Why Investing in Real Estate Makes Sense for Young Professionals

by Sean Bryant on February 14, 2013

House for rentMy best friend, Josh, bought his first home in the summer of 2009. He got a great deal and a low interest rate… and a year after he bought it, he got a pink slip at work.

Suddenly, Josh’s big, new house felt like a big, new burden. While the 2,500 square feet had felt luxurious when he was gainfully employed, all those extra – and unused – rooms started to feel like wasted space and wasted money without a paycheck coming every other week.

But Josh didn’t panic. Instead, he turned what could have been a modern-day financial tragedy into a story of triumph and overcoming adversity.

Looking for Investment Opportunities

Josh lived alone in that four-bedroom house for exactly a month after losing his job before a light bulb went off in his head. He could rent out the extra three bedrooms to help cover what his unemployment insurance couldn’t. Within a few weeks, he had three tenants – all either friends or friends of friends – whose monthly rent covered his mortgage payments and then some.

A few months into his experiment as a landlord, one of Josh’s roommates mentioned that he’d pay a premium to swap his smaller bedroom with access to the full bathroom down the hall to have Josh’s master suite instead. Josh, still unemployed, took him up on the offer. Not long afterwards, one of his current roommates asked if his little brother could move in. Unfortunately, there wasn’t an extra room in Josh’s house, so Josh did what any investment-minded person would do: he gave up his own room and moved out.

Diving into Property Investment

At this point, Josh’s house went from being his residence to his business. Thanks to the rent being paid by four tenants, Josh was making double his monthly mortgage and escrow payments. Not long afterwards, he finally found a new job, and discovered he was making more money than ever, thanks largely to the investment opportunities he’d seen in his own home.

It was now the end of 2010, and property prices and interest rates were still low, so Josh decided to dive deeper into property investment and buy another house. Because it was a second mortgage on a second house – and because applying for a home loan had changed dramatically in the previous years – Josh had to put down more money to secure the loan. He turned to his mother, who saw this as a good investment opportunity, who co-signed with him on the loan.

While Josh rented a small studio apartment, he found tenants for his new three-bedroom house. This time, it was a family of four instead of four separate renters, but their monthly rent still allowed him to pay the mortgage, insurance, and taxes on the property and net a 25% profit to boot. Josh’s two investment opportunities were now paying him nearly $2,000 a month.

The Advantages of Property Investment

Josh’s story isn’t unique. Since the start of the Recession, demand for rental properties has exploded as the home loan application process has become more daunting. Many homeowners who couldn’t afford to sell their home – like Josh – turned into accidental landlords; others took advantage of the investment opportunities in the housing industry to start a side business or even a new career.

With housing prices still below market value in many locations, property investment can make you money on two fronts right now:

  • You can collect rent on the property, usually enough to pay the expenses of owning and maintaining the house and often enough to net you a small profit.
  • Over the long run, housing prices will continue to climb out of the cellar, expanding the value of your holdings as you collect rent money on them.

But the benefits of these investment opportunities expand further, to your tax burden. The IRS allows landlords to deduct expenses on rental properties on their tax returns, including:

  • Mortgage interest
  • Property taxes
  • Homeowner’s insurance premiums
  • HOA dues
  • Costs associated with maintaining the property
  • Costs associated with advertising for vacancies

I’m an optimist, and like to think that I’ve already seen the worst of what the housing market will throw at me in my lifetime. However, even if I’m wrong, property investment from a young age – like long-term investments in the stock market – gives you the cushion of time to recoup your losses should we suffer another downturn.

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Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.
  • http://Www.Plantingourpennies.Com/ Mrs PoP @ PlantingOurPennies

    Real estate has been a great investment vehicle for us the past few years, and as long as the numbers make sense, I recommend it. But there are a lot of costs that are unpredictable with owning rental units, so I wouldn’t recommend it to someone until they have a sizable emergency fund set up to deal with that.

    • http://www.onesmartdollar.com/ Sean @ One Smart Dollar

      I completely agree. With interest rates being so low and the prices of homes down so much now is the perfect time to snag rental properties.

  • http://twitter.com/JohnnyMoneyseed Johnny Moneyseed

    Josh is a smart dude! That’s for sure.

  • http://twitter.com/RFIndependence Pauline

    I did the same, bought a 3 bedrooms flat, rented 2, then moved out renting the third. I prefer that than a whole family, as it is less likely that all three tenants would move out at the same time.

    You talk about 25% profit, is it 25% annual return on the money he put down or is the rent he charges 125% of his fixed cost?

    • http://www.onesmartdollar.com/ Sean @ One Smart Dollar

      Sorry that should be more clear. The rent he receives is 25% over and above all of the fixed costs.

  • http://twitter.com/StumbleForward Chris Holdheide

    That’s a great story Sean. Josh could have threw his hands up but instead he did exactly the opposite and embraced the situation. That takes guts to do and now he’s doing even better than before.

    • http://www.onesmartdollar.com/ Sean @ One Smart Dollar

      Yeah It is really a good “never give up” type of story.

  • Nick @ ayoungpro.com

    I like this post. I am currently in the position of “accidental landlord” and my wife and I are having a hard time deciding what to do. On the one hand, it is nice to have someone else paying off our mortgage. On the other hand, it is a tremendous amount of risk and a bit of a headache.

    • http://www.onesmartdollar.com/ Sean @ One Smart Dollar

      I am right there with you Nick. My wife and I moved to Denver, but we still own a condo in Chicago. While we are breaking even I would much rather get rid of the place.

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