Investing In Real Estate In Your 20’s, 30’s 40’s And Beyond

Nothing proves its authenticity better than when tested. The past few years have really highlighted the value and resilience of real estate as an asset class. It has continued to prove its mettle as a superior wealth tool through various economic cycles, as long as when bought with prudence.

Real estate is how I got started on my path to retirement and it remains the favourite amongst all my passive income. It is a great building wealth tool due to its repeatability. 

Given the challenging conditions and headwinds in the current investment climate, thought I’d share my take on how best to invest in real estate during 20’s, 30’s, 40’s and beyond. 

20’s – Starting Out With The Right Mindset

Having just stepped into the work world, one would be earning a starting wage and dreaming big about life. The most important wealth-building habit to cultivate at this stage is to spend less than earned, so as to start saving and investing. 

Make it a point to ‘pay yourself first’ by setting a savings target and stash that away before all other expenditures and bill payment. Saving needs to be a priority instead of an afterthought. Prioritising saving is a great way to budget as one is then ‘forced’ to figure out how to live within what is left after saving. Building this habit early in career enables one to first accumulate emergency funds to cover 6 months of expenditure, and thereafter to build up an investment arsenal.

In the meantime, start looking around, attend property launches and viewings. Do further research on neighbourhoods that fit your budget and criteria. Once there are sufficient funds to cover the initial deposit and enough cashflow to cover monthly mortgage repayment, take on the maiden investment in property. 

This property is likely to be a starter unit for affordability reason. The most important factor to consider once affordability is ascertained, is rentability. Pointers to keep in mind when buying the first property:

• Residential unit catering to the mass market that is within budget
• Located in a neighbourhood with rental potential
• Proximity to amenities (supermarkets, public transport, metro station, eateries, schools etc) for better demand

Keeping these criteria in mind will ensure higher tenancy rate and better appreciation over time. Real estate, above everything else, is about demand vs supply. The better the attributes, the higher the demand. 

 

While I strongly advocate buying property for rental instead of self occupation, it may be advantageous at this initial stage to buy an apartment that is suitable for self-stay with spare bedroom(s) to rent out. This way, one can save on paying rental while at the same time, collect rental to help cover mortgage expense, and perhaps even household expenses. 

Advantages Of Starting Young 

Do not fret if not able to save enough to buy the first property in your 20’s. The preparation itself will yield many non-financial but critical benefits such as:

• Mindset of delayed gratification, 1 of the most crucial aspects for financial success
• Learn to budget and live within means
• Make use of time, a most powerful factor in wealth accumulation
• Develop economic, political and social awareness
• Acquire financial literacy
• Sharpen investment sentiment and learn better control over emotions

Keep the north star in mind and continue to save and build up ammunition for when the right opportunity presents itself. 

For those who manage to snare the first property in your 20’s, congratulations! You belong to a minority club, truly a feat for someone in the 20’s. Property ownership brings much more advantages, in addition to those cited above:

• Lower and more affordable monthly mortgage repayment due to longer loan duration
• Start to build relationship and to establish a track record with lender(s)
• Learn to build passive income
• Lay claim to owning an asset (if generating cashflow)
• Learn the intricacies of property ownership such as lease management, tax/subsidy benefits, build network of contractors, insurers etc.
• Build confidence, communication and other life skills

Many countries have schemes to help starters buy their first home so make sure to include as part of research. For example, buyers of subsidised public housing in Singapore are entitled to various grants such as first-time purchase and proximity to parents. In the US, government-backed FHA loan are offered to young buyers and in the Netherlands, the 2% Transfer Tax is waived for those buying their first property before 35 years, in addition to being able to claim tax rebate on mortgage interest. Of course these subsidies and grants are subject to fulfilment of specified criteria so it is definitely worthwhile to do your homework.

Investing in real estate when young allows one to dip into the wealth pond. Although termed as passive income, real estate does require some effort which is what one is able to take on when young. 20’s also means not bogged down by bigger, heavier financial responsibilities such as school-going children and aging parents yet. Starting young means deploying time to its greatest advantage as the longer the time horizon, the bigger the compounding effect.

30’s – Career and Lifestyle Upgrade

The 2nd decade of work is when one is ready and able to embark on lifestyle upgrade. Backed by more work experience, higher income, emotional and financial stability, this is a good time to buy a 2nd property and 3rd property. For those who have found a life partner and thinking of starting a family, this upgrade is a natural development especially with double income to shoulder bigger liabilities and share expenditures. 

By now, there would be equity built from the first property having steadily paid down both mortgage and principle. Most likely the first property would have appreciated in value over the years of ownership too. 

1 way to buy the 2nd property is to borrow against the equity of the 1st property for downpayment. Let me illustrate with a simple example:

> Market value of 1st property = 400,000

> Balance loan amount = 200,000

> Re-finance at 80% market value = 320,000

> Cash from re-financing = 120,000 

The 120,000 can then be used as downpayment for a 2nd property up to a value of 600,000 (20% of 600,000 = 120,000) without needing additional cash outlay. Extracting the home equity from the 1st unit to buy the 2nd unit frees up personal savings as downpayment for the 3rd unit. Such is the power of leverage and equity!

It may sound contradictory but buying 2 additional rental units that are within budget and financial means is safer than buying just 1 more unit. The rental of one unit can be used to cover for income loss when the other unit is vacant between tenancy and owning 2 more units spread the risk better. 2 rental income also means building more passive income, faster route to financial freedom!

When thinking of lifestyle upgrade, most will think of selling the first unit to acquire a bigger unit since there is more cash to back such a purchase. But this is not a smart move. It actually disposes an income-generating asset to buy a liability, which is a net cash outflow. Not all property are created equal. So when investing in property, make sure to buy asset  instead of liability. Knowing this difference is key to growing wealth and gaining early financial independence. 

40’s – Building On Foundation To Expand

Being owner of 3 property – 2 of which are generating rental income – you have mastered the repeatability feature of real estate. You are now in an enviable position to be able to expand your portfolio of income generating assets. The 40’s will be a period of building on the expertise on the foundation started in your 20’s. 

Having gained financial stability and experience from 2 decades of dappling in real estate, one can explore other ways of generating income from real estate:

• • Acquire older units to renovate for re-sale 
  • Transform and convert property of lesser demand into those with higher demand
  • Split bigger property into smaller units or increase build-in area, which gives higher yield
  • Acquire land for re-development 
  • Diversify into commercial property

Owning several units means being able to sell and capitalise on market demand when high, like over the past 2 years. Selling at such times means reaping higher profits. One can then wait for opportune time to buy when the market takes a dip, with the knowledge that the property market is a cycle. 

50’s – Age of Simplification

The desire to simplify and scale down begins as one approaches the mid century mark of existence. Having been there, done that and seen much, a sense of quietening sets in with more emphasis on enjoyment, relaxation and taking things easier. Retirement planning and preparation probably takes on more priority than maximisation of yield.

This is a good time to switch to easier ways of investing in real estate without giving up the  stable and good returns. 2 indirect ways can be:

• Real Estate Investment Trusts (REITs) – which are companies specialising in ownership and management of income-generating real estate usually traded on stock exchanges. The rental income collected by these companies must be distributed as dividends to shareholders, after deduction of associated expenses and management fees. 

REITs offer diversification across sectors (eg: retail, hospitality, commercial, industrial, healthier, rental and also hybrid) and geography. Besides dividends, REITs can be bought and sold whenever markets trade, offer high liquidity plus possibility of increase in stock prices. Divesting into well-managed REITs makes good investment sense as one slows down the pace of life, in search of more quality time and less hassle.  

• Real Estate Crowdfunding – is the pooling of funds from investors to buy physical property with fractional ownership by investment quantum. A crowdfunding platform basically matches investors to developers or real estate managers and charges a fee for this service. Rental income and sale proceeds are then distributed to investors accordingly. 

Unlike public-listed REITs, funds committed to crowdfund deal usually cannot be withdrawn or sold prior to deal realisation though some platforms do allow for early redemption. Hence, one must be prepared to invest for longer term as it is not as liquid as investing in REITs. 

By selling the property portfolio and re-investing into REITs and real estate crowdfunding allows one to sit back and enjoy the benefits of staying invested in 1 of the best asset classes in a hands-off manner. There are no leaky taps, cracked flooring or tenancy matters to manage, freeing up precious time to focus on other matters such as retirement planning or hobbies. 

60’s – Retire in Style!

Yeah, retirement is finally here. Modern retirement is about making the most of one’s time and energy to pursue unfulfilled dreams or take on new adventures. Having relinquished direct ownership of property and re-invested into REITs and/or crowdfunding, one can continue to earn passive income in retirement to fund pleasures like travel and expensive hobbies like golfing, sailing and camper van trips. Having slogged hard in earlier years, one has earned the right to enjoy retirement, making this phase the best years yet. 

Why Start With Real Estate Over Other Asset Classes

There are many other proven wealth building tools such as stocks, bonds and collectibles. However, none can match real estate in 2 tremendously powerful aspects: leverage and cashflow. 

What one does not have enough of when young is financial resources. The use of leverage is a catapult enabling one to make use of Other People’s Money to generate meaningful returns. 

The difference between investing $100,000 in dividend stocks earning 5% annual return versus using the amount as 20% downpayment for real estate is explained below:

Rental income can be 5 times more than investing the same amount in dividend stocks! Plus the frequency and regularity of rental income beats that of income from stocks.  Taking on a mortgage when young also means better affordability since loan repayment can be spread over 35-40 years. Although absolute loan quantum is bigger, the monthly repayment amount is more manageable. Very few other asset classes allow one to tap into the power of leverage than what real estate offers. 

Regularity in rental cashflow is another important factor as it gives certainty for budgeting, saving and investment. These are the reasons why I strongly advocate investing in real estate when starting out on the wealth path. As the saying goes:

Don’t wait to buy real estate, buy real estate and wait.

 

Happy investing,

Savvy Maverick

 

(Main image: Breno Assis, Unsplash)

Disclaimer: The views expressed here are drawn from my own experience and do not constitute financial advise in any way whatsoever. Nothing published here constitutes an investment recommendation, nor should any data or content be relied upon for any investment activities. It is strongly recommended that independent and thorough research is undertaken before making any financial decisions, including consulting a qualified professional.