Investing in real estate is back. In fact, a lot of real estate investors have made quite a bit of money scooping up properties at pennies on the dollar at real estate auctions and foreclosure sales. Many of those bargains are long gone but investing in real estate has not.
In fact, investing in real estate is back in a big way and there are some very good reasons why. But for those who are 18-34 years of age, so-called “millennials,” should they be thinking of real estate as an investment or should they stick with their 401(k) plan?
Many investors who save for retirement don’t look to real estate because their employer doesn’t offer it with their 401(k) or their financial planner doesn’t mention it but savvy investors know that real estate should always be considered as a part of their portfolio. Should millennials be looking harder at real estate?
Investing in real estate takes a bit more planning when buying a first rental unit. Why? Because lenders won’t use any rental income from the subject property to help qualify. Instead, the borrower must qualify for both their primary residence as well as the new mortgage for the rental unit without the benefit of rental income.
Further, a lender wants to see someone be a landlord and manage the rental property for at least two years. Once these thresholds have been met, qualifying for a second rental property is so much easier. Why? Because the rental income can be used and will offset all or part of the new debt. It’s just so much easier.
Millennials can also partner with someone else to buy and finance a rental property. In fact, it’s a common practice to form a partnership or an LLC and buy and manage rental units. When partnering, down payments and closing costs are shared between partners as well as ownership. When it’s time to distribute income, all partners get their share. Partners also share the risk as well which is easier to take compared to investing solo.
Another way younger buyers are purchasing rental properties today is financing 2-4 unit properties including a duplex, triplex and fourplex. They do so by buying the property and occupying one of the units. In this manner, they can obtain financing at a cheaper cost compared to a mortgage for a rental.
Interest rates are lower as well as reduced down payments are needed for a primary residence. Further, the rental income from the other units can be used to offset all or part of the mortgage payment, property taxes, insurance and maintenance. In short, the borrower is living “mortgage-free” increasing cash flow each month which can then be used to add to a retirement account or to save and buy yet another rental property in the future.
One more final thought- real estate values are on the rise once again in most markets. That means when you buy a rental property today it will be worth more one year from now and could increase year after year, adding to the owner’s net worth. When you consider the advantages of owning real estate compared to other financial vehicles, millennials should think about adding real estate to their list of holdings.
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