Yes! Real estate is a good investment for Millennials who are seeking to create long–term financial stability for five1) reasons:
- It provides better returns than stocks with less volatility.
- Its value increases over time.
- It is a high value tangible asset.
- It allows investors to diversify their portfolios.
- It has many tax benefits.
There are several ways for Millennials investing in real estate to do so. Some ways include direct ownership, real estate investment trusts, and crowdfunding.
Home Buying for Millennials Investing in Real Estate
Money Under 302), an online personal finance resource for young adults, stated that purchasing a home to live in is not a form of real estate investing. But it is a financial commitment that can provide both personal and financial rewards. It is also the largest financial investment that many people may make during their entire lives.
Millennials are making3) this financial investment at a slower pace—in part—because of tight credit, student loan debt, and high unemployment. However, in recent years, they have begun to buy homes in larger numbers. The following discussion summarizes key characteristics of this group of housing consumers including purchase price statistics.
Characteristics of Millennial Home Buyers
In its, 2018 Home Buyers and Sellers Generational Trends Report 4), the National Association of REALTORS® (NAR) found that the Millennial Generation was the largest group of home buyers (36%) in 2017. The association defined Millennials as people who were 37 years of age and younger. This finding, which has remained consistent for several years, reflects the fact that Millennials are the largest generation in the United States.
NAR reported that the group is maturing and becoming more conventional in their home buying habits. For example, 54% of them purchased homes in suburbs and 79% bought detached single–family homes. Both of these figures represented an increase from last year's figures. In addition, 52% of them had children who are younger than 18 years of age in their homes and 66% of them were married. Nearly half (48%) of Millennials bought homes because of a desire to own a home while 12% needed larger homes. Fifty–five percent of them revealed that their primary reason for buying homes when they did was because they were ready to do so (i.e., it was the right time).
Mortgage and Purchase Price Statistics
Realtor.com5) reported that Millennials investing in real estate are acquiring the largest number of new mortgages and purchasing large numbers of homes at lower price points but with considerable debt. The company studied data from more than 3.2 million mortgages that were acquired from January 2013 to October 2017 to determine changes in buying habits of Millennials and other generations.
The company stated that this generation is still saddled with student loan debt. In fact, the Federal Reserve6) estimated that student loan debt totaled $1.49 trillion dollars in the fourth quarter of 2017. Student Loan Hero7) provided these statistics about this debt:
- Approximately, 44.2 million people have student loans.
- On average, students in the Class of 2016 graduated with $37,172 in student loan debt.
- The student loan delinquency rate is 11.2%. This figure is based on 90 or more days of delinquency and loans in default.
- The median monthly student loan payment for borrowers who are 20 to 30 years old is $203.
- The average monthly student loan payment for borrowers who are 20 to 30 years old is $351.
In addition to this debt, Millennials investing in real estate are starting families and purchasing houses in a market in which home prices have typically increased faster than wages.
Median Purchase Price
Realtor.com's analysis determined that in September 2017 the median price of homes for which Millennials investing in real estate obtained mortgages was $237,000. Generation Xers bought houses with mortgages that had a median purchase price of $280,000 while Baby Boomers purchased homes with a median price of $258,000. Millennials, however, are narrowing the gap in purchase prices.
Price Tiers of Purchased Homes
Millennials (who obtained mortgages) also purchased more homes at all price ranges compared to other groups. Since late 2013, they have been buying the largest number of starter homes (priced below $200,000). During the summer of 2017, they bought the most homes in the low and middle tiers ($200,000 to $350,000). This occurred for two reasons: (a) the demand for starter homes has outpaced supply and (b) older Millennials investing in real estate are starting to upgrade to second homes. If this trend continues, they will surpass Generation Xers in purchases of homes in the middle and upper tiers ($350,000 to $700,000) by the end of 2018. Furthermore, they have surpassed Baby Boomers in the purchase of homes that cost $700,000 or more.
Although they are assuming more debt to purchase more expensive homes, Millennials' debt–to–income ratios have only increased slightly. This indicates that their wages are increasing as well. In October 2015, the average debt–to–income ratio for mortgage applicants in this group was 37%. Two years later in October 2017, it had increased just one percentage point to 38%.
Some Millennials are taking on more debt to invest in real estate via the purchase of primary residences that have the potential to appreciate in value over the long–term. Others, however, are interested in real estate investing for purely income–generating purposes.
Interest in Real Estate Investing
RealtyShares8) and Harris Interactive conducted a survey to better understand people's perceptions about investment options. They found that despite limited knowledge about its potential benefits, millennial respondents were interested in real estate investing. For example, 72% of them believed that flipping houses is a good way to generate income. Moreover, Millennials demonstrated enthusiasm about real estate investing. More than 80% of those surveyed wished that real estate investing was easier, and 63% of them would be more inclined to invest in real estate if technology existed to make the process easier.
Why Are Millennials Interested in Real Estate Investing
BiggerPockets9) reported that Millennials investing in real estate are interested in investing in real estate for three key reasons:
1) They receive the benefits of home ownership without having to deal with the disadvantages.
Acquiring rental homes or making other types of real estate investments provides the financial benefits of buying (including consistent income and cash flow) without having to settle in a single location.
2) They gained insight and financial savvy from living through the Great Recession.
Distrust in financial institutions that stems from financial hardships faced during the Great Recession has piqued Millennials' interests "in forging their own, less traditional paths." They also want to protect themselves from the kind of financial downturn that hurt their parents' long–term stability including their retirement plans. Rental income, for example, is one way that they can create an additional stream of income that provides protection both in the short–term and over time.
3) They understand the concept and value of diversification.
According to Investopedia10), diversification is a technique that involves investing in a variety of areas that all react in different ways to the same event. This enables investors to reduce risk and maximize return on investment. Some Millennials understand that relying on one asset like a home or one investment vehicle is not the best strategy for increasing wealth in the long–term.
To learn more about Millennials Are Investing in Real Estate visit this11).
Real Estate Investment Trusts and Crowdfunding
In addition to purchasing homes to live in or to rent out, Millennials can invest in real estate through real estate investment trusts and crowdfunding.
Real Estate Investment Trusts (REITs)
An REIT12) is a company that owns and operates or finances income–generating real estate. These companies give investors the opportunity to (a) own real estate without the trouble of managing it; (b) gain access to dividend–derived income and total returns; and (c) help communities grow and thrive.
They enable investors to build portfolios of real estate assets through the purchase of an individual company's stock, an exchange traded fund (ETF), or a mutual fund. Stockholders earn a share of the income that the real estate generates.
Real Estate Crowdfunding
Crowdfunding13) makes it possible for people who need to raise funding for their undertakings—like businesses, inventions, nonprofit organizations, or projects—to use online platforms to attract investors. This investment vehicle may be particularly appealing to Millennials who tend to rely on technology more heavily then older generations.
Similar to REITs, real estate crowdfunding allows people to invest in real estate without the hassles of ownership. They are shareholders in the crowdfunding company who receive a portion of the profits produced from the real estate.
Advantages and Disadvantages of REITs and Crowdfunding
Both REITs and real estate crowdfunding allow investors to build their portfolios—with less revenue than direct ownership—without taking on all the risks of owning and operating real estate.
REITs typically have higher expenses. For example, they could have portfolios that are hard to manage. The real estate may have large maintenance costs, and the companies' managers may receive some of the profits. These higher expenses reduce rate of return for investors.
Real estate crowdfunding14) is not liquid or traded. As a result, it could be nearly impossible to cash out on this type of investment prior to disposal of the property. Furthermore, unlike REITs15), crowdfunding companies are not required by law to distribute 90% of their taxable income to investors annually.
Millennials investing in real estate grew up during great technological advancement and a devastating economic downturn. As a result, they have the skills and fortitude to make savvy real estate investment choices. This course16) provides comprehensive information about Millennials and how they are changing real estate.
Footnotes [ + ]