The Benefits of Real Estate Investing for Software Developers
So, you're interested in real estate?
I want to be upfront and honest, it is by far my favorite asset class.
In the last 6 months I invested $30K into a property and now have over $180K of equity in it. That's a 500% return...
If you are a software developer, odds are you can do this too.
So let's get into it.
Advantages in Real Estate Investing
Software developers have a few key advantages that make it really easy to invest in real estate compared to most people.
1. It's Easier to Qualify for a Loan
One of the biggest advantages with real estate investing, is being able to buy a property with a really cheap loan.
I bought my first property with money I borrowed. I was able to borrow 95% of the purchase price with less than a 3% interest rate. Those funds now generate a lot more than 3% in income. If you invest wisely, these loans will more than pay for themselves.
Now as a software developer, you should be really excited about this.
Because if you manage your credit well, your job is an incredible tool for getting access to massive loans.
Lenders love to see employees who work W-2 jobs. You have a steady, consistent, and probably fairly large stream of income that way. And it's really easy for lenders to calculate how larger of a mortgage you can afford based on your consistent income.
Compare that to freelancers or even business owners where income fluctuates every month. These professionals typically have a harder time getting approved for a loan because they have to provide tax records and more documentation to prove that they can afford any given mortgage.
Keep your W-2 forms around and try and hold your job for a couple years.
Lenders will love you.
2. You Have Access to Bigger Loans
By working in a high-paying field like software development, your high income will allow you to borrow larger amounts of money.
When you apply for a residential mortgage, lenders will limit how much you can borrow based on how much debt you currently have and your current income.
This is called your debt-to-income ratio. This is a measure of your monthly debt payments, divided by your monthly income. And if this is too high, lenders won't approve you for the loan.
From their perspective, there's risk that you might not be able to make your loan payment since you have so much other debt.
Different lenders have their own requirements about debt-to-income ratios. The Federal Housing Administration (FHA) provides loans up to a debt-to-income ratio of 43%. But generally, lenders like to see this number below 36% or so.
So, as a software engineer with at least a few years of experience, you can probably use your high income to more easily qualify for a loan.
3. Saving For a Down Payment
When you buy real estate, you probably won't be able to borrow all of the money to make the purchase.
Most lenders will want you to make a down payment so you have some skin in the game. How much totally depends on the loan program and your lender's requirements.
A few examples.
If you're buying a residential property to use as a rental, lenders will probably want to see a down payment of about 20% or more. But again this can vary.
If you buy a home to live in a your primary residence, you can get away with a down payment as low as 3-5% down. For example, I made a 5% down payment on my first purchase. Lenders believe that you're less likely to let the house you live in go into foreclosure so they see this kind of purchase as being less risky.
You will typically have to pay a small amount more for mortgage insurance when you put less than 20% down. But it's still a very powerful option if you want to get into real estate with a smaller down payment.
If you are a veteran, you can access VA loans for 0% down. Definitely something to look into.
Back to the software developer thing.
As a developer who makes a good salary, you have the potential to save a lot of money very quickly.
If real estate is something you want to pursue, the reality is you can probably take action sooner than you think.
Prepare your credit score and live below your means for a little while as you save up a down payment. But again, you can buy a property with as little as 3-5% down.
With a in-demand job like software development, you can take advantage of your opportunity to save money and make a down payment with ease.
4. Earn Actual Passive Income
Your job likely pays you well. But at the end of the day you are still trading your time for money.
If you stop working, you won't have any income.
Real estate fixes this.
If you own a property that generates income, you can stop working and you can still put food on the table. Or better yet, you can keep working and gradually add to your income by expanding your real estate portfolio.
The point is, real estate separates time and money so you don't have to trade time for money.
Like you do with your job.
5. Context Switching
A subtle but important reason why I really like real estate, is because it's not software-related.
I get to take a break from thinking about all of the things I normally do during my 9-to-5 job.
There are many investments that software developers can get into like crypo, web3, and NFTs. As engineers we have a massive advantage in understanding these technologies. You could definitely argue that these are better or worse investments for various reasons.
The reason I like real estate is because it's not related to software and I get to think about something other than code for a change.
Real estate is already very passive. But being able to context switch and take a break from work makes real estate feel even less like work.
Software development is an incredible career path.
Companies are hiring more developers than ever. They are competing for your talent, and willing to pay you big bucks to become an asset to their team.
Software engineers enjoy perks that other jobs can't offer too. Like remote work, flexible hours, and plenty of time off. You can work on your own and go heads down to solve a tough problem, or you can pair up with your team and collaborate as much as you want. You are free to solve problems in the best way you can.
But at the end of the day, your compensation is limited to what you make from your job. You can literally do the math and see how much you make every year and how many years it will take you to save for retirement.
Unless... you invest!