Should You Skip the Starter Home? How an Investment Property Can Pay Off

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The prospect of buying a first home is exciting, but it can be equally daunting if you’re facing a pile of student loan debt, or just getting settled on a career path. That doesn’t mean that millennials are shying away from home buying completely, however.

Figures from the Census Bureau show that the home ownership rate among the under 35 crowd checks in at 34.1 percent. While some of them are buying starter homes, others are opting to become real estate investors instead.

Buying an investment property can pay off big-time, but you can’t dive in blindly. Here’s what you need to know.

An Investment Property Can Bump Up Your Cash Flow

Millennials are fighting some unique challenges financially. Beyond the fact that seven in 10 grads leave college with student loan debt, they’re also heading into a job market in which wages have more or less flatlined for most workers over the last three and a half decades. Doesn’t exactly sound promising if you’re hoping to buy a home or grow a fledgling retirement nest egg.

An investment property, on the other hand, can trump those money headaches. If you’re able to land a home in an area that’s in high demand among renters, it could generate enough income each month to cover your mortgage—and then some. The extra money that’s coming your way could allow you to wipe out your student loans faster or sock away cash for a down payment once you’re ready to buy a home in which you plan to live.

You Can Build Wealth Without Being Tied Down

Investment properties can be serious moneymakers if you’ve got a great location and a tenant who’s conscientious about paying the rent. The same goes if you want to try your hand at flipping homes.

In either case, you reap the financial benefits of owning property but you don’t have the same restrictions that go along with living in a home you own. For example, let’s say you decide to move to another city in a different state to pursue a job opportunity. In that scenario, you’d have to put your home on the market and go through the process of financing a new home if you plan to buy again.

With an investment property, you wouldn’t necessarily have to do that. If your tenants are providing you with reliable income, you could simply hire a property manager to collect the rent and tackle any problems that arise. You’d have to pay them a fee, which would detract slightly from your profits but you’re still making money and you don’t have to go to the trouble to sell.

Cash and Good Credit Are Prerequisites

Good credit is a must if you want to get approved for a mortgage and lock in a great rate. According to the Ellie Mae Millennial Tracker, the average FICO credit score for millennial homebuyers is 724. That’s not too shabby but overall, millennials have the lowest average credit scores of any generation.

If your credit score is closer to 620 than 720, you could still qualify for a loan but your rate may be less than stellar. Bringing a larger down payment to the table can offset the difference because it means you’re financing less. The industry standard is 20 percent down for a conventional loan, so if you’re trying to balance out a lower credit score, it’s in your best interest to save every penny you can.

At the same time, you should be doing things to improve your credit. Paying all of your bills on time and making a dent in what you owe if you’ve got debt can go a long way towards raising your score.

Investment Properties Aren’t Risk-Free

Historically, real estate has a tendency to remain relatively stable when stocks go haywire, but that’s not always the case. Investing in a rental property or tackling a fix and flip project isn’t something you can do without understanding what’s on the line.

If you can’t keep renters on a steady basis or you blow your flip budget and the home’s not selling, you risk losing money instead of making it. That’s the last thing you want to happen. Doing your homework can help you cut down on the risk as much as possible.

Spend some time studying the market you want to invest in. Find a mentor who’s making money as real estate investor. Look at the broader trends that are happening in the industry. The more you know going in, the better your odds of banking some serious cash from your investment.

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