Time and money is a weird paradox. When you’re young and starting out, you typically have a lot of discretionary time and very little discretionary money. As you get older, that paradigm usually shifts. When you’re in your 40s or 50s, you’re typically killing yourself with work, kids, church, and hauling people where they need to go. The list goes on and on. So while you may have more discretionary money, you have very little discretionary time.
When it comes to investing in real estate, time is by far the greatest ally you have. The tough thing is having the cash to start building your money factory, especially if you’re starting from scratch. When I say money factory, I mean the cash you take from your rental property (or other business endeavors) that you can put to work to make more cash, and even then, you still need time. So, what do we make of this problem?
Let’s break down the importance of timing in real estate investing. When you buy rental property, you’ll likely make a down payment, which you will then use to leverage for a return on your initial investment over [x] amount of time. Well, the earlier in life you do that, the more time you have to benefit from the return on your investment (ROI). The goal, then, is to have as much time as possible for your investment to pay for itself.
In the example of rental property, let’s say that you finance a rental house over a period of 20 to 25 years (which is pretty likely for today’s market). So, if you’re 30 years old and finance a rental house over 20 years (and keep it rented), you’ll be 50 when the house is paid for. At this point, the rental property functions almost as a trust. For the rest of your life, you’re going to reap the benefit of whatever your rent minus operating expenses is. So, if your rent is $1,000 a month and your operating expenses are $250, then you’ll receive $750 a month (as long as you keep the house rented) for the rest of your life. Multiply that by how many rental houses you have, and things are looking pretty good.
The most common age group I talk to about this type of real estate investing is late twenties to mid thirties. At this stage in their life, people begin to hit a wall. They may have spent their 20s full of hope and optimism in their career, but now they’ve realized that the income potential for their chosen field may not match their lifestyle, and they become disenchanted. Many times, people from this category will come and ask me, “What can I do to get out of the rat race?” Essentially, these individuals want to stop working for someone else and experience more freedom in life. Fortunately, real estate investing can accomplish both, giving you choices and self-direction as you begin to build generational wealth. At the end of the day, real estate investing allows you to be self-determined at an earlier point in life and gives you the finances to make more choices. If you get started in rental property in this age range, you’re probably going to have a decent balance of discretionary income and discretionary time, thus putting you at a realization for your highest potential.
When you first get started in real estate investing, it may be tough to get the cash together for a down payment, especially if you’re younger (early 20s). But, as it is with any point in your life, you can find the money by following a couple steps:
- Be disciplined with your budget.
- It’s critical to know how to be disciplined with your budget. Spend the time necessary to build a good budget and stick to it; don’t cheat it. If you’re working 40-50 hours a week, it’s likely that your job will cover all your living expenses, but you may not have money left over to save. With this being the case, many people will need some sort of side hustle to generate more income.
- Establish an emergency fund. In my opinion, this should be a minimum of 3-6 months worth of living expenses that you have tucked away. The earlier you can save money and establish an emergency fund, the earlier you can start saving for the down payment toward your first rental property.
- Commit to saving for a down payment.
Once you’ve built a good budget and saved an emergency fund, you’re ready to start saving for a down payment. You can do this in a variety of ways, either by saving incrementally or saving in large amounts. Many people, for example, use their quarterly or annual bonus to put toward a down payment. I would recommend saving until you have at least 20% ready to pay down toward any investment property.
After following these steps, I’d say you’re ready to start down the path of investing. The sooner, the better! The power of time is on your side when you’re young. Consider this: you buy your first rental property when you’re 25 and each year until you turn 30, you buy another. Think about how powerful that will become when you turn 50 and have five or six rental houses paid off! At this moment, you’re in a much better position to help your kids pay for college, buy a new house, take extra vacations (or have a vacation home), or not do any of those things and just go buy a Ferrari! All jokes aside, real estate investing gives you choices. I’ll also mention that the time it takes to manage those 5 or 6 rental houses is minimal. Sure, getting started is a pain in the hind end, but as you get things up and running, the management time becomes minimal, especially if you have a property manager.
If you’re older and looking to get started, you could lament the fact that you squandered away your 20s and 30s, or you could get started today. It’s like the saying about the best time to plant an oak tree. Well, the best time to plant an oak tree was 20 years ago, but the second best time to plant an oak tree is today.
I recently met with a man in his late 40s who doesn’t own any rental property. One of his questions was whether or not it was too late for him to get started in real estate. My answer to him? No, absolutely not! If he takes 20 years to finance a rental house, he’ll be pushing 70 when the house gets paid off, which is around the time that everybody else retires anyway. I did advise him, however, (and would advise an older reader the same way) to be a little more aggressive in how much money he puts down or how he manages his debt retirement schedule. I also told him that he may want to be more selective in the deals he puts together-he might need a tighter pro forma, for instance. But, in the end, I don’t think someone in their 40s or 50s is too old to start investing. I even know a couple in their 70s who started a rental property! Besides, with the average lifespan reaching close to 85 years, you will experience some cushion of time to reap the benefits of your investment. Frankly speaking, I don’t know that there is a time that’s too late to start investing. Regardless of the time left for you to experience the payoff of your investment, think of the legacy you’ll leave behind for your family!
It’s never too late to get started in real estate investing. While the time you get started may require different decision matrix criteria, the end result is the same: cash, freedom, and choices. The point is, just start.
I’ll leave you with a few questions:
- Do you have a budget that you live by?
If not, start to build one. It’s never too late, and once you get one established, you’ll be glad you did.
- Do you have an emergency fund set aside?
It’s important to protect at least 3-6 months worth of living expenses. You never know when you might encounter unforeseen circumstances, and you don’t want to be caught off guard.
- If you’re older, what opportunities did you miss out on to start earlier?
Don’t feel guilty about what you missed out on, but identifying those things may help you take advantage of the opportunities you have now.
- What’s stopping you from saving for a down payment right now?
I understand, there are plenty of hesitations. In the case that it feels too risky, as it does for many people, I’d encourage you to check out my piece on risk here: How Risky Are You?: Assessing Risk Tolerance.