Investing in real estate has been proven to be a great option for past generations of investors, however, many millennials are opting out of the market and choosing more flexible investment options. The popularity of stocks and new forms of investments like cryptocurrencies have become a popular option for millennials since they only require small capital and the returns are quicker.
However, investing in rental properties can be a great entry point in investing in real estate since it can serve as a long-term passive income while providing cash flow. Millennials also have the advantage of knowing how to market their rental properties to the younger generation.
Investing in real estate might not give quick returns, but it is definitely profitable in the long run. Here are several ways millennials can start investing in rental properties.
1. Establish your credit score
Your credit score can have a big impact on getting approved for a mortgage and getting good terms. Many millennials struggle in building their credit score because of financial constraints. While it might take some time and effort to establish a credit score that’s good enough to be accepted by lenders, there are still many simple steps to improve it. How you manage your credit card is one factor that can leave a big impact on your credit score. It’s important to not go over your credit card limit and to make timely payments. If you are unable to pay your total balance, make sure to pay at least a portion of it before the due date. It’s important to keep your credit at 30% or less of your total credit limit.
2. Save up for a down payment
The next step is saving up for a down payment. Once you are pre-approved for a loan, the down payment is the biggest chunk of money that you will need when buying a rental property. You would need to deposit at least 20% of a property’s contract price. To prepare for this, you can do your research in advance on the market value of current listings before you decide to buy a rental property.
3. Calculate the rental property’s ROI
Once you have a target rental property, you’ll want to calculate the property’s potential return on investment. You’ll need to get initial figures on monthly rent prices in the area as well as your expenses. For the expenses, you’ll need to consider the initial expenses, operational expenses, vacancy periods, repairs and fixtures, among others. The best way to calculate a property’s ROI is to analyze the current market trends and to make sure that you are accounting for all the expenses, including the interests. You’ll also need to identify and assess the risks. Projecting your ROI is the best way to decide whether the investment is worth it in the long run.
4. Manage the property on your own
As a millennial starting out in the rental industry, you can skip hiring a property manager and choose to manage it on your own, especially if your budget is too small. Managing a property can seem easy to do, but it can also take a lot of time and hard work. You’ll need to learn certain skills that will help you manage the property efficiently. First, you’ll need to know the right qualities to look for in a tenant. You’ll also need to know how to write a sound contract and you’ll need to set property rules. You’ll also need to know how to handle unruly tenants and other conflicts that may occur. Moreover, accounting for your finances and knowing how to repair broken fixtures are also skills that you’ll need.
5. Consider house hacking
House hacking is buying a property, such as a single-family home or duplex, and having parts of your home rented out to generate income. House hacking is popular among millennials because it is a great way to cut down on housing expenses. When you commit to this type of investment, you’ll be able to cover your mortgage and monthly utilities while enjoying tax deductions. It is also a great start if you want to ease in investing in more rental properties in the future.
Investing in real estate might seem like a big commitment, but it’s definitely a smart long-term financial move. Not only will you yield high capital gains, but you’ll also have regular cash flow available while benefitting from tax deductions. Make sure to follow these tips to make your investing journey easier.