May 2, 2017
Investing in real estate is back. In fact, a lot of real
estate investors have made quite a bit of money scooping up properties at
pennies on the dollar at real estate auctions and foreclosure sales. But those
bargains are long gone but investing in real estate has not. In fact, investing
in real estate is back in a big way and there are some very good reasons why.
But for those who are 18-34 years of age, so-called “millennials,” should they
be thinking of real estate as an investment or should they stick with their
401(k) plan? Many investors who save for retirement don’t look to real estate
because their employer doesn’t offer it with their 401(k) or their financial
planner doesn’t mention it but savvy investors know that real estate should
always be considered as a part of their portfolio. Should millennials be
looking harder at real estate?
Investing in real estate takes a bit more planning when
buying a first rental unit. Why? Because lenders won’t use any rental income
from the subject property to help qualify. Instead, the borrower must qualify
for both their primary residence as well as the new mortgage for the rental
unit without the benefit of rental income. Further, a lender wants to see
someone be a landlord and manage the rental property for at least two years.
Once these thresholds have been met, qualifying for a second rental property is
so much easier. Why? Because the rental income can be used and will offset all
or part of the new debt. It’s just so much easier.
Millennials can also partner with someone else to buy and
finance a rental property. In fact, it’s a common practice to form a
partnership or an LLC and buy and manage rental units. When partnering, down
payments and closing costs are shared between partners as well as ownership.
When it’s time to distribute income, all partners get their share. Partners
also share the risk as well which is easier to take compared to investing solo.
Another way millennials are buying rental properties today
is buying and financing 2-4 unit properties including a duplex, triplex and
fourplex. They do so by buying the property and occupying one of the units. In
this manner, they can obtain financing at a cheaper cost compared to a loan for
a rental. Interest rates are lower as well as reduced down payments are needed
for a primary residence. Further, the rental income from the other units can be
used to offset all or part of the mortgage payment, property taxes, insurance
and maintenance. In short, the borrower is living “mortgage free” increasing
cash flow each month which can then be used to add to a retirement account or
to save and buy yet another rental property in the future.
One more final thought- real estate values are on the rise
once again. That means when you buy a rental property today it will be worth
more one year from now and could increase year after year, adding to the
owner’s net worth. When you consider the advantages owning real estate compared
to other financial vehicles, millennials should think about adding real estate
to their list of holdings.
For more information or questions about mortgage loans, please call (855) 757-8748.