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This isn’t going to be a bash on millennials. I am one. But I am tired of articles discussing millennials and their student debt, lack of good job opportunities and rising housing costs. In my opinion, the number one thing millennials are doing that’s crushing their financial futures is not buying real estate.
Real estate has always been and likely always will be the foundation from which all wealth is built. In Tom Corley’s best-selling book, The Daily Success Habits of Wealthy Individuals, his studies concluded that the number one thing millionaires have done is have multiple revenue streams, including owning real estate. Since buying over 300 rental properties over the last seven years in central Ohio, one of the biggest issues I see facing most of my old friends is choosing between lifestyle and future. I get asked all the time how I can buy real estate when I don’t have any money. The truth is you will need to save up a little money — but it’s not nearly as much as what you might think.
This article is encouraging you to use a primary residence as an investment vehicle if you don’t otherwise have the cash to buy true investment properties. Even though I think that real estate should pay you every month, not the other way around, houses are payments that you have to pay every month. You have to keep up with the roof and the gutters, cut the grass, shovel the snow, and on and on. But, if you’re broke and you cannot put 20% down on an income-producing property, here are some easier ways to get into the game.
1. Buy A House With Built-In Equity. Even in today’s hot real estate market, you can still find good deals that need minor work or are just outside of the “hip” areas. These tend to be at a lower price point, which makes the minimum down payment (3.5% with a 620 credit score, according to Michael Auge from Homeside Financial) more palatable. These types of properties just outside of the hip zones also give you two exit strategies: either selling or renting. Either way, the goal should be to refinance and pull out your equity or to sell the property for a profit once you’ve lived there for two years (to avoid any capital gains taxes). Selling your primary home, you can make up to $250,000 in profit, or double that if you are married, before you owe anything for capital gains. This means your profit from cashing out any equity in a sale might not be subject to any tax from Uncle Sam!
2. Buy A Duplex, Triplex Or Fourplex. The concept here is simple: Live in one side, and let one, two or three other people pay your mortgage for you. For those of you looking to save money on a monthly basis, this is a no-brainer. What is also great here is that you can still buy this property with only 3.5% as a down payment. There are no strings attached, as a one- to four-family property is considered a residential property!
For example, if you buy a fourplex for $400,000, you will only need to come up with $14,000 instead of the traditional 20%. Even if that sounds like a lot of dough, let’s take this example. Let’s take a $200,000 fourplex (easy to find in a market like mine of Columbus, Ohio) and put down 3.5%, or $7,000, to obtain a mortgage on the property. On a $193,000 FHA loan amortized over 30 years at 4.75%, the mortgage payment is only $1,006 per month. Taxes and insurance on this property in Columbus would run $350 and $150 per month, respectively. Last, there will be a PMI (mortgage insurance) payment of an estimated $75 per month. This means you would have a monthly payment of $1,581 per month.
Now let’s chat rents. On the property we’re talking about, two-bedroom rentals, each unit would rent for at least $850 a month in my market. Let’s do some math. You collect rents of $2,550 per month and pay out $1,581 per month — and live for free. What about expenses, Tarry? Living for free and clearing almost $1,000 per month should give you plenty of breathing room.
3. Pick Up Mortgage Payments. If you are working with a realtor or real estate wholesaler, see if the seller is willing to let you take over their mortgage. I did this exact thing with the seller for a house that I lived in. The seller wanted to move from Columbus to South Carolina and had little to no equity. They did not want to be a landlord, either. Instead of potentially taking a loss on the property, they agreed to let me take over their mortgage payments for them. This not only gained me an income-producing asset but it got the stressed-out seller down to their new home in Hilton Head, South Carolina: a true win-win scenario. Just because someone is underwater on their home doesn’t necessarily mean they have a high mortgage payment. It never hurts to ask!
At the end of the day, there are numerous ways to buy property and build wealth. While most millennials I see are looking for ways to pay off their liabilities (e.g., student loan debt, credit cards and so on), in my mind, the easiest path to a successful financial future is to offset these liabilities with income-producing assets. Instead of waiting 15 years to save and pay off all of your debt, buy some property and offset your payments immediately.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
May 7, 2019 at 09:09AM
Forbes – Entrepreneurs