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Updated almost 9 years ago, 01/24/2016
21 with a $70K salary...where to start?
I am 21 years old and just graduated from college May 2015. I am still at my very first job making $70K annually (very fortunate) and am wanting to start investing in real estate. My one year anniversary at work will be this June and I plan on buying a house. How much should I spend and what size house should be my first?? Also, does anyone have experience with advertising on small acreage such as off highways??
I would look into buying a duplex that you live on one side and rent the other side out. You can still get an FHA loan, put 3.5% as a downpayment and use the other side to rent and cover your mortgage. You get investing and landlord experience and basically can live for free. Just my opinion.
First thing is to pay off any student debt you have laying around or consumer debt. Then do as Simon says. (Couldn't help myself) Buy a duplex, live in one side and rent out the other. Get it rolling and then buy another one and do the same thing.
Yeah I get that @Brian Mathews. lol
Originally posted by @Simon Shih:
Yeah I get that @Brian Mathews. lol
My initials are BM. I've heard that more often than you can imagine. It finally got old in my mid 20s when people thought they were the first ones to discover it.
How long would I have to live in my first duplex? Also i don't have any loans, I was able to pay my way working thru college. I just have an associates degree.
I think you have to live in it for a year.
I didn't even notice that @Brian Mathews. I have also heard it all and everyone thinks they are super clever and the first. It doesn't even phase me anymore.
Originally posted by @Tyler Sample:
I am 21 years old and just graduated from college May 2015. I am still at my very first job making $70K annually (very fortunate) and am wanting to start investing in real estate. My one year anniversary at work will be this June and I plan on buying a house. How much should I spend and what size house should be my first?? Also, does anyone have experience with advertising on small acreage such as off highways??
Hey Tyler, I started buying houses in the same situation as you. I used an FHA to buy my first house while i was in grad school. You need to learn what types of houses work for your rental market. I would talk to a local property manager in your area or a seasoned REI.
I knew my rental market and bought something that I could live in and still have enough rooms to rent out and still cash flow.
Originally posted by @Tyler Sample:
How long would I have to live in my first duplex? Also i don't have any loans, I was able to pay my way working thru college. I just have an associates degree.
Don't get in a rush. You are still young. Take your time and do it right. Have a nice cushion of cash in the bank. At least 6 months of salary. Save up a good down payment for whatever you buy. If you don't understand something, ask questions. Not knowing what your degree is in. I'd probably start working towards upping that to at least a bachelors as you will undoubtedly experience ups and downs in your career.
Originally posted by @John Ma:
Originally posted by @Tyler Sample:
I am 21 years old and just graduated from college May 2015. I am still at my very first job making $70K annually (very fortunate) and am wanting to start investing in real estate. My one year anniversary at work will be this June and I plan on buying a house. How much should I spend and what size house should be my first?? Also, does anyone have experience with advertising on small acreage such as off highways??
Hey Tyler, I started buying houses in the same situation as you. I used an FHA to buy my first house while i was in grad school. You need to learn what types of houses work for your rental market. I would talk to a local property manager in your area or a seasoned REI.
I knew my rental market and bought something that I could live in and still have enough rooms to rent out and still cash flow.
Thank you for replying! It's neat to be able to relate to people about this stuff. Does it cost to get advice from an REI? Are there any here on the website?
I'm in a very similar situation.
What does it take to qualify for FHA financing?
Spending on a 1st home all depends on what you are looking for. Do you want a small place to just live while you save up for more real estate investments? Do you have a SO that may want certain features from a house/etc. What are your long term plans?
Consumer dept is a 1st IMO because of the high ARP they charge. Then I agree that paying down student loans and getting good credit are good starts, but if you have low interest student loans, it may be better to save up for down payments on investments.
Originally posted by @Tyler Sample:
Originally posted by @John Ma:
Originally posted by @Tyler Sample:
I am 21 years old and just graduated from college May 2015. I am still at my very first job making $70K annually (very fortunate) and am wanting to start investing in real estate. My one year anniversary at work will be this June and I plan on buying a house. How much should I spend and what size house should be my first?? Also, does anyone have experience with advertising on small acreage such as off highways??
Hey Tyler, I started buying houses in the same situation as you. I used an FHA to buy my first house while i was in grad school. You need to learn what types of houses work for your rental market. I would talk to a local property manager in your area or a seasoned REI.
I knew my rental market and bought something that I could live in and still have enough rooms to rent out and still cash flow.
Thank you for replying! It's neat to be able to relate to people about this stuff. Does it cost to get advice from an REI? Are there any here on the website?
REI are Real Estate Investors. Kind of a loose term, but I mean someone who has been investing in the area and know it well. Most will be happy to help for free, as are any brokers/agents.
Originally posted by @Ryan Koehler:
I'm in a very similar situation.
What does it take to qualify for FHA financing?
Not much. I qualified for a loan just a few months out of college.
Tell you what I did when I was young and single. (This is not for everyone.) I bought a 4br 5ba townhouse and rented out the other 3 bedrooms to young professionals that were in transition or on temp assignments. (Travel nurses, medical, Boing engineers, petroleum, etc)
Rented as a SF would gross 1000/month but I got 600 per room. 1800 per month gross and lived for free. Paid down the note and moved on. Now I rent it to a family for 1275 and have never spent a dime of my own money.
John Ma I live in NOVA also and am interested in connecting with other investors. PM me if you would like to meet for coffee sometime.
Ryan Koehler to qualify for a loan is simple
You can contact a loan officer answer a few questions regarding employment and salary. If you do not know any loan officers I can give you a referral
Tyler Sample that's great to start off at 21. Like others said I would recommend a duplex or triplex. You could hire a property management company to collect the rent and manage tenant request.
First, start by following the advice of the iconic book on investing: The Richest Man in Babylon.
Since it was originally a series of pamphlets, the book is composed of short, allegorical stories, all intended to teach readers how to acquire money, how to keep it, and how to use it. The persistent character in each story is Arkad, the richest man in Babylon, who is often the teller of the stories, describing how he earned that title and drawing attention to relatable truths.
I would suggest studying, from this book, the iconic 5 Laws of Gold:
If I was 21, educated and debt-free (if you are not yet debt-free, this is step 1), I would immediately make it my aim to retire by the age of 30. And, I think you are headed in the right direction. You have decided to set your "gold" to laboring diligently by investing it in real estate. Furthermore you have found yourself at BP: a great place to find "the advice of men wise in its handling."
First thing I'd do is take stock of who I know who has demonstrated wisdom in your geographical area and are investing in an area that you are interested in. Buy them lunch and ask them what steps they would take to build a portfolio from scratch. What are the areas where they are seeing a great return? Being from a small town in Texas, I expect this information would be invaluable.
In the meantime, what property to get started with? Even with mediocre credit, you should be able to easily obtain a loan to purchase a 4 bed/ 2 bath, $200k SFR on a 15-year loan in Victoria, TX (probably even with little to no money down). Live in 1 room and rent out the other 3 to some buddies that you find equal parts reliable and interesting for about $500 a door. Now, enjoy a few years of extended youth. At $1.5k/month, even if you put no money down and carry a larger interest rate or PMI, you should be living close to rent free as that amount will cover your PITI.
Now live for 3 years this way while living like you are still in college...given that you're making at least $70k/year (and if you're single, without dependents or other tax deductions, you can expect to take about 70% of that home), you'll have a monthly income of about $4000 starting out. Since you've set yourself up to not have to put anything toward your mortgage payment and still have no dependents, you should be able to save at least $2300k of each paycheck. Live what is being termed, "the essential life", i.e. purchase tools that better your enjoyment of life and avoid unnecessary extras that crowd you in. After 3 years, you're 24 with $83k banked and about $32k paid off of your $200k principal.
In addition, you have built up a basic understanding of dealing with tenants and repairs on a totally manageable scale which you can use to determine how you want to scale your portfolio. Are tenants a big pain for you even when they are buddies? Then property management is part of your business plan. Did you struggle with repairs? Then fixer-uppers are probably not the option for you to find value. Or perhaps you were successful in those areas, and now know them to be your value-adds on future investments.
A lot of people will have you buying a multifamily right out of the gate. In terms of ROI- that is a great route to take for a long term gain. But, if it was me and I had the choice, I would start small as I was young and trust that I will have a sound understanding of myself as an investor to leverage later for larger returns with lower risk.
For the ease of this exercise, let's say you sell your SFR for $200k (there may be better options, but for the purposes of this exercise...). After realtors fees and taxes, you should net at least $12k. ($32k- $12k to a realtor and 8k to taxes and concessions).
Lets also remember that you've been networking with the savvy investors in your geographical location. Lets assume you have leveraged these relationships into an invitation to take part in some very reasonable wealth-creation strategies by which you can expect to earn something like 10% on $12k, of your original investment year over year, which you would reinvest each year after capital gains tax.
Assuming you're able to do some sort of investment like this every year, you'd keep investing your $12k each year. If your investment isn't tax-sheltered (and it probably isn't), you'll lose 15% of the interest income each year:
Age 24: $12k
Age 25: $12k + $1k + $12k = $25k
Age 26: $25k + $2k + $12k = $39k
Age 27: $39k + $3.3k + 12k = $54.3k
Age 28: $54.3k + $4.6k + $12k = $70.9k
Age 29: $70.9k + $6k + $12k = ~$90k
So by age 28, you'll have ~$90k in your alternative investment.
BUT WAIT...REWIND...we also need to spend that other ~$83k you saved up living with friends and renting out the doors.
You've spent 3 years establishing extra awesome credit now and have $83k to put toward a multifamily.
You should easily be able to aquire a sweet little quadplex for $300k on a 15 year loan, living in one unit of your quadplex and renting out the other 3 doors. At $1k/month, even if each of your units are vacant 2 months out of each year, you'll earn an average of $2500/mo. That amount will completely cover your PITI, plus provide a cushion for small repairs.
Lets also assume you have during this time gathered some dependents and extra bills, and your rate of savings has dropped to just 10% of your take home...or 400/month.
By age 29, you should have:
$150k in equity in your Quad, $90k in your alternative investment, and another $24k in your families savings account. And you've now spent 8 years building your credit rating, learning how to own and manage rental property and building relationships with other investors and wealth builders.
Let's say you now sell your 4-plex. Assuming appreciation has just kept pace with inflation, you have about $130k (after realtor's fees) to put in on a 24-plex. AND since it's your primary residence, you won't have pay any capital gains tax and can put it directly into a new property.
You can buy a nice 24-plex for $1.1M. Because you've got such great credit from your 9 years of steady payments, a 9% down payment is perfectly acceptable. But if necessary, you could draw up to $114k additional from your savings and alternative investments to get the down payment all the way up to 20%.
Now you're renting out units in a 24-plex at $800/month. Say you have 20% vacancy, just like with the 4-plex, so you're making an average of $15k/month. Spend $3k/month on a property manager (who will do full-time what you used to do part-time with your 4-plex --- build relationships with the residents, find new residents, handle the paperwork, take phone calls, etc) and $1k/month on a part-time handyman/janitor. With a $7.6k mortgage payment each month, total monthly expenses are $11.6k.
You're making $3.4k/mo. You'll still only be able to take about 3/4 of that home, though, so you're looking at an income of about $2.5k/month.
Now, you've got anywhere up to $114K in the bank, a stream of income bringing you $2.5k every month and you can do what you want with it.
You *could* easily able to consider yourself retired at this point, if you choose. You'll still need to put in maybe 4 hours per week into checking email, performing oversight, solving small problems, etc.
Or, perhaps you will have your own wise ways to step up from this point into building a legit empire.
Sorry if this was too wordy, it is something I have wanted to write out for awhile so that I could share it with young clients interested in investing.
This is exactly what I have been looking for in an answer. Very informative and very wise as well! Thank you for your input. I can honestly say age 30 is what I had in mind.
welcome to Biggerpockets.
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@Tyler Sample if you can handle it and I am not sure anyone mentioned it.. but actually buy a 4 plex.. with your FHA loan you will be limited to 4 loans for the foreseeable future so try to stack up as many doors as you can.
- Jay Hinrichs
- Podcast Guest on Show #222
I think you have received good advice. Pay off loans and purchase a duplex. One thing to be careful of, though, is justifying too large a purchase because it's an "investment" or because your tenants will be paying much of your mortgage payment, for you. That may happen, and I hope it does, but it may not work that way 100% of the time.
Pick a reasonable duplex, ideally, one that you can afford to cover the entire mortgage, if needed. This is your first step into this world, this is when you are most likely to make mistakes, so make them small mistakes.
When I purchased my first rental home (which I still own), I payed $28k for it. The reasons for that were 1. it's all I could afford 2. if the Sh*t hit the fan I could afford the $150 mortgage payment. 3. If I was going to make a mistake I wanted it to be a small one.
Turns out that one wasnt a mistake. I decided to make my mistakes on later purchases.
Good luck man, I hope you have much success.