One of the previous posts discussed the rising costs of education and the power of compound interest. So, how are millennials accumulating their wealth if they are not fully taking advantage of retirement plans for their savings? The answer is real estate is where this generation it appears has been putting its money to use. Over the last four years, those under the age of 36 are the biggest group that is buying real estate according to the National Association of Realtors. And the reason is real estate has the potential to make someone a lot of money if the investment has been made properly.

Now, it is important that anyone either buying real estate or investing in it needs to realize, you want to maintain a low debt level on your personal balance sheet. By managing your finances properly, you will maintain a low level of debt be that real estate, credit cards, automobiles or student loans. If you have any of these develop a plan to get out of debt or at least have your debt at a manageable level. Pay debt as fast as you can so you can invest more in real estate or a traditional retirement account. That way compounding works in your favor and not against you as it does when you owe others money.

Now personally I would recommend saving as much as you can and maintaining low levels of debt. And that does mean saving while paying off your debts if that is possible as every little bit saved gets you that much closer to your goals. But do not save if the opportunity cost will be against you when you have such debts as those associated with credit cards. Most other debts you can afford to save while paying them off with the exception of credit card debt due to its high-interest rates. It makes no sense to save money that will earn you 8% when your credit card debt costs you 24% or more. Now if you have debt that costs less than about 8% or 10%, it makes sense to pay off the debt and save at the same time, especially if your invested funds earn more than the cost of the debt. But always do the opportunity cost analysis for yourself to see which is better for you at that moment in time.

The first home you but should be the one you will live in and I am hoping you have saved up enough to put down at least 20%. Then I would recommend a 30-year mortgage over a 15-year. Why? Well, if you go with the longer loan, it lowers the monthly payment but does cost you more in interest. But as there are no prepayment penalties, you can always send in additional principal payments towards a 30-year mortgage. Then if for some reason you need some of that payment you can adjust a few months payments lower and not be in violation of a higher 15-year mortgage. Get in a position where you have paid for at least 50% of the mortgage and have little or no other debt and then look for a second house to rent.

When looking for a rental, you will need to have at least 20% to put down on the home and have a lower debt to income ratio to present the lender. Now avoid costly courses or seminars on how to invest. Read books by reputable authors or look for reputable blogs online. Study and absorb as much as you can on the subject. Then find a home that needs some work that you can do yourself to get it ready to rent in a good neighborhood. The lower the cost and the higher the rent you can charge the better off you will be in this process. Make sure that the rent you will get from the purchase will cover all insurance, the mortgage payments, and taxes plus leave you $300-$400 a month in excess funds. That way you can save for unexpected repairs or months where the house will sit empty in-between renters. But pay off the mortgage as soon as you can so you can move on to your second rental property.

Once the first house is paid for you can repeat the process and find that ideal second rental property to invest in. Then you will have rent to cover that mortgage plus you will have the rental income from the first property that is paid off to accelerate the payment on the second rental property. Then repeat that process and buy additional properties. But under no circumstance should you take on more debt than one house at a time as that is too risky. Take your properties one at a time and slow and steady to build your real estate portfolio.

If you have any questions or comments on this post, please leave a comment here or contact me directly.