By Maryalene LaPonsie
US News & World Reports
If you ask investors, many will tell you real estate is the best place to park your money for long-term gains. In fact, 27 percent of 1,000 adults surveyed in July by Bankrate said real estate was the best way to invest money not needed for another 10 years. That topped the list of options, beating out cash, the stock market and gold.
Despite the money-making potential of real estate, some experts say millennials are opting out of the market.
"What we're seeing a lot with our younger clients is they often think they're too young to invest in real estate," says Scott Cousino, a certified financial planner and co-owner of Legacy Capital Planners in Grand Rapids, Michigan.
However, investing in properties may not be out of reach, even for those millennials who have a small bank account. Ari Rastegar, CEO of Rastegar Capital in Dallas, and himself a millennial, is an enthusiastic advocate for his peers to invest in real estate. He says it's something that can be done with little risk and only a couple thousand dollars.
"For me, it's all about lowering risk," Rastegar says. "I come from the vantage point of 'just don't lose money.'"
To that end, Rastegar recommends millennials first invest in real estate funds. It's one of four options available to young investors who want to make money off the real estate market.
Option No. 1: Put money in real estate investments.
The easiest way for millennials to invest in real estate is to buy mutual funds based on property. An even more lucrative option may be to put money in real estate investment trusts, known as REITs. For example, the FTSE NAREIT All REITs index fund had a 27.4 percent return in 2014. That was nearly double the 13.7 percent gain for the S&P; 500 during that year.
Any investment broker can help millennials evaluate and purchase real estate funds or REITs, but Rastegar recommends they look for a registered investment advisor.
"A RIA is fundamentally different," he says. "They have an invested interested in your success." That's because while a broker may earn a one-time fee or commission from a sale, a RIA is often paid an ongoing percentage of their clients' managed assets. Rastegar says that's motivation for a registered agent to get clients into the best investments possible.
Option No. 2: Move on to private REITs for better returns.
Once someone has experience buying real estate funds or public REITs, Rastegar says the next step is to look for private REITs, otherwise known as private placements.
These funds may have better returns than public REITs, but they are also only offered to select investors. "For some of the most advantageous deals, you need to be an accredited investor," Rastegar says. Accredited investors must have at least two consecutive years of $200,000 income or at least a $1 million net worth, not including a primary home. "A lot of investors haven't yet met that threshold."
As a result, private placement may not be a good fit for all millennials. However, for those who can get in on these deals, Rastegar says they offer good returns with enough checks and balances within the investment to lower risk.
Option No. 3: Buy a property on your own.
Not everyone wants to buy a piece of a mortgage or real estate through a fund or REIT. Some millennials may prefer to actually own a property themselves. In that case, Cousino says people should be very careful about what they buy and how much they pay.
"You make money when you buy, not when you sell," he says, repeating an old real estate axiom.
Before making an offer, millennials should carefully consider the expected cash flow of the property, how it will be managed and the exit strategy for getting out the investment when needed. Those are all discussions that may be best had with a professional such as a real estate broker, certified public accountant or financial advisor.
"Wisdom comes from two places: mistakes and mentors," Cousino says. "We help clients discern what is a smart purchase,"
Option No. 4: Purchase a home instead of renting.
Ann Thompson, Bank of America's regional sales executive for Northern California, says purchasing a home may be one investment some younger people are reluctant to make. "[Millennials] were adolescents and young adults during the biggest financial crisis of our time,” she says. “I think that caused fear and trepidation [about homebuying], and I think some of their hesitation is well-founded."
At the same time, Thompson says rental prices in major cities such as San Francisco, Los Angeles and New York are outpacing the monthly cost of some homes. Purchasing a house means monthly payments build equity in an investment that may be later sold for profit.
High rents can make it difficult for millennials to save money for a down payment, but programs are available to lower the amount of cash needed upfront to buy a home. For example, Bank of America allows doctors or medical residents to place only 5 percent down on mortgages up to $1 million. Plus, the bank doesn't include those applicants' student loans toward their income-to-debt ratio so long as those loans are deferred.
Millennials may balk at the idea of being tied to a specific location at such a young age, but Thompson says there is no reason buying a house means you have to live there forever. "Remember, you can rent out that property if you're moving or your job takes you elsewhere," she says.
Real estate investing isn't only for the old or the rich. Even millennials with limited means can use real estate to build their personal wealth. Rastegar simply cautions not to take on too much risk too quickly: "You've really got to crawl, walk and then run."