Should you Buy Real Estate at a Young Age?
If you see real estate as an asset, buy it. If you see real estate as a liability, don’t.
You can pay off someone else’s mortgage or you can pay off your own.
Some people will say you shouldn’t buy real estate and here’s why… it requires a large down payment, there’s property taxes, oh, and the maintenance. Buying a home isn’t for everyone and that’s ok. In fact, a lot of these people are probably speaking from experience and they aren’t wrong. There is a flip side to this argument, and that is buying real estate is a great investment, especially at a young age.
Numbers don’t lie… 80% of millionaires own real estate.
For those looking to secure financial freedom for their future it starts with buying a home. You can reduce your liabilities (rent) and increase your monthly cash flow (Income) if you choose to rent out bedrooms. Sell Your House West Sacramento
The people who claim buying a home is a liability rather than an asset are right by definition. A home is a liability because it costs you money, and doesn’t make you any. By that definition a home is a bad investment.
Wait a second though… if you don’t own a home there is a good chance you’re renting one. Rent is a liability. So while a home may be a liability at least it’s in the form of a mortgage (building equity) vs. renting (building someone else’s equity).
Let’s do some quick calculations on buying vs. renting because it’s important to understand the numbers. Below you will see photos from our calculations and how the numbers work.
In our example we are buying a home in Raleigh, North Carolina for $200,000 and we plan to stay in Raleigh for 7 years (The average american moves every 6-7 years). In Raleigh you can buy an incredible home for $200,000. Here’s how the numbers work…
In our Raleigh real estate calculations we took a home purchase price of $200,000 to remain conservative on our estimate for those buying real estate at a young age. Maybe you will buy real estate at a lower price, or maybe you will buy at a higher price… here in Raleigh the typical home price for a young real estate buyer is around $200,000. There are many great mortgage lenders in the Raleigh area. Below you will see example mortgage details and taxes that mostly pertain to the Raleigh area, so for those of you buying in a different area of the country, you will want to run your own numbers.
Raleigh, NC has the fastest appreciating rental rates in the southeast quarter of the U.S. at 7.7%! This is greater than 3x the national average and with rental appreciation rates it’s a great time to be a landlord a not so great time to be a renter. For this example we took some more conservative numbers that brought it down to 5%. Additionally, the home appreciation should be closer to 5.5% (if we are going by the most recent y-o-y appreciation rates) although we kept it at a more conservative 3.5% (historical average for Triangle area).
The conclusion in this example is that if you can find a similar home to rent for less than $611 you’re better of renting. That just isn’t possible for a $200,000 house for sale in Raleigh. You wont find one. Even a 680 square foot one bedroom apartment will be more than $611/month. In the Raleigh area it’s extremely hard to find a home worth renting under $1,000, even $1,200 can be hard if you want a great home with 4+ beds in a nice area, with good schools.
Everyone needs somewhere to live, to provide shelter for themselves and their family. A home is tangible, it’s something you can show your friends.
Real Estate is a Great Investment Vehicle
There are a lot of people who don’t look at Real Estate as an investment vehicle and that’s one of the reasons they don’t buy a home. Buying a house or an investment property when you’re young makes a lot of sense. If you’re in your twenties there is a good chance you’re going to have roommates living with you whether you rent or you buy a home. If you rent, you pay your landlord, and his mortgage.If you buy, you can rent out rooms to friends and pay nothing, while paying off your own mortgage.
Think about that for a second. You can live for free. Albeit with roomies, but so what? If you have great roommates than you shouldn’t have a problem living with them.
In Apex, North Carolina you are paying $1,000 in rent for 1 bed, and 850 square feet. You can buy a better home in Apex for less than that. If you rent out the other bedrooms there is a good chance those payments will cover your principal, interest, taxes, and insurance costs!
So not only are you saving $1,000/month because you’re not paying for rent, you’re receiving rental income as well that is paying off your mortgage. Think about that, you are living for free.
That is more than a $20,000/year swing in you favor (Save $1,000 on rent, and receive $700 in rent). Keep in mind this example doesn’t factor in expenses. Say you spend $2,000/year (even that is a lot) keeping up with the house the $6,400/year ($8,400 – $2,000) you make in rental income adds up fast.
For those of you who don’t want roommates you should look at the example, as a $12,000/year swing in your favor. While you aren’t receiving rental income, you’ve reduced your liabilities by $12,000 and created a different form of liability (one that works in your favor over time). Keep in mind you will have maintenance expenses.
While this makes a lot of sense in the Raleigh market, it doesn’t necessarily mean that the numbers are the same in your market. Feel free to run your own calculations and find out what makes sense or you! There a lot of pros and cons to the buying vs. renting debate.
You’re young, take a chance, and you can count on the home appreciating faster than inflation (especially in Raleigh).
Appreciation in Real Estate Happens over Time
Homes move up and down in price. A house is still a great investment when you’re young. Over time it’s around 3.5% per year on average homes appreciate here in Raleigh. If you’re going to buy a home you need to have a plan, run the numbers, and make sure you’re buying at a good time, and in the right neighborhood. Contact a top local Realtor if you need help understanding what makes sense for you.
Homes in Raleigh average a 3.5% appreciation year-over-year. Raleigh real estate is a lot less volatile than the rest of the country, and that’s in large part due to the amount of people moving here as well as the local economy. This gives you the comfortability of knowing that your investment is going to appreciate if you hold on to it, especially if it’s over thirty years. You’re reducing your liabilities, your home is appreciating, and you’re providing shelter for your family.
If you choose to rent your home out, you can find real estate investments that will rent out for more than a mortgage in Raleigh.
Return on Investment when Buying Real Estate
If you’re in your twenties and you want to make an investment you can do it several ways. Let’s say you want to invest $5,000 in the stock market and it gives you a return of 10%, that means you made $500. If you use $5,000 to buy a home you can afford one up to $142,857 (3.5% down). If you make 10% on your investment that’s $14,200.
Right off the bat it’s a total return of $13,700 more than an investment in a company. Not to mention it’s reducing your liabilities, building your equity and if you want to rent out bedrooms it’s passive income!
There’s plenty of ways to look at purchasing real estate, you can’t deny that with a great strategy you can have a great return on your investment. 80% of millionaires use their real estate return to create their wealth!
Forced Savings Account – Start Saving Early!
For those that have trouble saving or a spending problem, a home is a forced savings account. It gives you a way to save for retirement. If you buy a home for $200,000 and it appreciates 3.5% every year it will be worth $561,000.
That $200,000 is now worth over half a million. It’s a great way to build wealth. Imagine if you did it 10 times in your twenties and rented out the other properties. You’d be retiring on more than $5 million by 60.
For anyone who has a saving problem their home is going to be their largest asset. What I mean by that is a person’s home is going to be the largest item of value they have. From the definition of an asset and liability it’s an asset in this case, though there are definitely liabilities involved in homeownership.
Build your Equity with Real Estate
When you buy real estate at a young age you’re building your own equity. Whether you choose to rent out bedrooms to roommates or live alone, you’re building the equity you have in your home. This works well with a forced savings account because when you retire you’re going to love off the equity you have built up. 8 out of every 10 millionaires have used real estate as an investment vehicle to help build their equity.
A lot of successful landlord’s don’t work, they are financially free because they are using real estate income to live. How would you like to escape the 9-5, build equity, create income, all at the same time?
You can with rental properties, and it will help you to learn and earn using these techniques by buying real estate when you’re young.
Real Estate Income from Rental Property
Rental income is income. If you make $1,000/month in rental income, you’re earning $1,000/month (Does that sound like something John Madden would say? Oh, well.)
It’s important to understand that if you treat your home like a business it’s absolutely an asset. It’s earning you income and from this perspective real estate is the best investment you can buy. It’s tangible and America is filled with people who want to rent. Especially here in the Raleigh market where rental rates are going up at some of the fastest rates in the country.
Rental income is a great way to create passive income. Although I use the words ‘passive income’ it isn’t exactly true by the definition. It is however a great way to earn income without doing much. You will be required to answer the phone when tenants call, update the home when things break, among other requirements of a landlord.
Real estate is one of the best ways to create a type of passive income, that will allow you to live without having to ‘work’ should you choose to go that route.
Create the Estate you want to Live in!
Buying real estate at a young age also gives you the opportunity to customize and create what you’re looking for. If you’re renting you have to run things by your landlord before you can do anything and you will be at their discretion. When you own your own home you can make the upgrades you want, decorate the way you’d like, and make any additions to the home you’d like.
After buying a property you can customize it any which way you want! Want a backyard with a fence? Build it! How about a deck that gives you a chance to entertain outside? Build one!
Responsibility/Freedom Life Lessons, Learned!
Buying and owning real estate when you’re young forces you to gain new responsibilities you may not otherwise have while renting. It’s an opportunity for you to force yourself to save through paying down your mortgage, gain income (should you choose to rent it out), and over the time in which you own the home it should appreciate.
Whether you plan to rent out the property you buy to tenants, live in it and rent to roommates, or live in it by yourself you are going to
Concept of Finance – Great Skills to Develop
Want to understand what other people know that you don’t? Buying real estate is a great way to learn. When you’re young you have a much better opportunity to take risks you may not otherwise have as you grow older. When you settle down with a family and kids your time is dedicated to new things in your life that weren’t there when you were young.
It shouldn’t come as a surprise that eight out ten millionaires own real estate. It’s an opportunity for them to diversify their investment portfolios, gain rental income and positive cash flow, as well as appreciation that beats their money sitting inside of a bank account.
Learning and understanding what these millionaires already know comes with an education, and the best way to learn is to not be afraid to fail at first, especially when you’re young and have the time/energy to dedicate to learning.
Real estate is an opportunity for you to reduce your liabilities, gain passive income through rent, and to pay down your mortgage with other people’s money (OPM).
Anyone who didn’t buy real estate when they were young probably will tell you they wish they did!
You have more Free Time when You’re Young!
One of the reasons young people don’t want to buy real estate is that they don’t have the time. Well, you’re not going to have more time when you’re older, in fact you are likely to have a lot less as you gain new responsibilities. A family and children are a responsibility you don’t have when you’re young making it a great time to learn real estate.
Buying real estate is a time requirement and most of the time should be spent BEFORE you buy anything. Researching, educating yourself, understanding neighborhoods and city plans are all factors that are going to have an impact on the home you purchase. These hours you put in before you start looking at homes for sale are the most important. Study the numbers, the local real estate trends, and find a top Real Estate Agent to assist you!
When I bought my home in Downtown Raleigh I spent 10 months studying the local market and drew a map around the two areas I wanted to focus on because I knew how great the rental market is in those areas. The homes for sale in Raleigh are priced about 5.5% higher than they were in 2014 so I knew I wasn’t going to purchase anything I didn’t feel was 10% below it’s true market value. This would ensure the property I bought had equity already built in.
Final thoughts – Buying Real Estate when You’re Young
When you ask people who are twenty or thirty years older than you if they would buy real estate at a young age, they’re more than likely to say yes. Buying real estate at a young age gives you more than just the ten benefits listed above. The ten benefits that we have listed in our article are great reasons to consider purchasing real estate while you’re in your twenties or early thirties. It will help lead you to financial freedom in your future. With right real estate team, your first home is sure to be a great one!
Raleigh real estate is appreciating at 5.78% (slightly above national average) and the rental prices have gone up by almost 7.63% (3x the national average of 2.71%). This makes it an easier decision for those who are currently renting to try and find a house to buy.
There are certain situations where buying real estate at a young age doesn’t make sense. If you have any questions about buying real estate please don’t hesitate to reach out to us. We are happy to chat with you and figure out what is the best options for you.