Education, Investment Advice

Why You Should Start Investing in
Real Estate in Your 20s and 30s

smartland-why-you-should-start-investing-in-real-estate.mp3 Those who start investing in real estate early can continue doing this in perpetuity to grow the value of their real estate holdings hose Listen to this article

Introduction

For the average American, their 20s and even their early 30s are joyful times filled with adventure. It is when people begin to graduate from college, start their first jobs, get married and begin their families. Often, it is the first time people begin to think about saving for retirement.

Typically, the default for those saving for retirement is to do so by investing in an employer-sponsored 401k, Roth IRA or the equivalent. Fewer people consider investing in real estate during this phase of their lives. Most assume that real estate is unattainable for people so early in their careers.

In reality, your 20s and 30s are an ideal time to begin investing in real estate. Passively investing in real estate is especially attractive to those who are just learning about the real estate industry or who don’t have the time, interest or resources to invest in property directly.

In this article, we look at why investing in real estate during your 20s and 30s is so beneficial for those looking to attain financial freedom sooner rather than later.

Top Three Reasons to Invest in Real Estate

Before we begin, let’s start with a quick primer as to why people (of any age!) should consider investing in real estate.

Investing in real estate helps individuals
diversify their investment portfolios

  1. Passive Cash Flow: One of the primary benefits of investing in real estate is that most investments will generate some degree of cash flow. When someone invests alongside a sponsor in a syndicate or fund, this cash flow is earned passively.

    In other words, the sponsor oversees the day-to-day operations of the property and the investors, who otherwise have no management role, earn cash flow distributions according to the sponsor’s business plan.
  2. Portfolio Diversification: Investing in real estate also helps individuals diversify their investment portfolios. Most people, especially those in their 20s and 30s, tend only to invest through their employer-sponsored 401ks—and these plans tend to be concentrated in traditional stocks and bonds.

    Investing in commercial real estate is a way of adding a relatively “safe,” alternative investment to your portfolio. This is especially beneficial for those looking to mitigate risk, as real estate tends to have a low correlation with the stock market. In the event of a stock market correction, real estate can continue to perform well, thereby lifting a person’s overall portfolio.
  3. Tax Advantages: Real estate is also a highly tax-advantaged industry. In the first years of ownership, investors can claim depreciation (and currently, “bonus” depreciation as well), which is effectively a paper loss represented on a tax statement that helps to offset income earned through the investment. This helps to maximize the value of the cash flow being earned, even while the property technically appreciates in value.

    Moreover, upon sale of the property, an investor can roll the sales proceeds into another “like kind” asset – such as a property of higher and greater value – in order to defer paying capital gains taxes.

    Individuals who start investing in real estate in their 20s and 30s can continue doing this in perpetuity to grow the value of their real estate holdings while taking advantage of substantial tax deferrals in the process.

Why Begin Investing in Real Estate in Your 20s and 30s

Time is on your side

Those who invest early in their careers have time on their sides. Time affords many things (e.g., compounding growth, amortization), some of which we’ll discuss in more detail below. Real estate investing is not a “get rich quick” scheme. In fact, to be successful in real estate, it often takes years. People build equity over time, and with time, can grow their portfolios. Moreover, with time, people learn how to weather economic ups and downs. One of the best reasons to invest when you’re young is simply because time can afford great opportunities to those who do.

Compounding growth

Albert Einstein once said that “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

To that end, compounding growth is especially beneficial for those who begin investing in real estate in their 20s and 30s. A compounding growth calculator can be used to show how significant compounding growth can be in practice. Someone who invests $15,000 at an 8% interest rate will have $22,039 after five years. Now, let’s say that same person invests $15,000 at the same 8% interest rate but holds the investment for 15 years. Due to compounding growth, that investment will be worth $47,582 at the end of the hold period – a staggering threefold increase on their initial investment. After 25 years, that initial investment would be worth more than $102,000.

In short, compounding growth is a way to speed up someone’s journey to financial freedom. The sooner someone invests, the sooner they start reaping the rewards that come with compounding growth.

Amortization benefits the young

Let’s assume that a mortgage on a commercial property amortizes over 30 years. A person who invests in that property when they’re 20 will own the property, free and clear, by the time they are 50 years old.

They have more time to enjoy that property being paid off (i.e., the time in which they can maximize cash flow) versus someone who invests in a property when they’re 40 and does not have that property paid off until they are 70 years old.

Real estate appreciation

While there is no guarantee that real estate values will continue to climb (and if they do, by how much), real estate does tend to appreciate over time. Real estate values may go up or down in the short term, as evidenced during the 2008-2010 Great Recession. However, if someone had purchased a property in the leadup to that recession, weathered the storm, and continued to hold that property today, they would likely own a property worth more now than when they first purchased it. By 2013, the average sales price of homes sold in the U.S. had rebounded to pre-crisis levels.

Again, this shows why it is worth investing in your 20s or 30s: most who plan to own property for 10+ years will benefit from real estate that appreciates in value.

The “Snowball” Effect

Warren Buffett made this concept famous as detailed in the book by the same name. Buffett believes in having a long runway in which to build your investment portfolio. He argues that a snowball, as it travels down a steep hill, will continue to grow and grow the same way a person’s real estate holdings have the potential to do when investing early on.

Those who invest in their 20s and 30s will
begin earning cash flow sooner than their peers.

For example, those who invest in their 20s and 30s will begin earning cash flow sooner than their peers.

Over time, as they pay down the debt on those properties, they can either a) maximize cash flow on debt-free properties; or b) refinance those properties with new, long-term debt.

The cash leveraged through a refinance can be re-invested to other more valuable real estate assets. This is what Buffett means when he talks about the “snowball” effect.

Ability to take on more risk

Most people become more risk-averse as they age. This is because they don’t have time on their sides. As people approach their retirement years, a risk investment has the potential to derail an otherwise promising retirement portfolio.

Yet, at the same time, the “riskier” deals tend to offer the most promising returns. Those who invest in their 20s and 30s will generally feel more comfortable taking on riskier real estate deals and in turn, can benefit from the upside these deals deliver.

Fewer personal commitments

There are sometimes more obstacles to investing in real estate when you’re older. As people age, they have less time, more job commitments, more family commitments, and more financial commitments. They’re more likely to have car loans, mortgage payments, children in daycare, etc. This makes it harder to both a) learn how to invest in real estate and b) find the resources to invest in real estate once other financial commitments are accounted for. Those who invest in their 20s and 30s will have fewer personal obligations, which will make it easier for them to find the time and resources to devote to real estate investments.

Learn lessons early on

Those who invest in real estate for long enough will eventually experience hiccups. They may invest at the wrong time in the market cycle, in the wrong geography, or with a sponsor who fails to meet investors’ expectations. That said, those who invest early in their careers will have more time to learn from these mistakes than those who start later.

To be sure, there’s a learning curve associated with real estate investing. People who invest in their 20s and 30s have more time to learn the ins and outs of what makes a successful real estate deal.

They’ll also learn more about their own personal investment strategy, such as whether they prefer to invest in stabilized vs. value-add vs. opportunistic real estate.

Whatever the case may be, those who start investing when they’re young will learn valuable lessons that can be applied to real estate investments later in life to maximize the value of those investments.

How to Start Investing in Real Estate in Your 20s and 30s

One drawback to investing in commercial real estate is that there can be high barriers to entry. Those who wish to purchase property independently will often struggle to come up with the capital needed to acquire the asset. The down payment and closing costs can tally tens or hundreds of thousands of dollars. This deters many investors, especially those in their 20s and 30s who have less capital at the ready.

People who invest in their 20s and 30s have
more time to learn the ins and outs of
what makes a successful real estate deal.

There are other ways for young professionals to invest in real estate, though. Some of the most common ways to get started include:

  • “Househacking” – this is the process of buying a multifamily apartment building and then owner-occupying one of the units. Those who pursue this approach will find that they qualify for advantageous loan options (e.g., FHA loan programs that only require 3.5% down) that are only available to owner-occupants. Househacking also allows the owner-occupant to self-manage the property, which gives them hands-on operational experience that they would not learn otherwise.
  • Investing in a REIT – another way to invest in real estate with little capital is to invest in a real estate investment trust. Shares of publicly-traded REITs can be purchased and sold as easily as other stocks and often trade for less than $100 apiece. This is a great solution for those looking to learn more about real estate investing, the ebbs and flows of the market, and various property types. However, when someone invests in a REIT, they are purchasing shares of the entity that owns the real estate. They are not investing in real estate directly. This is an important distinction to make as there are certain benefits (e.g., depreciation) that only come with actual property ownership.
  • Real estate crowdfunding – recent changes to federal regulations now allow real estate sponsors to engage in “general solicitation,” something that had been prohibited in decades past. What this means, in practice, is that sponsors can now raise capital (debt and equity) from individuals around the world using crowdfunding platforms like Fundrise and RealtyMogul. Some of these deals are only available to accredited investors. Others are open to the general public. The latter is a great option for those looking to invest nominal dollars in commercial real estate for the first time. This is a way of passively investing in otherwise large commercial projects that are generally spearheaded by experienced sponsors on investors’ behalf.
  • Investing in a syndicate – most people in their 20s and early 30s are not yet familiar with real estate syndicates. Syndicates are an investment vehicle created for the purpose of raising capital for a specific real estate deal. A sponsor will pool capital from many investors and then deploy that capital into a commercial real estate project according to a pre-defined business plan.

    Many of the deals featured on crowdfunding platforms use this model. Other syndicates raise money via word-of-mouth or other advertising techniques in which individuals invest directly with the sponsor instead of through a third party. In any event, syndicates are a great way for individuals to own fractional shares of high-quality real estate deals that they would not be able to access otherwise. Syndicates allow investors to earn passive income in the form of both cash flow distributions as well as a lump-sum upon property sale or refinance.

Conclusion

Investing in commercial real estate may seem daunting, regardless of a person’s age or status of their career. Some challenges, like lack of capital, can be exacerbated when someone is in their 20s and 30s. However, young investors should not be deterred. In fact, those with limited capital are often better off investing now, while they’re young, compared to those with more capital who start later in life. They have time on their sides and can benefit from compounding interest and other factors as listed here today.

Are you a young professional interested in investing in real estate? Contact us today to learn more about the ways in which Smartland’s platform can accommodate first-time investors of all ages and experience levels.


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