Plenty of smart, older, wealthy people are making money off of real estate investing. Perhaps as a forward thinking young person, you want to join the fray. Why not? As a 20-something year old, now is a better time than ever to get some skin in the game. Maybe you’re ready to move out of mom and dad’s house, or you’re tired of spending half your paycheck on rent. What’s the next step? There are several compelling reasons for purchasing a multi-family property when you’re young. Let’s take a look:
The value of time
In your twenties, you have a huge leg up over the older folks in the business. You have time. Having time on your side is key. If you think back to finance class, you might remember learning about a concept called, “Time Value of Money”. The basic idea is that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. How does this apply to real estate? Take the example of my grandparents who purchased a two-family home in the 1950s for $22,000. Today, that house is worth about $800,000. That’s a good-looking line of appreciation.
The bottom-line: By holding onto a property you can accrue value over time.
Okay, so accrued value over time is great in theory. But, if you’re like most millenials, you’re not into delayed gratification. I’m with you! In the short term, a multi-family property can help you chip away at your mortgage and build your equity. My grandparents paid off their two-family decades ago and enjoyed living mortgage-free and collecting rent well into retirement.
With interest rates at an all-time low, you can spin a profit off even a small multi-unit house like a duplex or triplex. For instance, here’s a quick break down of one of my clients who lives in an owner occupied three family.
In the end, this investor cash flows about $400 per month. Essentially, this means that him and his wife live for free. The rental income covers their housing costs with some extra cushion. When they move out, they will rent out unit 1 for an additional $1,750. That will increase total monthly cash flow from $400 to $2,150.
The bottom-line: Why pay rent when you can earn rent and build your equity?
All good things come to an end. Fortunately, with multi-families, the ending can be the best part. Unlike a single-family house or a condo, a duplex or triplex provides flexible resale options. You could sell the house as a multi-family, or you can do a condo conversion. A condo conversion is when you legally break up the house into separate units and sell them individually. The advantage of this strategy is that you typically can sell the individual units at a higher price per square footage.
The bottom-line: Optimize your resale value and cash out on multiple units.
It’s NOT all about the money!
Of course, owning multiple units is not all rainbows and butterflies. Overall, it can be a rewarding experience, but at what cost? Being a landlord is time-consuming and stressful. Whether you’re 26 or 96, you’ll need to think about whether or not owning a multi-family is right for you.
Drawing from first-hand experience, I’ve compiled a list of things to consider. You’ll want to put some thought into these points and the reality of being a landlord and homeowner.
Don’t expect a thank you.
Being a landlord is a thankless job for the most part. Since you don’t want to get too friendly with your tenants, most of your discussions are about repairs and addressing issues. The best-case scenario is that you can handle problems as efficiently as possible so that things don’t escalate into unpleasant situations.
Do you really want to intertwine your life with random people?
In order to make rental income, you need tenants. Who are these people? Your first encounter will likely be an email conversation through a Craigslist ad and the next thing you know they will be living under your roof. What do you really know about them? Will you be able to smooth out conflicts if they arise? What if they don’t pay and you need to evict them? Will you be able to handle that process emotionally and financially?
Can you make yourself available?
When you own a property, it’s only a matter of time before things break. Whether it’s a malfunctioning appliance, a slow drain, or a leaky roof, you’ll need to make yourself available to fix and oversee maintenance work. Do you have the flexibility to be available for emergencies? Can you get out of work if need be? What happens if you go on vacation? Will you have any support from a partner, friend, or parent to help with coverage?
Are you comfortable with the level of risk?
Of course, with any investment, there is a level of risk. With no risk, there’s no reward. Are you comfortable tying up your cash in a house? Aside from monetary risk, are you okay with being accountable for managing a property and keeping it safe for your tenants? Certain states like Massachusetts have very strict laws that regulate the business of landlording.
Do you have reserve funds?
Home ownership gets expensive when systems fail and wear out. Sometimes you can’t predict when these things happen. For example, what if the heating system breaks, or the basement floods? These maintenance problems can come with a hefty price tag. What if you have an unexpected vacancy? Finding solid tenants can be difficult during the winter months. Can you afford to miss out on rent checks?
Can you deal with making certain lifestyle sacrifices?
Obviously, if you move into the property it will impact certain aspects of your life. In order to acquire a multi-family house, you may need to look outside your desired neighborhood to an affordable area. Although all your friends might be renting in the city, it’s unlikely that you will have enough money for the down payment on a piece of real estate in such a prime location. Will you be okay with being on the outskirts?
Secondly, multi-families typically are not as updated as condos or single-families because planning upgrades around tenant schedules and leases can be tricky. In many situations, renovations can’t be justified because they don’t produce a strong enough return on investment. As long as the units are safe and clean, it doesn’t always matter from a cash flow standpoint if they have the latest and greatest updates. Can you stand the idea of living in an apartment with lackluster finishes or dated décor?
In conclusion, investing in a multi-family property when you’re young can pay off in a big way. But, don’t get blinded by the dollar signs! Make sure to think how the decision will impact your lifestyle and if you are prepared for the responsibility.
If you’re ready to make the plunge, you’ll want a real estate partner experienced in multi-unit investment properties to guide you through the purchasing process. Having owned and managed multiple properties since age 23, I’ve walked the talk and can help you start your portfolio along Boston’s North Shore. For questions, or to schedule a consultation, please contact me.