This post originally appeared on SmartAsset.
If you’re young and looking to purchase a new home to live in, maybe you should consider “why your first home should be an investment property?” instead. While most people wait until after they’ve bought their first or second home to begin investing in real estate, you could start much sooner than you think.
Get started with a free financial assessment.
Get started with a free financial assessment.
In doing so you can leverage your less than perfect credit, less than perfect lifestyle and limited responsibilities into an investment. All it takes is a little bit of smarts, and real estate shrewdness.
The idea of your first home as an investment goes against the general notions of personal finance. In fact it goes against how most people approach post-college life. The typical financial timeline for your average American adult might look like this:
- First Job
- First rental
- Second/third rental
- Starter Home
- Second Home
There’s nothing wrong with the above, it allows plenty of time to develop credit, save money, enjoy being young, and make plenty of questionable decisions.
But if you’re a 22 year old college graduate with a solid job (good for you), waiting until your well into your 30′s or 40′s to begin putting your income to work for you is a long time. Especially when you add up how much your investment property could increase in value while supplying you with rental income. Talk about lost opportunity.
Granted deciding to purchase a first home as an investment property is just as big of a decision as buying your first home. It may require some lifestyle changes, careful planning and may even demand that you embrace your inner Bob Vila.
Here’s are five reasons why you should entertain the idea of investing in real estate while your young, and how to go about doing it.
1. You’re Young
Aside from having little to no credit, being young and on your own can be pretty amazing. You make your own rules, live where you want, buy what you want and travel whenever you can. But that can get old pretty quick especially if you have other goals in mind.
All the money you’re currently spending “living the life” while living in a crappy apartment, could be spent on “building the life” while living in a crappy apartment. Saving money to pay your bills on time and build up your credit isn’t impossible. In fact it’s very possible and that’s really all you’ll need to qualify for a loan (more on that below). More importantly your lifestyle may allow for penny pinching that you might not otherwise be able to undertake later in life because of larger obligations. Leaving you with plenty of cash for a down payment, or to purchase a distressed home.
2. Real Estate Can Be Cheap
According to recent reports from National Association of Realtors home prices are on the rise. However, most real estate markets present many bargains to potential buyers in the form of distressed sales. Distressed sales are homes or properties that have usually been foreclosed on that the bank is willing to sell at a loss in order to clear its books. These distress sales also help to drive down the cost of all properties in the area because there is so much inventory.
There are thousands of distressed homes for sale right now. According to a February 2013 RealtyTrac report there are a total of 947,995 U.S. properties in some stage of foreclosure. Foreclosure related sales accounted for 21% of all U.S. residential sales during 2012.
Most economists agree that the market is poised for a rebound , it is simply a matter of when. Buying a distressed home right now could allow you to own an investment for significantly less than market value, especially as prices begin to rise. Nevertheless, the question of "how much house can you afford?" still remains.
3. Rental Income
Rent increases are outpacing purchase increases in most locales due to demand and tighter restrictions on loan applications. If you are purchasing an investment property, your monthly mortgage payments may be less than the market price for rent. In other words you can make money, and may have plenty left over to reinvest in your property.
4. FHA Loans
The timeline listed above has one major disadvantage, by the time you get to the age where real estate investing typically takes place, you will probably be required to put at least 20% down. With current requirements that 20% is probably closer to 30-35%. But if you’re young you may be able to purchase an investment property with much, much less than that. How? With an FHA loan.
If you’re in your 20′s or early 30′s chances are your credit isn’t the greatest, which is why FHA loans exist. If you decide that investing is for you, an FHA loan could be the perfect way to finance the purchase. There is one catch, FHA loans require that you live in the property you seek to purchase. However you can purchase a property with up to four rental units as long as plan to make one unit your primary residence. The rental income from the other three units is factored into whether or not you will be able to afford the loan.
5. Changing Demographics
According to a report produced by the Research Institute for Housing America, home ownership among immigrants nationwide is expected to account for 36% of housing growth over the next decade. This is due in large part, according to the report, to the strong desires among immigrants to become homeowners.
Evidence of this can already be seen in rapidly changing urban neighborhoods. Would you want to miss out on the opportunity to own property in a neighborhood that is set to see values skyrocket? Your future self probably wouldn’t.
More From SmartAsset.com
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the people interviewed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.