Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Layla in AL: Hey Brian, I’m 26 and have been working on my career for about three years. I’m trying to learn a lesson from my mother. She wants to retire in the next few years but has seen her 401k retirement savings destroyed over the years by economic events that make me fearful of stocks and bonds. Right now, I’m following the same path because it’s hard to resist grabbing my employer’s contribution to my 401k. But I have almost no choice of where they invest the money.
I don’t want to get to the end of my career to find myself in the same situation as my mother - wanting to retire but not financially comfortable. I’ve decided on real estate as a backup plan. I don’t want to raid the little I have in my 401k and the rest of my money goes to living expenses. How do I get started with real estate investing without much money?
Answer: Hello, Layla. WOW. It sounds like you’re writing the first chapter of your financial success story. I congratulate you on such an aggressive start toward your retirement. On an even brighter note, getting started now offers the real possibility that you’ll achieve financial freedom well before you retire.
Now for the tricky part. Real estate investing is a huge industry with countless creative possibilities. At its most basic definition, it is about owning or controlling property to generate profits through rental income or market appreciation. Of course, having a limited amount to invest means your options are also limited unless you have access to other people’s money. For the sake of this discussion, I’m going to assume that you don’t have access to other people’s money and will be going at this alone.
The first thing for you to do is become educated about real estate investing. This includes investment strategies, risks, expected rates of return, and tax implications. That sounds like a lot but it is only the beginning. The good news is that it doesn’t have to cost you any money. Skip the seminars and weekend boot camps. That type of early education is only going to teach you about a single strategy. You want to start at the 40,000-foot level with an overview of many different strategies. You’ll be able to quickly narrow down these strategies to a few that you can realistically get started with for very little money. To begin, all you need to do is search with “overview of real estate investing strategies” and spend a day browsing through the possibilities. You’ll be able to quickly eliminate things like large apartment buildings and commercial real estate because these require a significant source of money.
A few strategies that should catch your attention are tax lien investing, seller financing, sandwich lease options, and small multiplexes. There are more that might pique your interest. Next, you want to select several and then continue your education by drilling down into the details of the ones that interest you, that you have time for, and that you believe offer the highest possibility of success. Remember as you drill down, the basic information you need to understand is risks, expected rates of return, and tax implications.
Layla, my personal opinion for a young person getting started is to strongly consider a small multiplex. I’m referring to a tri-plex or four-plex. A place where you can live in one unit and rent out the other units. These offer some valuable benefits to the beginning investor. First and importantly, the rents will pay for your own living accommodations. That gives you an opportunity to begin saving more money for future investments. Living in your own multiplex also goes a long way toward furthering your experience as a landlord. Living at your rental property also minimizes risk because you’ll be able to easily keep an eye on everything. Of course, you don’t have to live there forever. As your real estate portfolio and income grow, you’ll soon be able to move into something you desire more. Then you collect rent on the multiplex unit you vacated. Maybe the second house you move to isn’t your dream house either. When you do move into your dream house, you can add your second house to your growing rental portfolio. And so on, and so on….
You will need some money to get started with a multiplex. The good news is that anything less than five units is still considered a personal residence (five units and more are considered commercial). As a personal residence, you can qualify for some of the most favorable and easy to qualify for mortgages, such as an FHA loan with a down payment as low as 3.5%. Generally, federal tax laws favor landlords but you still want to get into other tax details like depreciation, property taxes, and state taxes. And there is still more to learn about taxes such as 1031 exchanges and business entities like limited liability companies or corporations.
Layla, I’m not saying a multiplex is the only option you have but it does seem to fit well with your age, ambition, and strategy as a beginner. After you gain some experience and knowledge of the industry, you can always venture into even more profitable investments.
What advice do you have for young investors just getting started? Please add your comments.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].