Investing in real estate can be a good way to diversify your portfolio. And it can be particularly appealing to 20-somethings who are comfortable taking risks and who want to earn bigger returns. If you're in your 20s and you've toyed with the idea of becoming a landlord or putting money into a real estate investment trust, here are three key reasons to jump on the property bandwagon.
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1. Real Estate Can be a Hedge Against the Market
If you pay any attention at all to the stock market, you know that things aren't always stable. A great day of trading can be followed by a huge tailspin and it's that volatility that makes 20-somethings so leery of investing. In fact, millennials are so cautious when it comes to investing in stocks that they're keeping 70% of their portfolio in cash.
Real estate, on the other hand, offers an added layer of insulation against bumps in the market. The recent housing collapse aside, real estate tends to remain stable even when stocks tumble. If you're not sold on putting a big chunk of your savings into stocks, investing in property can be a more lucrative alternative to letting your money sit in your bank account.
2. It Doesn't Require a Huge Upfront Investment
Investing in private real estate deals is typically something that's reserved for the elite, but that's not the only way to add property to your portfolio. Twenty-somethings can begin investing in real estate (even if they don't have a lot of money) by purchasing an investment property or getting into real estate crowdfunding.
With real estate crowdfunding, it's possible to get started with as little as $100. The SEC recently finalized Title III of the JOBS Act, making it possible for anyone to invest through crowdfunding platforms, regardless of their net worth. That's a plus if you're in your 20s and you haven't built up a sizable amount of wealth yet.
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You could also buy a property and either fix and flip it or lease it out. Getting a loan in your 20s is easier than you might think and you don't necessarily need a huge down payment. With an FHA loan, for example, you only need to put down 3.5% of the purchase price. If you can qualify for a USDA or VA loan, you may not have to make a down payment at all.
Now, there is one small catch to be aware of. These kinds of loans generally require the property you're buying to be owner-occupied. If you're thinking of going the low- or no-down payment route, keep in mind that you'll have to live in the property before you can rent it out.
3. You Can Bump up Your Cash Flow
Perhaps the best reason why 20-somethings should invest in real estate is the immediate impact it can have on their bottom line. If you buy a home and then rent it out, for example, you've got a steady supply of income each month beyond your regular salary. If you decide to become a house flipper instead, you'll have access to more money once the home sells.
Either way, that's money you can use to pay down your student loans, save for retirement or put towards the purchase of your next investment property. That extra income can be a welcome addition if you're just starting your career and you're not making big bucks at your day job.
Find out now: How much do I need to save for retirement?
Real Estate Isn't Risk-Free
Like any other investment, real estate comes with certain risks. For example, your tenant may flake on you halfway through their lease or your flipped property may sell for less than what you anticipated. Doing your research on the market and the property itself beforehand can keep your real estate investment from being a flop.