From finding a job to settling down in a new city to paying off their student loans, building wealth can be the last thing on a recent graduate's to-do list.
For many, it isn't until their late 30s or early 40s that they start to seriously think about building wealth, and by then they've lost out on a lot of time in the market.
One way that graduates can become wealthy is by investing in real estate. According to a 2020 survey from the Federal Reserve, homeowners on average have a $225,000 net worth, while renters have an average net worth of only $6,500. That means homeowners are 34 times wealthier than the average renter!
While choosing to put aside a huge amount of your current paycheck in order to max out your retirement contributions can seem restrictive, homeowners get to build wealth by paying down their mortgage, money that would otherwise be spent on rent.
Here are a few steps that any graduate can follow in order to become a homeowner in just a few short years:
Set up a checking and/or savings account in order to establish a relationship with the bank. Even without a credit score, if the lender sees that you deposit money into your bank account, they're more likely to trust you with a credit card. This leads to the next step.
Build a good credit score. If you have student loans, make sure to make all of your payments on time. A good credit score will convince lenders that you're trustworthy. The median home purchase price in the United States today is roughly $400k. Even with 20% down, that's still a loan of well over a quarter of a million dollars. In order to convince the bank to lend you that money, you need to be able to show them an extensive history of paying down your debts. There are tools that you can use to stay on track.Best credit builder tool
Live with roommates and find a place to rent as cheaply as possible. If you're interested in homeownership, you're not going to stay at that apartment for more than 2-3 years anyway, so just see it as an extension of student living. These are the most important years of your life to live cheaply so that you can lay the foundation for wealth in your later years.
Working remotely would also be ideal. If you can work remotely and live in the suburbs, you can possibly save a lot of money and enjoy some perks of the best locations for remote workers.
Focus on earning as much as you can. This goes well with keeping your living expenses down. If you pick up a side gig, you won't have time for Netflix or going out for drinks all the time. While there's time and a place for entertainment, it's best to stay focused on making as much money as possible so you can save for a down payment.
Your employer will likely match a certain amount of your 401k contributions, so you should set one up as quickly as possible. The 401k is a tax-advantaged retirement account that lowers your taxable income (and therefore your total tax bill) while allowing your money to grow tax-free.
Did you know that 401k accounts allow you to borrow against them? While rules vary by provider, it's possible to borrow up to half of the total money in your 401k in order to purchase your home. That means that you can start building your down payment while minimizing your tax bill.
You should put about 20% into a specific investment account so that some of the money can grow in the stock market while you save for a home. However, since you already have a 401k, make sure that the investment accounts are balanced and not over-exposed to stocks or bonds or really any market fluctuation. You want the money to be there when you buy a home. If the market tanks, you don't want your dream to die with it.
After 2 years of earning a solid, steady income, you should be able to qualify for a mortgage. FHA loans can help you move into your new home much faster, since they have lower down payment and credit score requirements.
Here's what an example monthly budget may look like with a 5% 401k match from an employer:
Gross pay: $5,937.50
Net (take-home pay): $4,312.50
Food, car, and other expenses: $1,000
Investment account contribution: $2,000
Your down payment calculation after 2 years:
401k balance = ($312.50' x 2 years) + (5% employer match) = ~$15k
Borrowing 50% of 401k for mortgage: $7.5k
So, $7.5k is available from your 401k to use for a down payment.
Additionally, after 24 months of saving about $1k/month, you should have a little over $24,000 if it compounds at 6-8% per year.
This will be more than enough for the 3% down payment requirement for most FHA loans.
Additionally, with a $60-75k' income, you can qualify for a $345k house. In some markets, like California, you may be looking at buying a condo and not a home. Remember that this is just your starter property, and you can always move up from here.
It's not always a great thing to hear, but buying your first home in an expensive, hot real estate market like Los Angeles or NYC might just not be possible for you right now. Take a look at some lists of best places that you may like.
Now that you own an important asset, focus on replenishing your investment accounts and staying on top of paying down your mortgage. Increase your earnings in any way possible, by getting a roommate or listing one of your rooms on Airbnb. Since you're still young and you likely don't have kids, this is still a great option.
After you've built up some more savings and investments, you can purchase another property and rent out the first one that you purchased. In just a few short years, you'll go from a renter to a landlord. Many people don't do this step; they just enjoy the house that they purchased. That's okay too, but expanding a portfolio can make you even wealthier.
After two years of owning an investment property, lenders will take into account your experience as a landlord and grant you more buying power.
Owning several homes will allow you to build more equity over time, allowing you to build enormous amounts of wealth and live the life that you've always wanted.