Millennials are expected to create 2/3rds of household growth in the coming years, so as real estate investors, we need to pay attention to where and what they will be buying. And some new data is giving us a few clues on that.
Millennials, whom we define as young adults ages 18-36, are the largest population group today. In 2015, they added up to 75.4 million, surpassing the 74.9 million Baby Boomers (ages 52-71). They will have the largest impact on the economy and politics, just as the baby boomers once did when they dominated the population. It’s important to stay abreast of their actions as they will create booms and busts for the next 40 years depending on their spending habits.
According to a “millennial tracking report” by mortgage service company Ellie Mae, millennial homebuyers are most active in the Midwest.
The report used data from October 2016 and says more and more Millennials are giving up on the expensive coastal cities and buying property in more affordable areas – namely the nation’s “heartland”.
This Ellie Mae tracking report also says that Minneapolis is attracting the most Millennials. It says 44% of the homes purchased in October were by Millennials.
Philadelphia was a close second. 43% of those sales were by Millennials. St. Louis, Chicago, and Detroit were also very popular.
It says that high-priced areas in Florida and California had the smallest number of Millennial buyers. Miami came in last, followed by Los Angeles, San Francisco, San Diego, and Tampa. It just too expensive for first time home buyers in these markets, so they will likely continue to rent in these areas.
The report says that as home prices continue to rebound, an increasing number of Millennials are buying inland “where they can get more home for the money.” The average age of the Millennial buyer is 28 years old with an average 722 FICO score. The average appraised value of the homes they’re buying is $223,153 with an average loan of $182,498.
Ellie Mae is based in Pleasanton, California. It launched its Millennial Tracker in May of last year to keep track of millennial loan trends in the U.S. If you want up to date demographic data on the new generation of homebuyers, you’ll find a link at our website.
Recently, one self-made millionaire warned young people that they better not wait too long to get into the housing market if they hope to secure their financial future.
David Bach, founder of FinishRich.com, has some advice for people who are opposed to homeownership – mainly advice is for those Millennials who feel that owning a home will tie them down. He says flexibility can be an important lifestyle choice or one that will help your career, but owning a piece of real estate can set you free financially.
Bach told CNBC that not prioritizing homeownership is “the biggest mistake millennials are making” and says that buying a home is “an escalator to wealth”.
He told CNBC that the smartest investments he’s made were the purchases of his three homes. He bought one in San Francisco that surged in value. He says he then moved to New York and bought another home, which also surged in value. He said on CNBC: “My net worth has gone up millions and millions of dollars, simply because I’ve lived.”
Now keep in mind that he bought in the most expensive metros in the country before prices ran up to today’s highs. Many of today’s Millennials are priced out of those markets. And assuming values will continue to rise is speculative.
My family also made lots of money during the California run-ups in home prices. But we lost as much during the downturns. If you bought in 2006 in California, you are just now back to where you started – over 10 years later. Some areas in California are not even back at their 2006 highs yet.
If you bought in a down market, then yes, you could make millions like David Bach, or like I did. But if you buy at the peak, you could lose a decade of gains.
Trust me, I know. I’ve had both experiences. We bought our first house in 1996 at the trough. We paid $546K. Ten years later, that house appraised for $1.8M. We then bought our 2nd house in 2016 to get our kids in the best school district. We paid $1,060,000 for a fixer upper. After putting in $300,000 in repairs, it appraised for $800,000 just a few years later. Today, it’s back up in value, appraising for about what we had into it. So you see – if we bought that property with the intention of making millions as Bach said, well, we lost 10 years and it would feel today as if we were just starting out.
Bach says that renting can easily add up to the price of a home. At $1,500 a month, you end up paying more than half a million dollars over 30 years. So why not buy a home now, and start putting your money into equity? Again, I agree. But only if the numbers make sense. In this case, if you plan to buy at the top of the market, make sure you can easily afford the payment. If it’s cheaper than rent, and it makes sense to hold theproperty for the long haul, go ahead and buy in a high priced market.
Or do what we did. We bought at the peak of the market in Malibu – but we got the cheapest home available and fixed it up. Our payment is actually $1000 less than we were paying in rent. Granted, we are not longer beach front, but that’s Ok. We’re close.
And that’s where Bach and I agree. He say don’t have to shoot for the stars right away. Your first home doesn’t have to be your dream home, just one that will get you “into the market”.
For people who feel they can’t afford to buy a home, Bach says they should start by doing the math to see what things really cost. They might be able to juggle some of the options to come up with a workable plan. Meeting with a mortgage broker is the first step to see what it takes to qualify for a home loan.
I say, Millennials can have it all. They can keep their nomadic lifestyle while owning property. They don’t necessarily have to live in the home. They can buy one to rent to others, but still get all the benefits of home ownership. Even more with the tax benefits and asset protection available through rental property.
This is a great solution for people of any age who can’t afford to buy a home where they live and work. With today’s technological advances and improved property management systems, you can own property anywhere and you can live anywhere. You own property you rent and rent property you live in. Whether it’s you or someone else paying off your mortgage, you can own the property or properties free & clear in 30 years. Or if you use the cash flow to pay off the loan faster, you can have it paid off in approximately 12 years – if you buy in high cash flow markets.
Of course, there’s a lot more to it than that. That’s why I wrote the book, “Retire Rich with Rentals” which you can get on amazon.com. Or join Real Wealth Network for free to listen to our weekly educational webinars.
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