How To Successfully Invest In Real Estate In Your 20s

If you listen to one piece of advice in your 20s - let it be this. Diversify your investments. Putting all your eggs in one basket is a big mistake whether you’re investing everything in stocks, bonds, or real estate.

Instead, your portfolio should be a series of diversified investments, including stocks, bonds, ETFs, and real estate.

Why Real Estate?

It gives your portfolio another asset that isn’t tied to the market. If the stock market crashes and you lose most of your investment, but you have some of your money invested in real estate, it will still be safe. The real estate investments can offset the market loss or vice versa. It’s a way to ensure you don’t lose everything should the economy, market, or industry fail. 

4 Ways You Can Invest In Real Estate In Your 20s

Even if you feel like you’re young and inexperienced, there are plenty of ways to invest in real estate in your 20s.

House Hack
This is a little-known trick that anyone can use. Since mortgage companies make securing investment financing a little more complicated, you may not qualify when you’re just starting, but there’s a workaround.

When you ‘house hack,’ you buy a primary residence but as a multi-unit property (1 - 4 units). You live in one of the units and rent the others out to tenants. You earn cash flow from the monthly rent and use it to cover your mortgage payment, taxes, and insurance. 

If you charge enough rent (according to the average rent in the area), you may also make a small profit. Even if your rent doesn’t exceed the cost of running the property, you live mortgage-free, which means you can save that money to further your real estate investments or invest in other assets.

Buy a Fix and Flip
If you’re handy and love watching fixer-upper shows, you can make it your reality by investing in an undervalued property. This process takes more work, time, and patience, though.

First, you must find a property that’s undervalued (selling for less than the market value). Real estate agents, real estate wholesalers, and even just word-of-mouth may help you find the right property.

Before you buy the property, get a professional opinion on what needs renovating or repairing to make the home livable and worth more. Once you fix it up, you’ll turn around and sell it. Most fix and flip investors sell the property within six months, turning a quick profit and repeating the process. This works great if you have money saved up, allowing you to buy a property for cash.

Invest in Turnkey Properties
Turnkey properties are properties you buy that have tenants in them, aka an active lease. Investors who need to sell fast or who want to get out of real estate investing but don’t want to inconvenience their tenants (and live up to their agreement) will sell a home with tenants in it.

Roofstock Marketplace is a great place to find turnkey properties not only because the properties have tenants in them but because they do all the due diligence for you. Roofstock experts certify the property after inspecting and appraising it. They also run all the numbers, so you know the cash on cash return, net operating income, and cap rate - all of which you should use to help you decide if the investment is a good choice.

Buy and Hold Real Estate
If you don’t want a property with tenants in it already, as Roofstock Marketplace offers, you can also find properties yourself that you can buy and rent out to tenants. The key to this strategy is to do your homework. Make sure you choose an area high in demand with renters and with properties that hold their value.

At a minimum, you should be able to charge 1% of the home’s value in rent for the investment to be worth it. You can even find rental properties on Roofstock Marketplace that don’t have tenants if you prefer to do tenant screening and choose your tenants yourself.

The Benefits Of Investing In Real Estate In Your 20s

As you can imagine, there are many benefits of investing in real estate in your 20s, including the following.

Cash Flow
Cash is king, and when you invest in buy and hold real estate, including house hacking, you earn cash flow. You can use the cash to offset the cost of owning the property, but any profits are yours to do with what you want.

Many investors save the cash flow to further their real estate investment portfolio or even level up, sell their first real estate investment, and buy another with an even greater cash flow.

Real Estate Appreciates
Most investments don’t have a ‘guarantee’ that they’ll appreciate, but real estate generally increases in value.

If you buy and hold real estate, you’ll typically find that the home values are higher in a few years than when you purchased the home. But you can also force appreciation by improving the property. Not every home improvement gives you a dollar-for-dollar return on your investment, but every improvement counts.

When your property is worth more than you paid, that’s your equity. You can withdraw it using a home equity loan or line of credit and use the funds for other investment purposes, including buying more real estate or diversifying with other investments.

Helps Build a Retirement Fund
In your 20s, you probably aren’t thinking about retirement, but the earlier you think about it, the more money you’ll have when the time comes. Investing in a 401K or IRA is a great way to save for retirement, but investing in real estate in your 20s is helpful too.

When you invest in real estate, especially buy and hold, you let your money work for you without too much effort on your part. If you rent properties out, you can hire a property management company to do the work for you, making the real estate investment a passive investment. If you let the home appreciate, you’ll increase the equity and have more money to withdraw during retirement if you keep the property through then.

Offers Tax Benefits
Owning investment real estate has many tax benefits. When you actively manage the properties (even if you hire a property management company), you can deduct the expenses incurred to run your business. Even though real estate is an investment, when you’re a landlord, it’s a business too.

You can also defer your tax liabilities when you invest in real estate. You don’t have to pay taxes on the property until you sell it. If you keep it and continue renting, you’ll pay taxes on your cash flow (income), but you can offset it with the tax deductions offered at the expense of running a business.

If you sell a property and earn capital gains, you can defer the taxes owed if you do a like-kind exchange. This means you invest the money earned into another real estate investment. You must identify a property you’ll buy within 45 days of selling your initial property and close on the transaction within 180 days to defer the taxes on the capital gains until you sell the next property.

The Downsides Of Investing In Real Estate In Your 20s

Like any investment, there are risks to investing in real estate in your 20s. Understanding them can help you make the right decision.

Real Estate Isn’t Liquid
Don’t invest money you may need in the next year or so in real estate. To access money invested in real estate, you must either sell the property or take out a home equity loan, but you must qualify for the loan. Both processes take time and wouldn’t help you if you’re in the middle of a financial emergency.

Large Learning Curve
Owning real estate in your 20s that you live in takes some getting used to, but if you’re responsible for another person’s home, too, it’s even riskier. You’ll learn quickly not only how to manage a home but how to run a business. It takes a lot of time and patience and a few headaches along the way, but it’s easier when you work with a platform like Roofstock Marketplace.

You’ll Need a Decent Investment
To invest in real estate, you'll need at least 20% - 30% of the purchase price for a down payment if you’re financing it. If you’re buying an undervalued property for cash, you’ll need the entire amount in cash.

While you can leverage your investment, investing in an asset worth much more than you put into it, you’ll need cash upfront to invest in real estate.

Questions To Ask Yourself About Investing In Real Estate

Before you invest in real estate in your 20s, ask yourself:

• Do I have liquid assets I can be without for the next few years?
• Can I handle the risk of investing in real estate and having the tenant default? Can I cover the mortgage payment and costs without the cash flow?
• Am I willing to put in the work required to manage a real estate investment if I buy and hold?
• Can I handle living ‘with my tenants’ if I house hack and buy a multi-unit property?
• Do I have money saved for ‘reserves’ should an emergency occur since all responsibility falls on my shoulders?
• Asking yourself these questions will help you determine if investing in real estate in your 20s is suitable for you and, if so, how you should invest.

The Bottom Line

Investing in real estate in your 20s can be a great way to set yourself up for future financial success. Look at the big picture and see how it can help you whether you buy and hold or fix and flip.

The cash flow, profits, and the experience of running a business and realizing tax benefits are something you will take with you for the rest of your life. Whether you invest in real estate for the short-term or you make it a part of your portfolio well into retirement, it’s a great way to make your money work for you and set yourself up for life.

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