A fast-growing, new wave of young investors are thinking big in 2022, and they’re thinking about — drum roll, please — investment property.

In a national survey, four generations are considering purchasing investment property, including:

This is a huge shift in buyer behavior as the traditional starter home has typically been the first step for young adults. Instead, these buy-to-let investors — who continue to rent their main residence even while owning investment property — are going straight from renting to renting out.

Despite a shift in strategy among young people, buy-to-let investors of all ages still recognize residential property as a smart long-term investment, citing as their top reasons:

  • price appreciation;
  • asset ownership; and
  • extra monthly income.

While today’s real estate investors are in a hold phase, young investors are looking ahead to snagging their investment property when property prices bottom, expected here in California around 2025.

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2023 recession demands discipline from investors; Monthly Statistical Update (November 2022)

Recovering from one recession to the next

While people lament stagnating wages and overpriced housing, young Californians are finding themselves particularly vulnerable heading into the 2023 recession. The state has officially recovered its pandemic job losses, but these gains are likely to U-turn during the 2023 recession.

The savviest in this cohort are looking ahead by saving now — in fact, 82% of renters are finding various ways to save and are cutting back on expenses, according to Mynd.

This new generation of investors will seek insight from industry professionals.

Due to an agent’s experience and training, buy-to-let investors will find their opinions especially helpful. However, to avoid liability, agents are to avoid definitive statements when there is nothing to back them up. Agents need to refrain from statements such as “Prices won’t drop any further” and “Interest rates will only keep rising, it’s best to buy now” to avoid misleading the buyer.

As home prices continue to descend — not bottoming until around 2025 — real estate professionals need to stay alert for those potential clients who will invest even during the recession.

Building wealth on a budget

Millennials and Gen Z turning to investment property as their saving grace will be looking for good investment elements.

Even young people who already own a home are looking for property investment opportunities on the other side of the recession. These clients, similarly priced out of their local SFR market, might consider constructing an accessory dwelling unit (ADU) instead.

By building an ADU in their backyard and renting it, owners can earn passive income for considerably less money than buying and managing a separate property.

Related article:

Why California investors are turning to build-to-rent

Young investors may also consider buy-to-let mortgages. Though most buy-to-let mortgages require a greater down payment, it is an opportunity to accumulate wealth and fund other investment properties down the line.

Investors of all types may fret about finding the right capitalization rate (cap rate) for their property.

The “right” cap rate is relative to each investment, as each property has unique demands and potential. Agents are ideally placed to walk new investors through how to calculate what sort of cap rate is right for the investor’s purposes. [See RPI e-book Income Management Chapter 4]

Agents may ease investor clients’ fears with a Property Expense Profile to ensure new homebuyers are fully aware of any and all operating expenses. With this form, a buyer may confidently pick the best cap rate for them and decide if the property is a worthy investment. [See RPI Form 306]

Agents may also ease young investors with a comparative market analysis (CMA). A CMA is used to estimate the value of a property based on the price comparison of other properties. With a CMA, the investor will know about each itemized feature down to the dollar to correct — for greater or less — the value of the property. [See RPI Form 318]

With wide-eyed investors fresh on the scene, real estate professionals may look to RPI e-book Income Property Brokerage to prepare themselves for the new clientele anticipating their long-term investment.

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