Once you’re in a well-paying career with potential for ongoing advancement, your income should no longer be the limiting factor preventing you from becoming financially sustainable. There’s still some work to do though to ensure that you secure and develop your finances to meet your needs for a lifetime. In this section we'll touch briefly on a few topics related to ongoing financial management and then take a closer look at investing in financial markets and real estate ownership.
Following are a few key areas to keep in mind with regards to managing your finances. Generally they’re not tasks where you can do them once and forget about them, but rather areas where you’ll want to revisit periodically.
Consider hiring a professional financial planner / advisor - Not everyone has the time or inclination to focus on managing their finances, and even if you do, it can be reassuring to have a professional to help educate you, make you aware of options that may not be obvious, and help keep you on track with your goals. There are a number of different kinds of relationships you could have with a financial professional. Some may just do one-off consulting. Some you might work with ongoing. Some are there to offer guidance, while others will actually manage funds for you. Financial professionals can also help connect you with other kinds of professionals, like tax professionals, when that would be useful. It isn’t essential that you work with a professional, but it is vital that your finances get adequate attention and working with a professional is one way to make sure that happens.
Nurture your career development - For the moment at least, your salary from your work is the foundation that supports the rest of your financial success. Make sure you’re doing everything you need to do to deliver great work, advance, grow your professional network or whatever else it takes to continue to be successful. In fact, in many cases it is useful to plan on changing jobs every 2-3 years in order to keep progressing.
Revisit your approach to savings - How much you need to save each month will vary depending on your life circumstances and goals. Now is the time to be deliberate about balancing your current needs and wants with your future needs and wants. You certainly don’t need to deprive yourself of important things today in favor of a better future, but it is important to consider what the life you see for yourself is going to cost (buying a house, raising kids, taking care of aging parents, retirement, etc.) and begin setting aside money now. Probably one of the biggest mistakes people make that undermines their financial success is to let their expenses grow in tandem with their income. Don’t fall into that trap.
Invest your savings - Maybe one of the biggest mental shifts as people transition into having more money is to see that you now have two sources of building wealth: your labor and your money. Once you start to have significant amounts of money saved, it isn’t enough to keep it sitting idle. It needs to be invested, one way or another, so that your money makes money. It can be exceedingly difficult to reach your longer-term financial goals otherwise.
Be discerning with your debt - Some people have an instinct to borrow money indiscriminately, and some avoid or pay off debt compulsively. Neither of these extremes will serve you well in the long run. Debt is a powerful tool if you get comfortable using it. At this point it is important to pay attention to the interest rates on your debts, and compare them to the returns you’re getting (or expecting to get) on your investments. Then always be on the lookout for opportunities to move money in whatever direction helps you the most. For example:
If you have some debt at 10%, but could borrow money now at 5%, you may want to borrow the cheaper money to pay off the more expensive debt.
If you have a mortgage at 3.5% and can invest your money for a 6% return, it might be better to invest any extra money rather than to pay ahead on the debt.
Just a couple other notes on managing debt. First, it is generally best to avoid variable rate debts. Prevailing interest rates go up and down. If rates go up, you don’t want your debt to get more expensive as it will if the rate is variable. If rates go down significantly, you can see if there’s an opportunity to refinance at a lower, fixed rate. There are some reasonable exceptions to this rule, but it's a good starting guideline. Second, inflation ends up as another point in favor of having debt (especially fixed rate debt). Normally people dislike inflation because it means the money you have is worth less now than it was before. That is, you can buy less with it. But this works in your favor if you’ve borrowed money because the money you pay back in the future will also be worth less by the time you're paying it.
Consider and address all the things that might undermine your financial success - Tend to all parts of your health and well-being (physical, mental, social, etc.) Make sure you have adequate insurance for your life circumstances (auto, homeowner / renters, health, life, etc.) Expand your emergency savings / line of credit to make sure you can cover larger emergencies or disruptions to your income. Keep professional relationships warm in case you find yourself job hunting unexpectedly. Get strategic about playing financial defense. What could really hurt you financially in a big way and how can you prevent or manage it?
Suggest Searches:
How to hire a financial planner / advisor?
How to keep growing in my career?
How much should I be saving? Strategies for saving money?
Should I invest or pay off debt? Strategies for managing debt?
Maybe the first thing you should understand about investing in financial assets (e.g. stocks and bonds) is that there’s a good chance you’ll need to do it in order to reach your financial goals. It is the most straightforward and accessible way to have the money that you’ve saved grow over time. Most people will need this growth at least to make their retirement plans work, and maybe for more intermediate-term goals as well. The second point to understand is that the amount of time you give yourself to save and invest for future needs matters significantly. Of course by starting early you spread the savings over more months, so each month requires a smaller amount to be saved to reach your goal. But also, money invested for a longer period has more time to grow, further reducing the amount you need to set aside to achieve your goals. So, the take-away is you’ll want to invest much of your savings, and don’t wait to start.
Getting Started Investing
Often your first exposure to investing will be setting up a retirement account (such as a 401K) through your employer. If your employer offers something like this, it’s a fine way to get started. Many employers offer some amount of “matching” which means when you contribute money to your retirement account they’ll also contribute a portion in addition. Most of the time, it makes sense to contribute enough to your retirement account in order to get the maximum amount that your employer will match. Another benefit of setting this up through your employer is that it’ll be easy to set up an automatic deduction that takes some percentage of your pay and puts it into your retirement investment account. There should be someone available who can help you get started making decisions about how to invest the money as well.
If your employment situation doesn’t make a retirement investment account available for you, you can set up an investment account through a brokerage. Setting up this kind of account is pretty similar to setting up a bank account. Many brokerages let you do all your interactions online, and some will have local branch locations you can visit if you’re more comfortable with that. One decision to make in selecting an account is whether you’d like to make use of a robo-advisor, which is an algorithm that manages investments for you. On one hand, you’ll have less flexibility with an account managed by a robo-advisor than you would with an account you manage yourself. On the other hand, it can be helpful to outsource some of the decision-making and management of the investments. Another decision you’ll want to research and consider is if you want to set up some kind of retirement investment account (such as an IRA) or an investment account that is not specifically geared toward retirement, or perhaps one of each. Retirement accounts come in a few variations, but all of them have some kind of favorable treatment of taxes, which makes them very good options if you’re specifically saving for retirement. These accounts also have limits on the amount of money you can put into them, and penalties for taking money out before retirement. So if you want to save and invest money for something other than retirement as well, you may want to have a separate account for that. You can learn a lot about your options online, and often brokerages will have people who can answer questions as well.
Once you have your investment account(s) set up, and money flowing into them, your next step will be to figure out how to invest that money. When you invest your money, what you’re doing is using your brokerage to purchase something, let’s say shares of a stock for example, that is intended to ultimately return more value to you than what you paid for it. That’s how your money grows. The challenge at this point is there are literally thousands of options for things you could buy for your investments. So how do you decide what to do? It’s worth being at least conversant in some of the key concepts of investing in order to feel confident about the investment choices you make. That said, it isn’t at all necessary for you to become an expert, and you certainly don’t want to delay investing until you have a sense of mastery around it. It’s ok, and in fact probably best, to get an overview of the basic concepts and then just get started. And again, if all this seems like something you're not really interested in digging into, consider finding a financial advisor or setting up a robo-advisor account.
Whether you're planning to manage your own investments or seek help for that task, it's worthwhile developing a working knowledge of some of the fundamental terms and concepts. Again, it’s not necessary for you to have deep expertise before you start investing. Just begin to develop your familiarity. Use the suggested searches at the end of this section for a list of key concepts to investigate. It might be useful to check those out now so that you're familiar with the vocabulary for the rest of this section.
In addition to the topics you can / should learn about on your own, there are also a few terms and concepts where a quick Google investigation is a fine place to start, but isn’t likely to give enough perspective to be useful. These topics are listed below, with brief explanations about what you should understand.
What is investment risk?
Investment risk warrants a little extra explanation, in part because the term is used differently in different contexts and can become confusing. Overall, risk refers to the possibility that something bad could happen to your investments. The nature and extent of these risks vary depending on the types of investments you have. There are three kinds of risks in particular to understand:
Risk of permanent losses - It is possible to invest in things that lose value that never comes back. Fortunately, this kind of scenario can pretty easily be avoided by following 2 rules. 1) Spread your money over a wide range of quality investments (see diversification) and 2) Stay away from more exotic types of investments unless you thoroughly understand them. Many stock options, for example, permanently lose all their value on a regular basis.
Fluctuations as risk - One very common use of the term ‘risk’ is to quantify the frequency and extent of the upswings and downswings of the value of an investment, such as shares of a stock. Sometimes this will also be referred to as 'volatility' but that term comes with its own complexity. So, to distinguish these ups and downs from other kinds of risks, let’s call these swings in value ‘fluctuations’. As a general rule, you can get higher rates of return in the long run if you’re willing to endure more extreme fluctuations along the way. If you have a long time before you need the invested money, it can be advantageous to hold a ‘riskier’ mix of investments (bigger fluctuations up and down) in order to gain a greater return. It is typical as you get closer to needing to spend the money you’ve invested, to shift the investment mix so as to minimize these fluctuations. In that way you can make sure the value isn’t swinging way down right at the time that you need the money available to spend. This kind of ‘risk’ / fluctuations, is not to be avoided so much as understood and used to inform your investment decisions.
Risk of missing your goals - If you are so worried about the fluctuations of your investments that you end up selecting very stable, ‘low risk’ options, there’s an increased likelihood that you won’t get the rate of return that you need in order to reach your investment goals. Admittedly, this is not a ‘risk’ in the way that the word is typically used in investment circles, but it is important to understand. If an investment is described as ‘safe’ or 'low risk' you’ll want to make sure it still meets your needs for investing in the first place. For example, putting your money into certificates of deposit (CDs) will look pretty 'safe' but is unlikely to give you any kind of meaningful return on your investment. Remember, bigger fluctuations are typically associated with higher rates of return in the long run. If you go too far in minimizing the ‘risk’ of fluctuations, you’ll undermine your ability to get adequate investment returns. To invest successfully, you’ll want to balance your tolerance for fluctuations in the value of your investment in the short / intermediate term with your need to grow it in the long term.
What is diversification and how do you achieve it?
Diversification refers to holding a mix of different investments with the intent of minimizing the risks (all types of risks). The basic idea is that if you spread your investment dollars over many different options, some will go up while others are going down, which will stabilize the overall fluctuations and rate of return. Your total risk and returns will be the average of all the individual investments that you hold. There are a few important points to understand about diversification:
You don’t have to buy lots of different things in order to achieve diversification. There are many available Mutual Funds and ETFs that are built to offer diversification on many levels. For example, you can buy single ETFs that hold shares in every stock in a stock index, like the S&P 500. So by owning just that ETF, your investments will reflect the average performance of all the companies in the index. Similarly, you can buy a single ETF that essentially follows the returns of bonds (either all bonds, or just treasuries, or just corporate bonds, etc.) So by owning two ETFs, you could have a diversified portfolio that would reflect the average returns across a wide range of stocks and bonds. You can even take this further and find a single ETF that holds a balance of many stocks and many bonds, or even an ETF that has stocks, bonds, real estate, commodities, etc. The point is, you don’t need to buy many different things to get a diversified portfolio. You can typically find one or a few ETFs or Mutual Funds that will meet your investment goals.
The next point to understand is that just because investments are different, doesn’t mean they help to diversify. Many, many investments move more or less together. When one goes up or down, the other goes up or down in near lockstep, although generally to a different extent. Investors call this relationship correlation, the tendency for two investments to move up and down together. In order to get the benefits of diversification, you want to find investments that have a low correlation, are uncorrelated or even negatively correlated.
Correlations represent historic tendencies and can change. Just because two types of investments had a low correlation historically doesn’t mean that they’ll never become more closely correlated. It’s worth revisiting your investments periodically to make sure that the diversification you intended is still holding true.
Finally, it’s worth noting that some investments are probably not worth including in your portfolio, even if they offer some diversification. If an investment will significantly lower your expected rate of return, or raise your expected risks, it may not be worth adding to your portfolio just for the sake of diversification.
What is Rebalancing and how does it work?
It is possible that you’ll find a single ETF or Mutual Fund that perfectly meets your investment needs and will be the only one you need to hold in your portfolio. Much more likely though, you’ll hold a mix of investments. Rebalancing is how you keep the ratio of the investments that you hold in a consistent proportion. For example, let’s say you intend to keep a portfolio of 60% of a stock index and 40% of the total bond market. But 6 months after you buy your investments, the stocks have gone up more than the bonds, and now your portfolio is 65% stocks and 35% bonds. In order to rebalance, you would sell some of your stocks to buy more of your bonds and bring the ratio back to 60/40. Here are a few details to be aware of in this process:
There’s no perfect strategy for keeping investments in balance. Some people use a range (i.e. if stocks become more than 65% they’ll be reset) but many just rebalance on a schedule, like every six months. Putting it on a schedule is good because you only have to check in on it once in a while. It might seem that rebalancing more frequently would be better, but that’s generally not a good assumption. Once a quarter is probably the most frequent you might want to do. Once a year might be the least frequent. Many people opt for every six months.
If your investments are not in some kind of tax-advantaged account (e.g. a 401K) then selling investments to rebalance will likely incur taxes.
The more diversification you can find in a single ETF or Mutual Fund, the less likely you are to need to rebalance. For example, instead of finding one stock ETF and one bond ETF, if you have an ETF that already keeps a balanced mix of stocks and bonds, the fund will take care of the rebalancing for you.
Rebalancing takes a certain kind of discipline that is not immediately obvious. Every time you rebalance, you’ll need to sell some of your ‘winners’ (those that have gained the most value) in order to buy more of your ‘losers’ (those that haven’t gained as much or have even lost value). This can be tricky because the tendency will be to want to keep the winners winning. Why would you sell a ‘good’ investment to buy more of a ‘bad’ one? To be successful in the long run, this is a mindset you’ll need to avoid or overcome. A better way to think about it is that the investment that has gone up could easily come down next. By selling some of it, you’re ‘locking in’ some of those gains. By contrast, investments that haven’t performed as well are relatively cheap, making it a good time to buy more. All that said, it is fine to reevaluate the ratio of investments you’re holding over time. Just be sure you’re doing it thoughtfully and not unduly influenced by the recent performance of your investments.
Once you feel comfortable with all of these terms and concepts, you should have enough confidence to feel good about your investment decisions. Over time, you may decide to develop your expertise in some aspect of investing and adjust your investments based on what you’ve learned. This added attention to investments isn’t at all required in order to be successful though, and in many cases is not even advantageous. Historically, people who have made pretty good investment choices at the onset and then stuck with them over the long term have done at least as well and often better than people who try to actively manage and change their investments. It is certainly possible for some people to become especially skilled and achieve superior results by more actively managing their investments, but for our purposes we can consider that to be unnecessary for achieving financial success.
Basic Terms and Concepts - Suggested Searches:
What are asset classes? What are Stocks? Bonds? ETFs? Mutual Funds? Real Estate Investment Trusts (REITs)?
What are balanced ETFs? Target date ETFs?
What is an Index? How does Index Investing work? What are index ETFs?
What are Interest Payments? Dividend Payments?
What are Capital Gains and Losses?
How do you calculate total investment returns?
How do Compounding Returns work?
How are investment returns taxed? (Capital gains? Dividends/interest?)
What are tax-advantaged accounts (such as retirement accounts) and how do they work?
How much should I save for retirement?
What’s the impact of inflation on investments? What kinds of investments help protect against inflation?
What is Leverage? What are Leveraged Investments?
What is investment risk?
What is investment diversification? How do you diversify investments?
What does it mean to rebalance an investment portfolio?
What is a robo-advisor?
Resource Links:
Optimized Portfolio - This is useful blog for learning the basics of stock investing. It does a nice job of evaluating pros and cons of different kinds of portfolios and puts everything into pretty digestible language even for novices.
Portfolio Visualizer - This is a tool that let's you see how individual investments or portfolios of investments would have performed historically (called 'back testing'). It is pretty robust and might take a little effort to learn to use it, but it is incredibly valuable for evaluating investment options once you do.
Your housing decisions deserve special consideration because housing is often one of the single biggest expenses in your budget. Also, investing in direct ownership of rental real estate deserves special consideration, because it has an unusual ability to build wealth. And, because these two topics can easily be intertwined, they’re worth considering together.
There are four scenarios related to your own housing and real estate investing that are useful to consider. Regardless of your current living and financial situation it is worthwhile thinking through the following four scenarios in order to really understand how they might play out for you. Each of these scenarios has many variations and plenty of complexity. For each scenario, choose a version of it that seems most plausible for you (even if it feels not very plausible). Also, take the time to understand the financial dynamics. Based on some reasonable estimates and assumptions, model out what happens in each of the scenarios below, year by year, over 40 years. It’s not that something important happens in year forty, but you’ll want to see how these play out over a long time horizon. If you’re not already friendly with spreadsheets, now is a great time to figure them out and / or enlist some help. This takes a bit of work, but it is absolutely worth it. It’s easy to fail to make the right financial decision if you don't really understand the options. Take the time and put in the effort to understand these options. Not everyone will make the same choices, but the choices should always be made from a truly informed position.
4 Scenarios to model over 40 years:
Scenario 1 - Buying your residence
In order to model the financial impacts of buying a place to live in, you’ll want to keep your eye on a few key numbers. How does the value of the house change over time? Start with a reasonable estimate of a purchase price and model its growth over 40 years at a reasonable percentage. It might be good to use broad averages to estimate the rate of growth (national, long term averages rather than local, short term averages, probably something like 3% - 4% annually) so that whatever happened recently doesn’t bias a long-term estimate. Next you’ll want to look at your monthly payments to own it. Start by figuring out your mortgage payment based on the purchase price, less any money you’d put as a down payment. Assume a 30 year, fixed rate mortgage at whatever current interest rates are. Plenty of online calculators can help you with this math. Note that it is common for property taxes and homeowners insurance to get paid as part of the mortgage payment. While the mortgage itself will stay flat each year, taxes and insurance might increase. So account for that as you estimate into the future. Add to your expenses a budget for maintenance and repairs. Some experts suggest estimating 1% of the initial purchase price per year. This is a very rough estimate, but is fine for our purposes now. So your mortgage payments, including any taxes and insurance, plus repairs and maintenance will show you your annual expenses. Next you’ll want to track your equity over time. Equity is the difference between the value of the house and how much you still owe on your mortgage. Again, a mortgage calculator can help you see how much you still owe in any given year until it is paid off completely. Because the home value is increasing and the mortgage balance is decreasing, you should see equity increase over the long term. The equity you build over time is by far the most financially compelling reason to own a home.
Scenario 2 - Renting your residence
This is a pretty straightforward scenario to model. How much rent would you expect to pay this year? What’s a reasonable estimate of the percentage that your rent will increase each year? What does that make your annual spending on rent in each of the next 40 years?
Quick side note on estimating how much rents increase each year. If you Google “how much do rents go up” you’ll end up with misleading results. Some of this is politically motivated, and some is mathematically problematic. Ultimately what you’re looking for is how much rent is likely to go up year to year while you’re living in the same place. This is a different number than the median rent increases that are most often reported, which in many areas will be substantially higher. A reasonable estimates for same-unit rent increase should be similar to or slightly above long term inflation, maybe 3% - 4% per year in many areas.
Scenario 3 - Buying your residence and renting part of it out
This scenario is going to be similar to the first one, with the added twist that you’re renting out part of your residence. You can imagine this as buying a little bigger place (maybe 3 bedrooms instead of 2) so you can rent out a room. Or maybe you decide to buy a duplex to live in one part and rent out the other. Or you find a property that includes another unit like a backyard cottage or basement apartment. (Note: if you do a search for “house hacking” you can find some information on these kinds of scenarios). This time, set up the same kinds of estimates you did in the first scenario (mortgage payments, house value, equity, etc.) but this time for a house that includes enough room to rent out part of it. Next, use the same thinking from the last scenario (renting your residence) to estimate how much you might rent part of your home for and how that rent might grow over time. Reduce your rental income estimates by 5%, just as a placeholder for potential vacancies. Finally, just calculate how much the rent you receive each year would offset your monthly expenses to come up with a net cash flow for each year into the future.
Scenario 4 - Buying an investment property only to rent out
This scenario is a little different than the last three in that it doesn’t actually account for your own living expenses. So you could think of it as something you could elect to do independent of your choice about your own living circumstances. Structurally, this scenario will have all the same components as the last one (renting out part of your house). You may want to select a different property to model this scenario as the choice of where to invest may be different than the choice of where you might want to live. For now too, find out how much money you’d need to put down and what mortgage rate you could get when buying an investment property. These may not be how this would play out for you, but it’s worth being aware of those differences. Finally, assume that you’re going to hire a property manager rather than managing it yourself. You may make a different decision, but again, it’s useful to see the impact of this cost. You can price shop property management services in the area where you might invest, or you can use 10% of rents as a reasonable estimate for now. Now you should be able to project out into the future what your cash flow and equity could look like over time.
As a side note on owning rental property, it’s worth understanding that there are many varied options on how this might work. You could decide if you want to manage it yourself or have it managed for you. There are now even platforms that help you buy and connect you with property managers so you are pretty hands-off as an investor and can even own properties in far-away locations. There’s also plenty of variations on investment strategies, including adding value to property to increase the equity and potential rents, renting it short term (such as AirBnB) instead of long term, etc.
Now that you’ve gone through to see how each of these scenarios plays out, here are some of the key conclusions you might observe:
Rents go up faster than mortgage payments - Even though renting is cheaper in the short run, it is common for rents to outpace and exceed home ownership costs eventually. Certainly if you’re considering your retirement, owning a home outright once the mortgage is paid off is substantially cheaper than continuing to pay increasing rents.
Growing equity is one of the most powerful ways to save money - The real superpower of ownership is equity growth. Because mortgages create leverage on your returns and they’re the largest amount of money at the cheapest rate that most people will ever borrow, buying a home becomes a highly leveraged way to build equity.
It takes time to build equity - Although equity builds quickly, it can sometimes be 5-10 years to really get going, especially if appreciation is slow or even negative in the first years of ownership. Also consider that to sell a property might cost you something around 8% of the sale price in fees and expenses. So if you need to sell before you have at least that much appreciation, you won’t make enough from the sale to pay off the full mortgage and will owe the difference.
Adding cash flow from a renter can have huge impacts - Having rent as additional income in a place where you live can enable you to buy a larger / more expensive home, which increases the amount of equity you’ll gain. And over time the increasing rents will cover a larger portion of the costs of ownership.
It’s worth noting that, of course, you’re not locked into any of these individual scenarios for 40 years as the models would imply. In fact having all of them available as options over time can help you maximize the investment potential while also meeting the living circumstances that fit your needs. Some examples of how you could be fluid between these scenarios:
Many people will rent initially in order to save money for a down payment and build work history and credit to qualify for a mortgage. That could be either to buy a place to live (with or without a renter) or a rental property as an investment.
One fairly common tactic is to buy a place as a residence (with or without a renter) and then eventually move out and keep it only as a rental investment. If the rents you can receive are higher than the cost of ownership, they can add to your income and help you qualify for a larger mortgage on your next purchase. Also, it could be possible to borrow against the equity in the first house to use as a down payment for the second.
For some people it could make sense to buy a house and rent part of it out initially and then grow into using the whole house for yourself when you need more space (and fewer housemates).
Further Real Estate Considerations
All of the above discussion on real estate has been a simplification of a pretty complex topic. Following are a few points that have been left out of the modeling and discussion for the sake of simplicity, but that you should absolutely dive deeper into in order to understand the topic more thoroughly:
Equity is not quite like money in the bank - Although the growth in equity is impressive, you should also realize that you can’t spend that money directly. In order to access it, you generally either need to borrow against your equity, such as by refinancing or getting a second loan / heloc, or you need to sell. Borrowing against your equity is a fine option as long as you have a financially sound way to pay on the new loan. Selling is also fine, but can be expensive. It varies by location, but you can estimate that something like 8% of the selling price will go to costs related to the sale. There may also be tax implications of selling. There are also now ways to sell a portion of your equity for cash up front while still owning the property. This could give you cash now with no obligation to make debt payments, in exchange for sacrificing some future appreciation.
Taxes - Every part of owning real estate, especially as a rental, has some kind of tax implication. Very generally speaking, you’d want to understand your local property taxes, how rents get taxed, what expenses are deductible, how depreciation (and depreciation recapture) works, how capital gains taxes work and what exemptions exist for them, etc.
Refinancing - Refinancing can be a powerful tool that’s worth understanding. Generally it does at least two things for you. First it can lower your interest rate (assuming you’re refinancing at a lower rate, which is really the time to do it). Also though, it resets the clock on your mortgage. If you’ve had your mortgage for 5 years and then refinance the remaining balance, you’re spreading out the loan amount over a new 30 years rather than the remaining 25. So you can lower your payments this way, but you’re trading off for 5 more years of payments. Refinancing can also be a way to access some equity, such as to reinvest it elsewhere.
Down payments - Sometimes people assume they can’t buy property because they’re not able to save large amounts of money for the down payment. Really investigate this before you assume that’s the case for you. It’s not uncommon to put down 5% and some special programs can get that down to 3% (for properties where you’re intending to live, at least initially).
Good reasons to rent - Although it’s less obvious from the purely financial perspective, there are also plenty of good reasons to rent your residence. For example, maybe the next few years of your life will be unpredictable and you need the flexibility to change your living situation easily. Maybe you value the absence of home ownership responsibilities and want the amenities you can afford as a renter. Maybe you want to absolutely minimize your living expenses in order to pursue some other kind of financial investment. There are plenty of scenarios where, even if the long term investment isn’t as appealing, renting rather than buying still is a good option.
Risks - There are some very real risks in owning real estate, especially when operating a rental. Without getting into all the details, there are broadly two kinds of potentially serious, financial risks that need to be managed. The first is that you may need to come up with more cash than you planned. Maybe something breaks and needs to be fixed. Maybe a renter stops paying rent or the rent you can get goes down. Any number of things can affect you in ways that you’ll need access to cash to help cover. The second kind of financial risk is that sometimes house values go down instead of up. Make sure before you invest that you have a clear understanding of what drives home prices up and down, and a strong thesis about why the value of your property will go up. Remember, all that mortgage leverage that gains you equity when prices go up will also work against you just as much when prices go down. This is also why real estate needs to be considered a long term investment.
Landlord Tenant Laws - The legal and political environment around renting property to tenants can vary tremendously by location. Don’t assume the laws are reasonable, clear, balanced, stable or that they even make much sense. Before you commit to investing in an area, connect with local landlords and ask questions about the legislative environment.
Next Steps
If you’re considering buying real estate, especially if renting out part or all of it is something you’re considering, find people who can help educate you. It is fine to Google topics and read books to get a general education, but before you invest you need to understand the specifics of your local market. Best is to find people who have done what you’d like to do and ask them to share their experience and input. Not only can they give you invaluable advice, but often they can help connect you with many of the services you’ll need to hire (real estate agents, mortgage brokers, property managers, insurance agents, contractors, accountants, etc.) If you have no friends (or friends of friends) who can help you, many areas have some kind of professional association for landlords / property managers and you may also be able to find people via groups such as on meetup or Facebook.
Suggested Searches:
Landlord Association of (your city, county or state)
Cash-Shiller Home Price Index
Renting vs. buying a home
Information for new home buyers
What down payment do I need to buy a house?
What is house hacking?
Resource Links:
Zillow or Redfin - These are both companies that provide lots of information about real estate (and I'm sure there are others too, depending on your location). They are useful for learning about home values and trends, sometimes rental estimates, mortgage rates, property taxes and other costs related to buying or selling property.