – 30% of the house's value in cash, you cannot comfortably afford the home.


3. Figure out how to finance the rest

how to finance the rest

When an asset class is deemed less risky, the returns are usually lower as well. However, because real estate is less risky compared to stocks, investors can ironically make a more significant amount of money in real estate for two reasons

The first reason is the higher confidence a real estate investor has in investing more money in real estate due to lower risk. The second reason is that real estate investors can borrow more money to buy a more expensive investment due to a lower risk.

Given real estate is less risky compared to stocks, it is ironic that the average person can make more money from it. But, we have the government's support to partially thank for this anomaly! And our ability to courageously take more calculated risks for potential financial glory ;)


4. Pick Your Market

There are two main steps when it comes to how to choose a real estate market

  1. You need to decide on a city.
  2. You'll have to find a good neighbourhood within that city to buy a rental property.

Where should you start your real estate market research? As it turns out, many of the best places to invest in real estate have similar characteristics. You're much more likely to find a suitable housing market if you know what real estate market trends and statistics to look for during your research. You'll essentially be reducing a significant risk of real estate investing - ending up with an investment property in a terrible location that you can't rent out or sell.

real estate market

Let's break down the main things you should look for in a target city and a neighbourhood. In addition to this list, there are some shortcuts you can take when trying to find the best places to buy investment property in the housing market. These shortcuts are reliable and will help you choose a good location for a real estate investment with confidence.

Finding the best cities for real estate investment: What to look for –

To not be repetitive, it's important to note that a lot of this information can be found online for both cities and neighbourhoods. And with this list, it will be easier to find the market information you need since you'll know exactly what to look for.

The very first thing you'll want to figure out is your budget. You should have an idea of:

Cities have median property prices ranging from very cheap to super expensive. And although you can almost always find affordable neighbourhoods in any city and cheap investment property for sale, it's easier to start your property search in a city with a median property price that fits your budget.


5. Choose your purchase strategy

1. Buy your own  

The most obvious way to become a real estate investor is to buy an investment property (or several). When I use the term "investment property," I'm referring to a residential or commercial property that you plan to rent out to tenants -- not a fix-and-flip, which we'll cover later.

Owning rental properties is an excellent way to invest in real estate while building wealth and generating income. The return potential is strong thanks to a combination of income, equity appreciation, and the easy use of leverage when buying real estate. However, owning rental properties isn't suitable for everyone, so consider these drawbacks before you start looking:

  • Cost barriers

It can be costly to buy your first rental property. Most lenders want at least 25% down for an investment property loan, and it's wise to keep several months' worth of expenses in reserves.

  • Uncertainty

When it comes to rental properties, vacancies happen, and things break. While the overall return potential can be great, rental properties have considerable short-term risk.

  • Time commitment

Even if you hire a property management company, owning a rental can be a time-consuming form of real estate investing.

  • Decide whether you want to hire a property manager.

One of the most important decisions you'll need to make with your first investment property is whether you want to become a landlord or not. You can either self-manage your property or pay a property management company to do it for you. The major downside to hiring a property manager is the cost. Property managers typically charge between 8% and 10% of the collected rent. If your property's cash flow isn't massive, this can seriously cut into your profit margin.

However, it's essential to consider what you get in exchange for your property management fee. Your property manager will:

  • Use their experience to price your property appropriately, so it collects the maximum amount of rent possible. This alone can justify the cost in many cases.
  • Market your property to prospective tenants.
  • Conduct background and credit checks on prospective tenants.
  • Collect rent on your behalf.
  • Deal with maintenance issues and tenant complaints.
  • Pay bills on your behalf, such as any landlord-paid utilities.

In our opinion, a good property manager is easily worth 10% of the rent. If you have lots of time on your hands and want to save money by self-managing, by all means, give it a try.

You can employ a property manager to handle the day-to-day operations of your rental properties, and it is strongly suggested that you do the same for your first rental property.

  • Learn from mistakes

It's crucial that you learn from your mistakes. The point is that nobody is a great rental property investor on their first try.

Likewise, in your 20s, you are not an experienced investor, so that you might make mistakes, but you should not repeat those. Educating yourself as much as possible will put you in the best position to succeed, but there's simply no substitute for real-world experience.

 

2. Buy through Platforms

  • Participate in real estate crowdfunding platforms

Crowdfunding is a relatively new way to invest in real estate, and it's proliferating. Real estate crowdfunding is when you gather a group of investors to raise capital for a real estate project. Here's the basic idea.

An experienced real estate developer identifies an investment opportunity. Typically, these involve one commercial real estate asset and a value-adding modification. This could be as simple as restructuring the property's debt or as complex as a complete renovation. There's usually a target end date when the developer plans to sell or refinance the property. Instead of funding the entire project with their own money and bank financing, the developer raises some of the necessary capital from investors like you in exchange for an equity interest in the project.

You can find crowdfunded real estate investment opportunities on CrowdStreet, Realty Mogul, and other platforms. These platforms are intermediaries between investors and real estate developers (known as the deal "sponsors"). The platform makes sure the investments it lists are legitimate and meet a quality standard. They also collect money from investors on behalf of the sponsors.

real estate crowdfunding

There are some major advantages to crowdfunded real estate investing. First and foremost, the return potential can be huge. It's not uncommon for a crowdfunded real estate project to target an internal rate of return (IRR) of 15% or more -- and early results indicate that these results are achievable. These projects often produce income as well as a lump-sum return when the property is sold. They can also diversify your investment strategy and let you piggyback on the developer's experience (as opposed to attempting such a project on your own).

On the other hand, there are some major drawbacks to consider. With increased reward potential comes increased risk. Unlike buy-and-hold real estate strategies, the value-add nature of crowdfunding adds an element of execution risk. Liquidity is another major concern. Unlike most other types of real estate investing, it's difficult or impossible to get out of a crowdfunded real estate investment before it's complete (meaning the property has sold). If you invest in a crowdfunded real estate deal with a target hold of five years, you should anticipate that your money will be tied up for at least that length of time.

In a nutshell, crowdfunded real estate can be a great fit for many investors, but there's a lot to know before you get started.

JA's tips: There's no perfect real estate investment -- by diversifying your capital amongst a few of these, you can get the best aspects of each one. REITs give lots of liquidity if needed, and rental properties give excellent long-term return potential while providing a nice income stream. The best course of action is to figure out what's most important to you and decide the best way to invest accordingly.

  • Invest in a REIT or other real estate stock

Real estate investment trusts, or REITs, can be an excellent way to invest in real estate. REITs are specialized companies that own, operate, manage, or otherwise derive their income from real estate assets. Many REITs trade on stock exchanges, so you can buy them with the click of a mouse and very little capital.

It is also suggested to put real estate mutual funds and real estate ETFs in this category. If you don't want to choose just one REIT, you can invest in a ready-made portfolio of them. It's also important to mention that some real estate stocks aren't classified as REITs. Land developers and homebuilders are two other ways to invest in real estate through the stock market.


6. Hone Your Property Analysis Skills

property analysis

  • Strong Communication Skills

On our list of the "must-have" property management skills, communication skills take first place. Without strong communication skills, your job as a property manager will be cumbersome. In fact, this skill can make or break your property management career. A residential property manager has to communicate effectively with people on all levels, including property owners/ landlords, current and prospective tenants, various contractors, the whole property management team, and other professionals. This role is all about coordination, and that requires you to listen and deliver messages and ensure everyone is on the same page.

  • Organization Skills

The work of a property manager often includes several simultaneous tasks and this requires good organization skills. These are some of the most essential property management skills. Being able to set up procedures that help you streamline the workload and keep several balls in the air at the same time is a must.

Let us think of a real-life situation: how would you manage your schedule while simultaneously screening prospective tenants and interviewing them, inspecting vacant apartment units, making sure everyone has paid their rents and that the security guard you contracted is doing the job as agreed? Without the ability to organize, the workload can feel stressful and your work will look rather sporadic to others. Well-organized property managers define their duties and create organized checklists and deadlines to make sure they will not miss a thing.

  • Knowledge of Relevant Landlord-Tenant Laws

Guess who both tenants and property owners often go to with their real estate related inquiries? You guessed right, the property managers. These property management skills are very important because you as a property manager should know real estate and tenant legislation in-depth. Imagine the owner's or your tenants' impressions if you cannot answer their basic questions. You should also realize that these laws can change, so it is property managers' responsibility to remain up-to-date on all legal and regulatory aspects of property management. Also, remember that sometimes it is okay to admit that you do not know the answer. A good property manager will look for the information and come back with an answer. This leads us to the next important skill: customer service.

  • Customer Service Orientation

Customer service orientation is also one of the key property management skills. Property managers, in essence, serve their customers (i.e. tenants and property owners). Customer service is about being present and handling your customers' inquiries.

A good property manager makes her or himself available to tenants, for example, through a web portal where tenants get to ask questions and find relevant resources. When your tenants or the property owner ask questions about the rental property, they should be answered as soon as possible. In terms of complaints, property managers will also need to take urgent action and fix tenants' problems. A pool of reliable contractors will be useful for unexpected repair and maintenance work. Good property managers do not hide behind the organizational processes of property management, but they prioritize people over other responsibilities and reap the benefits with better tenant retention.

  • Marketing Skills

While some property manager skills are more self-evident than others, marketing skills are often ignored when property management skills are concerned. Why does a property manager need marketing skills? Property managers need to advertise vacant apartment units and need to be able to write about them compellingly. They also need to know where to list them to reach the desired groups of prospective tenants. This is marketing!

Luckily there are good resources online for learning real estate marketing. Indeed, there is plenty of support available if you feel your core competencies lie within other property management functions. Marketing is a skill, and it can be learned too.

  • Technical Property Know-How

Property managers may have very different backgrounds than one another, but the key denominator for all usually is some basic level of technical understanding of how buildings work. This is a prerequisite for well-documented inspections at the rental properties that keep them safe and secure. Property managers' technical understanding and know-how help to map typical and expected problems at rental properties. This way they can be mitigated proactively and urgent maintenance issues can be prioritized based on their urgency. Therefore, technical know-how is one of the essential property management skills owners and tenants expect managers to possess.

  • Portraying Characteristics of a Property Manager

How is portraying certain characteristics related to property management skills? Being a property manager requires you to show a certain kind of personality and character traits in different situations. Property managers need a lot of patience and flexibility on one hand and assertiveness on the other. Their patience, especially, can be often tested when working with various stakeholders with different expectations. How would you react if your contractors run late, your tenants stop paying their rents, or the property owner expects urgent reporting? These are the moments where you need to show patience and flexibility.

On the other hand, the role of a property manager does from time to time require you to be tough. Rental property managers must track late rent payments and handle evictions of problematic tenants. Safe to say, this is a balancing act and requires a great level of professionalism and tact. Cultivation of social intelligence can also help property managers adjust their behavior according to any given situation and people they are dealing with.

  • Think Like Investors

A key consideration for property managers should be that they are in fact managing the properties of investors. This means they need to manage the property as if they were the real estate investor. To this end, they must understand the goals for owning a rental property: to make money out of it.

Cultivate an investor mindset by making sure you know the basic investors' tools for analyzing the property. Do you already know what net present value (NPV) is or how to calculate cap rates and cash on cash returns? Will you be able to find more properties for your clients and expand your business? Essentially, having an investor-friendly mindset means that you can make important business decisions for them. An experienced real estate investor might ask these from you already when evaluating whether to entrust the property to your property management company. Knowing these fundamentals can determine whether you get the property management assignment in the first place.

  • Tech-Savviness

This skill might not be so self-evident, but anyone who is working in real estate and property management knows that the industry is quickly becoming digital. That means the engineering know-hows, management skills, marketing, sales, rent and all these stuffs are very rapidly shifting into the virtual platform. This of course also impacts the property management skills managers are expected to master. New technological tools are introduced frequently that can assist you, your tenants, and the rental property in various ways. Good property management uses these tools to create additional value for their customers' experience. But it is not only about the added value, as several fundamental responsibilities of property managers require the use of digital channels and tools. What is certain is that today's tenants are used to different kinds of digital conveniences. So stay up-to-date on the digital property management tools you could utilize for better customer experience and competitive advantage.

  • Professional Development

The only thing certain is change. This also applies to the real estate industry and your property management career. A good property manager is committed to ongoing education, which supports and further develops the skills listed above. So, check some of the latest professional development books and other resources out there that ensure you are up-to-date with industry developments and your job description.

 

So, how to be a successful property manager? To summarize, a good property manager has a wide set of different skills.  It can even seem impossible to find all of them in one person. However, a person dedicated to becoming a successful property manager cultivates and develops these 10 core skills, and it often shows.


7. Set specific goals

In your 20s, most people are disorganized because they don't have any specific goals. At the very beginning, most people invest aimlessly. But you may become a successful investor even in your 20s if you properly utilize your investing ability. For that, you need to set your goal. Setting 'SMART' goals have proven to be a useful technique for creating financial commitments. 'SMART' is an acronym for Specific, Measurable, Attainable, Relevant and Time-bound goals.

SMART goals

This SMART methodology is commonly used by businesses to identify actionable goals and set achievement deadlines. Rather than working aimlessly, creating SMART investment goals can help you achieve your target while simultaneously carving out the optimal path to achieve it. SMART goals enable investors to leverage their resources and time productively, creating more focused efforts overall

A key component of SMART goals is creating a time frame for each objective. It is a good idea for investors to create short-term goals that lead up to their main goals for the year. For example, as you think about your long-term financial resolutions, look for incremental habits you can implement throughout the year to ensure you get there. One way to do this is by breaking down each goal into different terms: three months, six months, and year-end goals.

Factors to be considered before setting your Real Estate goals

It is important to understand that goal setting will look different for every investor. While there are financial tips that can be applied to everyone, the specifics will be entirely up to you. At the end of the day, your ability to set goals will come down to your individual preferences and market area. Here are six factors to consider when planning your real estate goals:

  •       Conduct a thorough market analysis to determine the right investments for you.
  •       Assess which investing niche aligns with your goals and market.
  •       Determine your ideal time commitment when it comes to investing.
  •       Ask what type of returns you are looking for.
  •       Strategize which marketing strategies will help you achieve your investing goals.
  •       Review your financial situation and whether or not you will need access to alternate funding.

 

How do you achieve your Real Estate goals?

  • Your Market

The first component to developing real estate goals is a strong comprehension of your market, which will require doing your homework. It's important that you conduct a market analysis in order to identify an opportunity, as well as trends and changes that are occurring. Investors should also look at factors like median home price, appreciation rates and gains in total home equity, home affordability, the health of the local economy, and new housing construction. Doing so will provide a snapshot of where the market stands and how you can add value as an investor. This information will not only assist in forming your goals but also detail where you should invest and how.

  • Your Niche

The next factor to consider when setting real estate goals is your investing niche. Because there are endless investment avenues within real estate, it's critical to identify a starting point. Finding your real estate niche will not only help refine your approach moving forward, but it will assist in distinguishing yourself from the competition. The right real estate niche will guide your investment strategy and therefore, all of your wealth-building goals.

Tips for discovering your real estate niche include defining your purpose, identifying what you're good at (and what you enjoy most), understanding how you can add value, and uncovering the needs of your market area.

  • Your Availability

Another important factor to think about when setting real estate goals is time. How much of your time do you want to dedicate to investing in real estate? Better yet, how much time do you actually have available to focus on real estate? Identifying availability will help investors align their efforts with the right investment goals. For example, rehabbing houses can take investors a significant amount of time to complete from start to finish. While this strategy may be right for some, investors who are hard-pressed for time may find better luck with alternate investment goals such as wholesaling or REIT investing.

  • Your Profitability

Profitability is the name of the game for a real estate investor. However, every investment avenue will differ, including the average potential profits, it will produce. It's critical for investors to examine the exact dollar amount they're seeking to obtain with their investment business. Similar to determining the amount of time you'll dedicate to real estate, it's essential to calculate the profitability you want to make from various real estate investment deals.

The best advantage real estate has to offer over other investment opportunities is the freedom of choice. From rental properties to house flipping, the type of income you wish to earn will be dependent on your investment vehicle. If you're looking to earn residual income, your approach to investing will differ from those seeking to obtain one large lump sum. Investors' preferred level of profitability can help shape your investment goals throughout the year.

  • Your Marketing

Investors will also want to consider their marketing efforts when developing their real estate goals. This is important for a variety of reasons; most notably, marketing encompasses a combination of time, money and strategy. In order to transform a business from an idea into reality, investors will have to rely on different marketing strategies. The reason it is important to review your existing marketing when setting investment goals is that the success of your marketing has a direct impact on the success of a business. By evaluating old marketing strategies and surveying the industry for new ideas, investors can determine which of their efforts should carry into 2021. Regardless of the strategy, you choose to pursue, it is important to continually monitor the success of all marketing efforts and be prepared to make adjustments.

  • Your Finances

Lastly, you'll want to examine your financial situation before setting real estate goals. This will ultimately dictate your approach moving forward, including whether or not the assistance of additional financial backing will be needed. If what you're seeking from real estate is unattainable with your current financial situation, the need to locate a partner or develop a joint venture may be necessary. The collaboration of resources and talents can be beneficial for investors, especially those lacking the monetary means to get started on their own. Use your current finances as a guide when determining your investment goals for the year ahead. Doing so will ensure you are ready for any opportunity that comes your way.


8. Network and Connect

Whether you are just beginning your real estate portfolio in your 20s, professional networking should be a fundamental component of your business plan. Similar to other industries, the more people you interact with, the more business you stand to acquire. The following are four reasons why real estate networking should be an essential component of any robust business development strategy:

  • Education

Meetings are a valuable tool for a strategic networker. Many networking events are not only centred on interactions with other investors but also have expert guest speakers in related fields. Always keep your ears and mind open when it comes to new information.

  • Contacts

In real estate investing, people are either buying or selling something. The more exposure you have to these people, the greater the odds you'll be able to infuse yourself in the process. You will get improved access to deals by engaging in real estate investors' networks and build better relationships with other investors, real estate attorneys, realtors, contractors, property managers and court officials among others. These people will help you find and close your deals.

  • Service Providers 

Whether it is a contractor, lender, or title company, you're going to need a team of reliable and effective service providers at every stage of your real estate investing journey. These people attend many of the networking events held each month. This is your opportunity to connect with them or get excellent referrals.  

  • Mentors

Some of the most successful people in real estate attend industry events to increase their circles and are often very generous with advice. Introduce yourself, ask for their card or reach out on LinkedIn. A seasoned mentor in the industry is the best source for information. Surrounding yourself with the top people within the real estate investing world will allow you to increase your knowledge and build a network of helpful professionals.


9. Take that first step!

This overview should help put you on the path to filling in any gaps in your home buying knowledge. Remember that the more you educate yourself about the process beforehand, the less stressful it will be, and the more likely you will be to get the house you want for a price you can afford. When it's done, you'll have the confidence that comes from successfully negotiating a major step in your life.


Are you ready to take your first step in investing? There's no right time like now!
If you're interested, drop a message below, and our team of agents will gladly help you out!

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