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Buy Real Estate Young To Build As Much Wealth As Possible

Buy Real Estate Young To Build As Much Wealth As Possible
Paylaş
 


If you want to get rich, it’s probably wise to buy real estate young. Think about all the times you’ve heard your grandparents buy property for so cheap. It was time that gave them the greatest gift to wealth creation!

My biggest real estate regret was not buying a two bedroom, two bathroom, double balcony condo with a view of Manhattan’s Chrysler Building in 2001. I was 24 and could have put down 10% on the $760,000 property that is worth over $2,000,000 today.



Now I’m almost 44 and no longer have a desire to “grow into my debt” through aggressive hustle. Instead, I’m all about paying down debt and simplifying life. Raising two kids is exhausting!

Why I Love Real Estate

I’m a huge fan of real estate because you only need to do four things to grow your wealth:

1) Come up with a downpayment using my 30/30/3 home buying rule

2) Pay your mortgage on time



3) Try not to buy at the top of the market

4) Own your property forever.

If you do these four things, I’m confident that thanks to inflation, at the very least, your net worth will be healthier than if you just rented. After decades of renting, you will have no equity. At least with real estate, you have a chance to get richer.

A while ago, I decided to put together a “progress chart” to see where I stand with one of my rental properties. I had just refinance the property and was feeling good about it.



A couple folks mentioned $850,000 was still quite a large mortgage. I agreed. That’s why I came up with an accelerated pay down plan. I’m all about creating goals, making charts, consulting with others, and tracking my finances to make sure I’m on target. You should do the same. It’s very enlightening.

What I realized from this exercise was that perhaps I was spending too much time trying to build wealth with too many different asset classes. If I just focused on optimizing this one rental property in my portfolio, there’s a good chance it alone could make me a multi-millionaire! 

Why You Should Buy Real Estate Young

When it comes to building wealth, simple is better. Understanding real estate as an investment is about as simple as it gets.



1) Real estate prices move in 7 – 10 year cycles.

2) There’s a natural tailwind due to inflation.

3) You want to own real assets because money is only a medium of exchange that loses value every day due to inflation.

4) With inflation, rents naturally rise. If you stay a renter, your costs will always go up quicker than a homeowner’s costs, making retirement a little more difficult to manage.

5) Despite inflation, interest rates keep coming down. This is the goldilocks scenario for all real estate investors who get to take advantage by refinancing their mortgages or getting record low mortgage rates for purchase while also raising rents. Credible is my favorite lending marketplace to get pre-qualified lenders competing for your business for free in under three months.



6) Humans are undisciplined savers and spenders. Having a mortgage forces you to save because each month you are paying down principal.

7) After you’ve finished paying off your property, if you wish you can add the full value of the property to your net worth. Everybody should make this calculation to see what their minimum net worth will be.

8) Living in your house doesn’t require investment work. Living is just life.

Real Estate Wealth Building Chart

Here’s my progress chart for a property I bought at the end of 2004 for $1,525,000. I bought real estate young, first at 26 and then this property at 28.

For years prior, I saved and invested 50-75% of my after tax income in order to one day break free from an unsustainable career. The numbers are estimates within 10% of true value/cost.

Benefits of buying real estate early - buy real estate young

Housing Chart Analysis

In 2005, I’ve already been an adult for 10 years. I missed my opportunity to buy a place in Manhattan at age 24. At 26, I finally bought my first property in SF, a 2/2 condo. The place was nice, but I regretted not buying to my maximum potential because I was afraid.



Therefore, at age 28, I went all-in and bought a single family home for $1,525,000 by taking out a $1,220,000 mortgage. It was kind of nuts to have over $1,600,000 in debt at such a young age. But I felt bullish about my future, having just received a promotion at my firm. No risk, no reward.

The total cost to own after deductions was about $4,800 including property taxes, insurance and maintenance. Given you can only deduct $1,000,000 in mortgage indebtedness, my goal was to get the mortgage down to $1,000,000 sooner.

However, after the $305,000 downpayment, I had practically nothing in the bank so I didn’t make extra principal payments the first five years. Instead, my immediate goals were to work hard at my job so I wouldn’t get fired and to replenish by savings account by saving 70%+ of my after-tax income.

If you take on huge debt, your motivation to work hard will shoot through the roof!

Opportunity Cost To A Down Payment

There is an opportunity cost to sinking $305,000 into a down payment. In my case, I would have only invested this downpayment money in more conservative asset classes like CDs, treasuries, or muni bonds yielding ~4% at the time.

So yes, I could have made about $1,000 a month risk free, but I wanted to swing for the fences while I was still young. I was either going to blow myself up or get rich sooner, rather than later.



Related: Invest In My 401k Or Save For A Downpayment?

A Scary Decline

I had two good years of property price appreciation until the financial meltdown chopped off ~22% from the 2007 high. I estimated my property’s value declined to $1,400,000 – $1,450,000 in 2010 because that’s the value I was able to convince the city to agree on to lower my property tax bill for several years.

The downturn didn’t feel good, but it didn’t hurt my lifestyle. I still enjoyed living in my place with a fixed payment. I just locked down all superfluous spending. My $6,000 vehicle named Moose was good enough!

When you never plan on selling, devaluations don’t hurt as bad. ONIG Financial Blog was born during this time of turmoil.

The Property Market Recovery

By mid-2011 things started to recover. The S&P 500 bounced off its lows and people were interested in buying property again. Interest rates declined, and I refinanced my property before I left my day job in 2012.

2012 was the time I seriously thought about selling my house given I didn’t have a steady W2 income anymore and Facebook had just gone public. Having $1,075,000 in debt just from this house without having a day job was concerning. Still, all I thought about was simplifying life!



Thankfully, I didn’t sell because a nice five year bull run ensued. In retrospect, I should have bought more property in 2012.

San Francisco Home Prices After Facebook IPO - buy real estate young

The Going Gets Better

In 2015, despite having over $1,000,000 in equity in a property that I valued at $2,300,000 compared to online estimates of $2,800,000, I still couldn’t refinance my 5/1 ARM 2.625% mortgage because I didn’t have two years of freelance income under my belt. I was disappointed, but felt strongly that another opportunity would arise before the fixed rated adjusted in June 2021.

In 2016, I finally refinanced my mortgage to 2.375%. The cost to own dropped to only around $3,000 a month after deductions (mortgage interest cost of $1,682, property tax of $1,600, $200 for insurance, and $200 for maintenance). Meanwhile, estimated rent for the house now ranges from $8,800 – $10,000. It is a blessing to be able to lower costs through a refinance and raise rents.

From 2021 – 2021, the real estate market declined as global growth softened, private tech/internet company valuations declined, layoffs increased, more new condo inventory filled the market, and poor performing IPOs.

Future Plans For The Property

By 2025, I plan to completely pay off the $1,220,000 original mortgage. I’ve always had a goal to pay off this property by age 50. The ongoing cost to own this property will drop to around $2,000 a month post-deductions. $2,000 is still a lot largely due to property taxes, but it’s less than the $10,000 a month it would cost to rent the property. Further, I have the option to sell.

If I do nothing else, this property alone will make me a small fortune. I’ll need it, because in 10 years, $4 million might be the new $1 million. 

Sure, there might be a massive earthquake, a fire, or another huge economic collapse between now and 2025 that will destroy my plans. Thank goodness for homeowners insurance and risk-free assets.



But if I stick to the program, there’s a real possibility that the scenario I’ve created in this chart will come true. Now it’s your turn to create your own scenario.

What Actually Happened To This Property

When I first wrote this post in 2015, I estimated the value of the house was about $2,300,000. I modeled out the property would be worth roughly $2,500,000 in 2025. Thanks to a raging bull market, I was able to sell the house for $2,740,000 in 2021!

It was a fortuitous situation because I only had one buyer. I wasn’t excited to sell, but with a newborn, I needed to focus. I was happy to sell the house for $2,500,000. But when I got him up to $2,740,00, $240,000 more and eight years earlier than my forecasts, I just had to sell.

I ended up reinvesting the ~$1,800,000 in proceeds in real estate crowdfunding, the S&P 500, and municipal bonds in 34/33/33 increments.

So far, so good. I’ve been able to generate a much higher return in my reinvested asset classes. Further, the income has been generated 100% passively.

My favorite real estate crowdfunding platform is Fundrise. You can invest in a diversified portfolio of private real estate investments that generates a steady income stream. It’s free to sign up and explore.

Automatic Wealth Building

Buy real estate young. When we are young, time is on our side. But once we hit middle age, time starts becoming our enemy. We lose our enthusiasm and energy the older we get. When you buy real estate young, you can more easily ride out the cycles. It takes time to build equity and take advantage of refinancing opportunities.



All I want to do as a 43-year-old fella is relax! Once we’re past 55, it becomes harder to justify buying a property because we might die before we pay it off.

Save as much as you can, figure out where you want to live for the next 10+ years, and get long inflation by buying at least one property as young as you possibly can. 

If you don’t invest a single dollar in any other asset class, at least you’ll end up with a fully paid off property within 30 years to provide some financial security. If you can build a diversified net worth, all the better!

Recommendations

Explore real estate crowdsourcing opportunities. If you don’t have the downpayment to buy a property, didn’t buy real estate young, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.

Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible.

For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.

Fundrise Due Diligence Funnel
Less than 5% of the real estate deals shown gets through the Fundrise funnel

Take advantage of lower rates. Check out Credible, one of the largest online lending platforms today that will get lenders to compete for your business. Fill it your needs and get real quotes from qualified lenders in under three minutes. The process is easy and free. Rates are at all-time lows!

Average 30-Year Mortgage Rate

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