Real estate is about as #adulting as you can get — and we’ve all seen it play out poorly. Most of us watched our parents struggle during the sub-prime mortgage crisis (aka the 2006 collapse of the real estate market), and 63% of millennials regret purchasing their first home. In an era of the gig economy and digital nomadism, I’m so surprised more people aren’t jumping on the train of residential real estate. Over the last 10 years, real estate has been vilified as a scary investment. When done properly, it can be the key to your financial future.
3 years ago (I was 25), my partner and I were living in an overpriced apartment paying $1,350 per month in rent plus utilities. Our apartment was gorgeous, but it was getting in the way of our bigger goals. A slightly older (and much, much wiser) friend came over one evening to talk shop, and we spent a great deal of time discussing what he wished he would have done differently in his 20’s. One of his main regrets was not getting into real estate earlier, and we took that to heart. At that point in our lives, we had $0 in savings and no way to secure a mortgage, but our friend had planted a seed. Less than one year later we had purchased a duplex, were living in one of the units while renting the other, and cut our “rent” by 50% while owning a property that will only increase in value.
We are now preparing to purchase our second property with the cash generated by the first. If you’d told me where we’d land 3 years ago, I would have thought it was completely impossible.
And guess what: This can happen for you too. This time next year, you could be paying little to zero rent and putting that money toward your lifestyle, student loans, another property, etc.
Someone else pays your rent for you.
Remember when you lived with your parents and lived for free? It’s kind of like that, minus the complimentary dinner and awkward social interactions. Unless you’re renting out or AirBnb-ing your extra bedrooms, a single-family home won’t make you money. If you purchase a duplex, tri-plex, or four-plex, you will have tenants that are paying your mortgage for you.
Let’s say you purchase a small duplex and your mortgage is $1`,000/month. If your tenant pays $500/month, then your new mortgage payment is $500. Now let’s say that you get ambitious and purchase a tri-plex (3 total units) with a $1,500 mortgage, but you rent each unit for $1,000. In the second scenario, you would not only be covering your mortgage, but making an extra $500 a month.
It’s a built-in business.
If you’re entrepreneurial but out of ideas, real estate is for you. What many new landlords forget is that your home is now also your income-producing business, and you can get creative with improving its profitability. What if you added coin laundry to the basement? Rented the garage out back? Charged for a dog policy? The world is your oyster. Additionally, real estate can really help you out with taxes. Not only can you write off your mortgage interest, but you can also write off expenses you incur on behalf of your tenants. Let’s say you want to hire someone to cut the grass or need to buy supplies to paint the house or want to put in a gorgeous patio for your morning meditation. All these expenses can be written off, including paying your accountant to do your tax return. (I’d recommend working with an accountant that is well-versed in real-estate.)
Your friend are built-in tenants.
In your 20’s, most of your friends aren’t settling down yet and are looking for spaces to live together. My current tenants are two of my best friends, and it’s been incredible. If you’re worried about finding and screening tenants (or are picky about who you live next to), this can make your transition into real estate much less stressful. Chat with your friends, see who’s interested, and draw up a lease agreement that protects everyone in case there’s an issue.
HUGE CAVEAT: You absolutely must make sure you select the right friends or this can go sour really fast. Only consider friends with similar lifestyles that you’d trust with your property.