Are You Ready for the Next Big Disruption in Real Estate Investing?

by | BiggerPockets.com

When you hear the word “millennial,” what’s the first thought that pops into your head?

I’d wager a guess it’s not “savvy real estate investor.”

Millennials have earned something of a bad rap when it comes to money—and pretty much everything else, for that matter.

But as a millennial and a real estate investor, I’ve often found myself wondering, “Am I an exception to the rule, or is everyone seriously misguided about my generation’s priorities?”

My company, Clever Real Estate, recently conducted a survey of 1,000 Americans who were planning to buy a home in the next year. Approximately 52 percent of respondents were classified as millennials (between the ages of 18 and 34).

What we learned was surprising—and ran contrary to prevailing narratives about millennials within the real estate community.

Our team compiled a number of key insights from our report, along with emerging data from leading industry analysts, to paint a comprehensive picture of the blossoming millennial real estate investor—aka the industry’s next major disruption.

Here’s what you need to know.

Related: 5 Ways the Real Estate Industry Will Completely Transform Over the Next Decade

millennials, homebuyers, investors, savers, generational trends

The Next Wave of Investors Has Arrived

Millennials are about to become America’s largest living generation. And did you know my peers and I are already the largest generation in the U.S. workforce?We’re earning more than previous generations did at our age and, despite what you may have heard, we might actually be better at saving, too.

In fact, a 2018 Bank of America study found that approximately 46 percent of millennials have managed to accumulate more than $15,000 in savings, while 16 percent have saved over $100,000. In other words, we’re a whole lot more adept at managing our money (and debt) than some would have you believe.

Related: Millennials Are Poised to Be the Wealthiest Generation Yet: Here’s Why

As the job market continues to improve, millennials’ buying power is increasing in kind, and we’re looking for smart ways to invest our newfound wealth.

Americans under the age of 37 already represent the largest share of home buyers, at 36 percent. While most of those buyers are looking for residential properties, we all know that real estate investing is only a small step from there—a step that many millennials, specifically, seem very interested in taking.

Clever’s study found that millennials are a full 52 percent more likely to invest in multifamily properties than Generation Xers or Baby Boomers.

In addition, 9 percent of millennials (also called Gen Y) respondents said they were buying properties specifically to generate passive income—more than Generation X (6 percent) or Baby Boomers (5 percent).

Why Real Estate?

Millennials came of age during the 2008 housing crash. We began entering the workforce in the middle of the Great Recession.

So, it’s no surprise that a lot of us are suspicious about the stock market, financial institutions, and the economy in general. We prioritize financial stability, autonomy, and ultimately, independence.

Despite the stock market’s recovery (and then some) over the past decade, Gen Y is increasingly giving it the cold shoulder and gravitating instead toward more tangible asset classes. And what’s more tangible than physical property?

In Clever’s study, 43 percent of respondents ages 34 and under said they were interested in purchasing property because they felt it was a good investment. But it’s important to point out that we’re not just following our collective gut here. We’re doing our homework.

Over the past two decades, the real estate market has outperformed the stock market by a factor of nearly 2 to 1. (Since 2000, the S&P 500 yielded an average 5.43 percent annual return versus the real estate market’s 10.71 percent.)

What’s more, a recent survey conducted by RealtyShares found that more millennials were aware of this fact than any other generation polled.

Part of this awareness may actually come from our typically maligned internet obsession. Many online financial experts popular among Gen Y are increasingly recommending investing in real estate over the stock market. So much for the theory that millennials have no attention span!

real estate, young, investor, millennials, generation

Barriers to Entry

Millennials may be eager to dive into the real estate investment market, but we have some unique challenges we’ll need to overcome first.

According to recent data released by credit rating agency Experian, millennials have an average credit score of 652. These lower credit scores can significantly hike up our mortgage rates or, in some cases, prevent us from getting loans altogether.

Related: 5 Tried-And-True Ways to Improve Your Credit Score

This is likely due to our generation’s massive collective debt load. The average millennial carries a burden of approximately $36,000, mostly from student loans and credit card bills.

Of course, this isn’t just making it difficult for us to get loans—it’s making it difficult for us to save, as well. In fact, nearly 39 percent of the millennials polled in our study listed down payments as the number one barrier preventing them from buying property.

Thinking Outside the Box

That said, Gen Y is nothing if not scrappy, and many of us are finding creative financing workarounds through technology and other emerging investment tactics.

For example, as the popularity of vacation rental sites like Airbnb, HomeAway, and VRBO continues to grow, expect millennials to lead the pack in terms of adoption. Just like we would with a multifamily residence, we’re using these emerging opportunities for supplemental income to pay off mortgages and taxes, build equity, and invest in new properties.

While this practice still hasn’t been fully accepted by the REI community at large, it should be. The official numbers for last year haven’t come out yet, but industry analysts projected that the private accommodation market would top $36 billion in 2018.

Plus, it’s allowing many millennials to break into the REI industry when they otherwise wouldn’t have considered it as an option (i.e., instead of having to buy an additional investment property, single-family homeowners can now simply rent out individual rooms to generate supplemental income).

Technology Will Level the Playing Field

Millennials have hurdles to overcome in entering the real estate market, but we’re also going to have the upper hand in an increasingly digitized real estate landscape.

As the first true “digital natives,” millennial investors have all of the skills and resources to not only identify emerging markets and investment opportunities, but also to pounce on them quickly.

Our study found that, more than any other generation, millennials are utilizing smartphone-centric platforms like Zillow and Trulia to obtain up-to-the-minute data and make informed decisions.

Apps like these allow young investors to search for properties and handle transactions from hundreds—or even thousands—of miles away, if they so choose. In other words, millennial habits and preferences are creating an increasingly delocalized real estate landscape, where investors can tap into hot markets all across the country—not just those in their immediate vicinity.

Millennials are just now entering into our peak spending years. At the same time, the real estate industry is quickly moving in a direction that plays to the strengths of our generation.

For those reasons, we’re perfectly poised to be the next major force in real estate investment—and we’re going to take the reins sooner than you think.

How do you think millennials will fare in the market? 

I’d love to know your thoughts. Comment below!

About Author

Luke Babich

Luke Babich is the Chief Strategy Officer for Clever Real Estate, a nationwide brokerage that helps you sell or buy a home and save on real estate fees. Luke lost a campaign for City Council as a 22-year-old because people told him "You've never even paid property taxes!" Now at 24 years old, he owns 22 apartments in St. Louis. That'll show 'em.

12 Comments

    • Luke Babich

      Fannie / Freddie loans are the way to go! I’m a huge fan of the “house hacking” approach to get started (although that, too, is a place where younger people who don’t need a single family home and have more flexibility in their living situation have an edge)

  1. Andrew Syrios

    Interesting take. Technology has already revolutionized real estate in many ways. Today, there are multiple large companies that focus on buying huge portfolios of SFH (most notably Invitation Homes, which owns something like 80,000 houses). Managing this sort of inventory all across the country would have been all but impossible a decade ago. I suspect our industry will get disrupted a lot more in the coming years. In many ways, real estate is behind on the whole disruption thing.

    • Luke Babich

      Couldn’t agree more. With all the cash that companies like OpenDoor, Compass and PurpleBricks have raised in the last year — since real estate won’t come to tech, tech is coming to real estate.

      I’ve seen this in our own startup, too: Clever lets homeowners sell for $3K or 1% in listing commission. People know commissions are too high, but have a hard time believing that it’s possible for listing commissions to come down that low, especially with agents from major brokerages (KW, REMAX, etc) that have resisted discount commission. In reality, technology has already brought down home-selling costs for agents so low that these rates are easy to achieve profitably — the missing piece was digital marketing infrastructure to let agents find clients cost-effectively too.

      As an investor, I’m very interested to see more tech innovation on the management / investment side. Most of it seems focused on the “transaction” for now, but I’m sure that will change with time.

  2. Alyscha Johnson

    I’m sorry – and this may seem like it is a tad off topic and a bit generalized, but is anyone starting to think that the, “you must go to college” thing was a big scam? This article mentions that when it comes to real estate investing, student loans are the biggest barrier to entry. Since when do you need a college degree to employ yourself as a real estate investor? I am observing that a majority of my friends with college degrees work right alongside and at the same level with many non college educated people. Unless your long term to goal is to become a professional dealing with science or law, is a college degree a waste of time (and money)?

    • Sam White

      It is the biggest scam. I went to college and graduated with debt. All my counselors and family encouraged me to go to grad school or law school to utilize the degree I had obtained in Political Science. I looked at the potential debt it would take to do so. And challenged myself to go make 100k in two years and then decide if i needed another two years of college. Its been 5 years and I am making enough in real estate investing to pay for a law degree every single year.
      No thanks on going back to school.
      Further, the tradesmen that work for me make about 50-70k a year. The electricians and plumbers i use closer to 100k. and they just went to trade school. Meanwhile, many college friends of mine are still making the 50-70k range and have just as much in student loans.

      College isnt the scam, pointless degrees are. My wife got a degree in nursing and THAT was a degree worth paying for.

    • Rob Cook

      Alyscha, I have to agree with your point to a large extent. Certainly, a college degree is not the ticket to a good career job opportunity like it used to be. And I mean over 40 years ago! Yes, in the last 40 years, the employment playing field has changed considerably, and I believe, permanently.

      That said, I would not say a college education is a waste of time or money. It could be a poor financial investment! But there is more to life than money. Lots of ignorant morons out there with money and no clue about most other aspects of the world or life.

      That said, it is probably relatively unwise to overspend for a college education. I started in Community college, transferred to Rice University where I graduated. Then attended law school at George Mason, a public Law School I commuted too daily. I also worked in the oil field summers while at Rice, as a real estate agent and renovation laborer on house flips, while in community and college, and full time as a construction company owner when at law school. I graduated Law School in 2000 at age 41. So assuming getting a college education requires student loan debts is not the case. It can be, but like so much in life, better choices can result in different outcomes in life. I retired at an early age, of 39, and now have over 57 rental units, most owned outright, and two homes we share time between, worth over $3 Mill combined (one is a ranch in Wyoming, and the other a house in Arlington, VA). My wife did the same thing, working as a cook and waitress and fast food manager thru here undergraduate college and had zero student loans when she graduated. We raised three successful kids along the way whose combined annual incomes now are well over $550K. They all have college degrees, are married, own homes and have children too. And no student loan debt. We did NOT pay for their college either. They worked their way thru too.

      You can have it BOTH ways, get a college education and not be overburdened later paying for it, and also be financially successful. All of it requires one thing in common – determination and hard work. Don’t “settle” for going thru life without a college education, or achieving financial success.

      Just don’t count on a college degree to be a meal ticket any longer, as you correctly pointed out.

    • Dillon Jalbert

      I do think high school teachers push college as a “must have or you will be a failure in life” way too much. As much as I disagree with how they portray that, I do think college has its share of pros since it gives 18-22 year old’s the ability to live away from home and (hopefully) grow up, the opportunity to meet like-minded friends through on-campus clubs/activities, and of course it gives a structured education.

      There are scenarios where you could be wasting time and money – like going to a private school and majoring in art, but going to a state school in majoring in finance, accounting, econ, real estate should be well worth the time and money in my opinion.

    • Jason R. Porter

      I have become hostile to the entire concept of University as time goes on. A horrible, obsolete investment for most, except the US government who’s largest asset is now student loan debt. What matters is your work ethic and character. Any other information you need can be looked up on line in seconds.

  3. Steve Vaughan

    I didn’t realize so many young people (52% more than boomers or Xers) would consider buying a plex. I’ve owned quite a few plexes. One of the downside assumptions of buying them is you will be selling to another investor at exit. Maybe a house-hacker will be a more likely buyer, putting emotion into the purchase, driving demand. I’ll consider that.

    But, at the same time you talk about having a lot of debt and lower credit scores. Wanting to buy and being able to buy can’t be different things. Sacrificing and delaying pleasure is not what millenials are known for. Something will have to give for desire to become reality.

    The technology disruption was not invented by the young and is available to all. Even I can search Zillow or redfin or look up assessor info and recorded docs online. And I can do it for more than 5 minutes at a time without being disrupted by notifications or other apps.

    The tech disruption has been more of an anchor for the young I would counter. Hard to build wealth and invest for later when looking at and comparing yourself to the Joneses most recent car purchase and vacation pics while eating avocado toast on FB with your $1000 phone.

    I engage with quite a few millenials as my renters, investor colleagues and buyers of my last 3 rental home sales. Just like any age group, the Pareto Principal reigns true. 20% are exceptional. 80% will be renting for a very long time.

    If you think millenials were put off by wall street and big banks during the great recession as you lived comfortably at home with no responsibilities, try having that hit you with a young family to provide for in a home with a mortgage. I love nothing more than creative purchases and sales that don’t involve further enriching a bank. My commercial refi in 2017 to a private lender costed a bank $700k in capital in 5 minutes time. That was a good day for me.

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