Whether you buy a house with an extra room you can rent out on Airbnb or purchase an entire building and turn it into apartments, homes and properties can be extremely lucrative assets.
Todd Baldwin would certainly agree. The 31-year-old grew his net worth to over $4 million through smart real estate investing (and a few frugal habits).
From buying homes to rent out on Airbnb to converting his basement into a rentable apartment, Baldwin has used real estate in a number of ways over the years to bring in extra income and even live in his home for free.
Here’s Baldwin’s top two pieces of advice for beginning to build wealth through real estate.
Before you buy property: Get your finances in order
The first step to getting into real estate investing is figuring out how you’re going to pay for it. Before you’re ready to buy a property, Baldwin recommends cutting down your living expenses and making sure you have a solid credit score.
Finding a roommate or two is one great way to help save on rent, though it becomes a less appealing option to many people as they age.
Baldwin encourages you to take advantage of your younger years when you can tolerate a little more discomfort. “If it’s gonna suck, just take it while you’re young,” he tells CNBC Make It. “You can get roommates when you’re 22; you won’t want them when you’re 42.”
Imagine, for example, you want to rent an apartment in New York City where the median rent for a 1-bedroom apartment is around $3,800 a month, according to real estate platform Zumper. Meanwhile, 3-bedrooms are going for a median of $4,500. If you live with two roommates, you could bring your rent down to about $1,500.
While you’re stacking that extra cash, Baldwin suggests you work on building your credit. Putting everyday purchases on a credit card and immediately paying it off can help you build credit for the first time or improve your existing score, he says.
However, “don’t go out of your way to spend more money you wouldn’t normally spend,” he says. “Just put your regular expenses on [your credit card] and eventually, you’ll build credit.”
When you’re ready to buy: Be picky
Baldwin takes pride in the fact that he’s never lost money on a real estate deal. He credits his success to being extremely selective about the properties he purchases.
Any home he invested in had to meet five strict criteria. “If someone sent me a house [to consider buying] that had four out of the five, I wouldn’t buy it,” he says. “It had to have five out of five.”
When looking for property to rent out by the room, Baldwin seeks:
- A good bedroom-to-bathroom ratio
- Enough parking spots for the expected number of tenants
- A location that’s going through a transition, such as seeing an uptick in new businesses opening or a new grocery store going in nearby
- No homeowners association (HOA) fees
- Close proximity to public transportation
Those don’t have to be the criteria you use. Still, Baldwin’s commitment to checking off each of his boxes has helped him stay focused on doing each deal well and growing his business without too much additional risk.
“Perhaps I didn’t scale as quickly as [someone] who has way more money than me,” he says. “But I’ve also never had a scary time where I’m like, ‘Oh, I could lose my pants on this.'”
DON’T MISS: Want to be smarter and more successful with your money, work & life? Sign up for our new newsletter!
Get CNBC’s free report, 11 Ways to Tell if We’re in a Recession, where Kelly Evans reviews the top indicators that a recession is coming or has already begun.