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The 20-Something Guide To Real Estate

4 August 2008 2 Comments

Real estate is something that garners a great deal of attention by many people. Currently, we’re in a rather unique situation where real estate is still a big focus but primarily in a negative light. In this post, I want to discuss with people in their 20s, the best way to approach and view real estate, how to participate in this kind of investment and certain things to be aware of as you pursue real estate. Welcome to the first edition of the 20-something guide to real estate!

Looking Back and Looking Forward

Before we get into specifics regarding your pursuit of real estate, it is appropriate to analyze the current environment. The real estate environment is drastically different than it was just a few years ago with sky rocketing foreclosures and plummeting home values. It is important to note that while it is, indeed, a better time to buy when compared to a few years ago, it does not mean that you are guaranteed to make money on your home. In fact, it is likely that home values will continue to drop for the near term.

Eventually, it can be expected that prices will stabilize. Stabilize is the key word here. Note that I did not say that prices will be bounce back or prices will start rising. It is likely that prices will eventually resume their historic slow growth. This means that majority of real estate owners will not make much money on their homes for some time; and if they do, it will be minimal.

Also, stating what a home sold for two years ago and comparing it to today’s price is irrelevant. Stating how far a price has come down from what it was listed at just 8 months ago is irrelevant. If someone bought my house for $500k two years ago that I just bought for $300k, that does not mean that I got a good deal. It means that the previous buyer overpaid. If a house I’m looking at is listed at $300k, the agent may tell you, “But it was listed at $430k a year ago, look how much it’s come down!” If you buy into that argument, what if they said, “But it was listed at $3 million a year ago, look how much it’s come down!” would you be more impressed?

The only thing that matters in real estate is what someone is willing to pay today for that piece of property. In that respect, it is pointless to look backwards because the past was a unique situation that is highly unlikely to be repeated (at least in the near future).

With that said, real estate ownership is still a good thing. It is a good thing when accompanied by realistic expectations. Owning a home is a way to build equity and generate some wealth. My advice is only buy a home if that is a place you really want to live. Also, it should be a place you want to live for longer than 5 years. Don’t plan on making money from it. If you earn a nice return when you sell the house down the road, then consider it a bonus.

Cost Of Ownership

Many first time home buyers (most people in their 20s are first time buyers), don’t realize the high costs associated with owning a home. Before you even get into maintenance, repairs and upgrade costs, your monthly payment might hurt you. The first thing many overlook as they plan to buy real estate is taxes and insurance. To give you an example, my mortgage payment is about $1400 a month. Because I also have to pay taxes and insurance each month, my monthly payment is just over $2000 a month. We’re talking an extra $600 a month! Now, I have fairly high taxes, but you still need to factor this in as you run the numbers of what you can afford.

Do you have money for a down payment? In today’s lending environment, you’re likely to need 10%. Inspections, appraisals, closings costs… they all add up, and these are costs you incur before you even move in.  Factor in bills, maintaining lawn and landscaping, repairs, owning a house is extremely expensive.

Get Help Paying Your Down Payment

Most 20-somethings don’t have much money.  10% on a $250k house is $25,000.  With closing costs and escrows, you’re going to need $30,000-$35,000 at the closing table.  Do you have that?  Probably not.  If you have a close relative that has some money, perhaps consider eliciting their help with the down payment.  Offer to pay back the money at a low fixed interest rate or get even more creative.  I have a friend who borrowed money from a parent and the terms included paying back the money interest-free when he sold the house but also will include 25% of the profit earned on the house.

Get Help Paying Your Mortgage

Now, there are ways for the typical 20-something to still make the real estate thing happen.  Easiest way, is to get roommates.  Many college grads live with friends after college.  Instead of splitting a four bedroom apartment, be the one who buys a sweet house and collects rent from three friends.  If they complain about “paying your mortgage”, offer an incentive such as you paying for the HD cable and TV.  If you have different room sizes, you could even have the friends bid on the room and have different levels of rent.  Get creative.

Be Realistic About A Fixer-Upper

With the days of guaranteed appreciation, you may be considering buying a fixer-upper and trying to unlock some value to earn a return.  I’m not going to tell you that this won’t work, because it can.  What I will tell you is that it will definitely be more work than you think, it will cost you more than you think, and you won’t do as much as you think.  If you have no experience doing this, the all three previous statements apply even more.

Fixing up a house is extremely hard.  You will definitely end up spending more money on it than you think, so much more that you might end up losing any projected return on your projects.  Plus, it takes an incredible amount of time.  How do you plan on accomplishing the work while you work on your career, your social life, etc.?  If you still think you can do it, I wish you luck.  I know I don’t have the type of personality or drive to do an effective job at fixing up a house.

Have a unique real estate story or a creative way of buying your first home?  Add your comment and join the discussion!

2 Comments »

  • Scott said:

    Investing in real estate should be examined on a cash flow basis, not a capital gains basis and you can create great wealth in any market.

  • InvestmentPlayground said:

    Great post. Real estate is exceptionally dangerous if you’re in it for a short term buck. The best thing is the tried and true method – buy a piece of real estate if you have the cash, don’t overleverage yourself and thereby screwing yourself over (hence 2008 America), and make sure to have a cushion built before you even start. I bought a home at the tender age of 25. The rent was at $2000, the mortgage was at $1000. Great, right? Well taxes, insurance, and PMI (necessary insurance for under 20% down) brought it up to $1400. Then my furnace blew and I lost $4000. And then I went two months with both units of my home vacant, losing $2800 to mortgage payments. I now barely break even every month, can’t sell the place, and after having things relatively stable for a year I’m back now to one paying tenant.

    Real estate is not as easy as it seems. It’s hard work and can be risky. Be careful out there…