Buying real estate at 18 and holding it can be an incredibly smart decision if done the right way. However, getting a mortgage at 18 can be difficult if you have no credit history, so you might not be able to afford the properties you want to buy outright. Instead, there are several ways to gain exposure to the real estate industry and make a return on your investment.
Hindsight really is like 20/20 vision, particularly when it comes to making money. For instance, how many of us wish we could have bet our life savings on the Red Sox after Game 3 of the 2004 World Series playoffs when they came back from 0-3 and upset the Yankees? And don’t we wish we could have bought Tesla or Google stock when they first went public?
When it comes to real estate, many of us also think about how different our lives would be wealth-wise if we saved and bought our first investment property at 18 rather than spending money going out with friends. So, if you are 18 (or close to it) or have a child/family member who wants to get on the real estate investing ladder, pay attention. Here is what you should know in order to buy real estate at 18.
Why does age 18 matter?
When you are 18, two important things happen that enable you to buy your first property or become a real estate investor. You can legally enter into contracts such as the sale and purchase contract of a mortgage, and you can officially have a credit score. In some cases, you can build your credit score with the help of an adult, such as an authorized user of a credit card. But for most people, credit starts at 18.
Steps to buying property the right way at 18
We are going to make a couple of assumptions for those looking to buy property at such a young age. Most 18-year-olds are not ready to settle down with a family, so we are going to assume that an 18-year-old is first and foremost looking for investment properties and not a place to live. The second assumption is that they will hold the investment property for the long term and not look to buy and flip.
For 18-year-olds, there are three questions they need to ask.
- What is the investment strategy?
- Where is the investment, and what kind of structure is it?
- How much money do they have, and can they afford it?
1. Investment strategies for buying real estate outright
There are two primary ways real estate investors make money from real estate: value appreciation, when the prices of the asset go up, and income (money derived from renting the property out).
In the real estate business, an appreciation play is when you buy real estate/property assuming the value will go up. Then you sell the property and make a profit when it does. The upside of an appreciation play with real estate investment is that it’s rather easy to get a mortgage, enabling you to use leverage without paying sky-high interest rates. However, as 18-year-olds do not have a rich work history or credit history, it can be more difficult to get a mortgage.
Example: Skylar buys a house and hopes it appreciates in value
In this example, we have Skylar, who is looking at buying a house in his home city of Chattanooga, Tennessee. The property is worth $300,000, and he is able to get a 70% mortgage with a 5% interest rate. We assume that property prices will grow 5% on average annually over the next 15 years and that his cash flow from the rental vs. mortgage breaks even.
|Purchase price (age 18)||$300,000|
|Down payment (30%)||$90,000|
|Value in 5 years (age 23)||$385,008||$85,008||$175,008|
|Value in 10 years (age 28)||$494,705||$194,705||$284,705|
|Value in 15 years (age 33)||$634,011||$334,011||$424,011|
You can see above the property will be worth considerably more when Skylar is 23, 28, and 33. We show the profit (value-purchase price), as well as the equity available, which is his original down payment, plus any value appreciation. This is important to note because Skylar can keep this property and tap the equity in the future through a HELOC, home equity loan, or cash-out refinance. At different points in his life, he can tap the equity to invest further or pay for expenses like graduate school if he so desires.
An income play in real estate means that you maximize the amount of income you can derive from the property. You don’t necessarily care if the value of the property goes up as long as it can produce a high income.
Example: Skylar buys a rental property for income
In this example, Skylar will buy a house as a rental property for $150,000 which is currently making about $15,000 a year in net rental income, with a net yield of 10%. In one scenario, he pays cash; in the other, he gets a 30-year mortgage at a 5% fixed interest rate.
|Annual net rental||$15,000|
|Down payment @ 30%||$45,000|
|Annual net rental||$15,000|
|Annual mortgage payments||$6,756|
|Cash flow after mortgage||$8,244|
You can see that if Skylar pays cash, he receives $15,000 in yearly income after all his HOA fees, property management fees, and property taxes are paid. This comes out to a net yield of 10%. In the second scenario, he gets a mortgage for 30 years and has to service this debt.
This drops the net yield on the property to around 5% after the debt is serviced. However, his cash-on-cash yield, which is the return derived from the income in relation to the equity he put down (30%), is 18%.
Skylar can do both, eventually…
The beauty of buying real estate at 18 is that you can have a portfolio in no time. One way to do this would be for Skylar to buy the property that is appreciating and, in 10 years, use the equity he built to buy a rental property in cash. In this case, Skylar doesn’t have to worry about taking on two loans for two separate properties. By the time Skylar is 23 or 24, he might be able to do this.
He can take money out of his property at age 23/24 and pay cash from the rental property. This way, he now has two aspects to his portfolio: a value appreciation play and an income play.
2. Decide what to buy
So what are you going to buy and where are you going to buy it? Here are some factors to consider:
Condo vs. single-family home
The biggest difference between condos and single-family homes lies in the HOA fees. As condos are typically part of larger buildings with amenities, the HOAs can be sky-high. Therefore, it can be a difficult structure for an income play on property investment. You should make sure that you break even or are close to breaking even on your incomings and outgoings on a condo. A house does not have as many fees but might be more difficult to rent out.
The location is another factor. Do you want urban, more suburban, or rural? Furthermore, if you want to manage the property yourself, it’s best for it to be within driving distance. As a general rule of thumb, in a period of declining prices, properties in more prime urban areas, close to commercial centers, will hold value vs. properties that are farther out. However, prime areas in urban centers are generally more expensive than their suburban counterparts.
3. How to pay for it?
So, if you are only 18, you probably don’t have much savings from previous work experience, but you might have some money squirreled away. You also might have been gifted money from your parents or inherited money from a grandmother. The problem, however, is that you don’t have enough credit history to be assured of a mortgage. So here are some ways you can work to pay for a property at 18.
Start building your credit!
If you just turned 18, then see the many ways you can build credit before your 19th birthday. Credit cards utilized the right way and on-time bill payments are a good way to start.
Pay a deposit and get a mortgage under your name
It’s possible that you could have money for both the deposit and a steady high income to get a mortgage, even without a credit history. Popular YouTube influencers and professional athletes can be 18 and make the type of money where this is possible. Even successful tradespeople can do it.
However, it’s important to make sure you know the basics of home loans, according to Luke Michaels, an experienced real estate investor and property manager/loan coordinator at Treadstone Residential Mortgages. “After I landed my first entry-level job, I began talking to a local loan officer who offered guidance on the home-buying process, what I can afford, and the various new home-buyer programs available,” he says.
Different folks in the mortgage industry will give you different advice, though.
Michael Bardales, director of mortgage at Radius Mortgage, says, “The general rule of thumb is to ensure you can meet the qualifications of a home loan, which typically requires having adequate income, good credit, sufficient down-payment funds, and a low debt-to-income ratio.”
Bardales also lists these other options if you are unable to meet any of the mortgage requirements.
- Income/credit: Two years of full-time employment (with supporting documentation) is needed. Otherwise, having a cosigner (they do not need to live in the home) that does qualify can help.
- Investment loan/DCSR (debt-service coverage ratio): If unable to qualify based on income, getting a loan for an income-producing property can also qualify your ability to repay. The potential rental income can then be calculated into your pre-approval.
- Gift funds: If you don’t have the cash available for the down payment requirements, you are able to use funds gifted to you from a donor.
Pay the deposit and get a cosigner for the mortgage
At 18, you might have a willing parent or family member that can cosign on the mortgage. You provide the deposit, and they cosign the loan.
Raise money for a deposit and get a cosigned loan
In this case, you don’t have money for a deposit, and you need a cosigner for the loan as well. This might be very difficult to do for an 18-year-old, but with the right friends and family, it’s possible.
Raise money to pay cash
Maybe you see a cool property and want to raise money to buy it with cash. In this case, you can structure a small cash real estate deal by finding your own investors.
Raise money for a deposit with your name on the mortgage
If you are able to get your own mortgage, you can raise money for the deposit and take out the mortgage yourself. This way, you are only borrowing a bit of money for the deposit and bringing something to the table in the form of a mortgage under your name.
Other ways to invest in real estate
If you want exposure to real estate but don’t want to buy it, you can still get exposure at 18. Here are some ways to do it.
A REIT, or real estate investment trust, acts like a fund that invests in real estate. Even 18-year-olds can buy into a REIT with minimal capital needed.
Equity partner in development
If you know someone investing in property themselves, you can invest with them. One way is to become an equity partner in property development.
Under “equity sharing agreements,” existing private landlords sell the equity in their homes. An 18-year-old can buy a portion of equity already existing in a home.
What is the best age to buy a house?
The sooner the better, as long as you can afford it, but it also depends on the trajectory of the market. If you are 18 and the market is declining, it might not be the best time to buy. You might also need a few years beyond age 18 to build your credit history to the point where you can secure your own mortgage.
Can you buy a house at 18 in California?
Yes, and even a minor can own property in California under the state Supreme Court case of Estate of Yano (1922) 188 Cal. 645, 649.
Who can buy a house in the USA?
Anyone from any nationality can buy a house in the United States, as long as they are not from a sanctioned country or subject to other special regulations that might pertain to their country of origin.
- Buying real estate at 18 and holding it can be an incredibly smart decision if done the right way.
- The first step is to determine your strategy (building equity and selling or renting out the property) with the idea of doing more if your first investment is successful.
- The second step is deciding what type of property you want and where.
- The final step is deciding how much you can afford and how to pay for it. Can you pay cash, get a mortgage, or do you need a loan cosigner or to raise money?
- If you aren’t able to purchase a property, you can still invest in real estate through a REIT, a partnership, or a shared equity agreement.
View Article Sources
- Credit Scores – Federal Trade Commission
- House Price Index Calculator – Federal Housing Finance Agency
- Best 7 Assets To Buy In Your 20s – SuperMoney
- How to Use a Real Estate Certificate of Deposit to Buy Property – SuperMoney
- How To Finance Multiple Rental Properties – SuperMoney
- How to Finance a House Flip — All Possible Financing Methods – SuperMoney
- Buying a House With a Friend: Good or Bad Idea? – SuperMoney
- How to Build Credit at 18 – SuperMoney
- Cosigning a Mortgage Loan: Pros and Cons – SuperMoney
- Cash-on-Cash Return: What Is It and How Does It Work? – SuperMoney