I buy a lot of real estate from failed real estate investors. They tried to buy properties, but ultimately end up losing them to foreclosure because they were not financially stable enough to invest. While you don’t have to be rich to invest in real estate, having a solid financial foundation can help cover you when things don’t go right in your real estate investments, as well as provide needed capital to fund your purchases.
But, what kind of financial position should a person be in before they begin to invest? How can you ensure you are not like all those investors who have failed?
While these answers may differ for each person, I would suggest following the four tips outlined below to fully prepare yourself financially for your venture into real estate investing.
1. Get Financially Educated
Before we even begin talking about the financial metrics you’ll want to meet before investing in real estate, it’s worth discussing the most important financial asset you can control: your mind.
Far too many individuals get excited about real estate investing after listening to a podcast, watching a late-night TV infomercial, or talking to a friend. But then they simply try to jump into the business without learning how the game is played. In other words, their financial IQ is lacking.
Therefore, it is important that individuals learn how wealth is built through real estate, before jumping in. After all, you wouldn’t open up a brand new unknown board game, and start rolling the dice and moving pieces. First, you need to read the directions.
Of course, there are numerous sources for this financial education, depending on how you best like to learn, including:
- Real eorld meetups
No matter how you like to learn, be sure you understand the basic concepts before dropping a lot of cash or time into a property.
2. Get on a Budget and Start Saving Cash
Although real estate can make you incredibly wealthy and offer financial freedom, it won’t happen if your personal spending habits are not in check. After all, if you spend equal to or more than you currently earn, you’ll find it increasingly difficult to save up the cash needed for down payments, reserves, and emergencies.
Therefore, get yourself and your family on a budget today, and ensure you consistently make more than you spend. Track every dollar that comes in, and every dollar that goes out. Make sure there is always money left over for savings. This might mean sacrificing some of the luxuries you currently love, like that new car, your Netflix account, your daily lunch out, or your frequent vacations. Don’t worry—you don’t need to cut these out forever—just until you can consistently save more than you spend.
Your budget can be as simple as a spreadsheet, or you can use one of many apps—such as YNAB.com—to manage your budget. The tool you use doesn’t matter; all that matters is that you budget your money and spending.
Once you can consistently save a considerable portion of your paycheck, start saving it! I recommend opening a separate savings account at another bank that you can’t easily get to, and setting up automatic transfers or deposits into that account, so accessing it will be difficult.
If you currently have a large amount of debt, like credit cards or student loans, you may also use this extra cash each month to quickly pay down your debt.
3. Increase Your Income
While cutting out the morning lattes and packing a bag lunch to work can help you achieve a better financial position, it’s only half the picture. At some point, it’s time to increase your income.
Of course, increasing one’s income is easier than it sounds, but consider a few of the following plans to increase your income by 20%, 100%, or even more.
Perhaps the easiest way to increase your monthly income is to simply ask for a raise. Sure, the boss may say no, but there is always a chance they’ll say yes. A simple, three-minute conversation could result in hundreds or even thousands of extra dollars in your paycheck.
Furthermore, even if they do say no, shift the conversation, and ask how you can earn the privilege of a raise. Rarely would a manager refuse to entertain such a conversation. Perhaps you can negotiate commission based on performance or learn a new skill on your own time that can help you obtain a higher-waged position. If you can find a way to make your company an extra $100,000 per year, it should be no problem getting a piece of that.
Another common way to improve your financial position is by starting a side-hustle. Chances are, you have skills that other people would find valuable. Perhaps you can play piano and could turn that talent into a paid gig by instructing teenagers. Maybe you have a penchant for graphic design; turn your nights and weekends into a chance to put your designs to work for local companies. Maybe you’ll decide to sell products on Amazon, or become a weekend photographer. Use part of the 72 hours a week you aren’t working or sleeping to make some side money.
4. Raise Your Credit Score
When you begin purchasing real estate, chances are you’ll do so using a bank loan—also known as a mortgage. But, if your credit score looks more like a bowling score, you’re in trouble!
Banks today typically want to see a credit score of at least 625 before they’ll lend out their cash; some banks want even more. Additionally, the higher your credit score is, the lower interest rate you’ll be able to obtain, which means lower monthly payments and more cash in your pocket. So, it’s time to get your score up!
Increasing your credit score begins with understanding what your score currently is, and what your credit report says about your credit history. You can get your credit score for free on a site like CreditKarma.com, which is actually free, unlike many of the “free credit score” companies out there that only provide a score when you sign up for a trial to their paid program. If your score is above 700, you are sitting pretty, and you can keep doing what you are doing. If not, keep reading.
Next, head over to AnnualCreditReport.com to obtain a copy of your complete credit report, which should show every open or closed credit account you have, as well as the payment history on those accounts. Be sure to review them for accuracy and take care of any problems you might find.
Finally, if your credit score needs drastic improvement, understand that raising your credit score is not a mystery. Mostly, it will move up when you pay your bills on time, and reduce the amount of debt you have compared to the amount of available credit you have.
Real estate investing is one of the most exciting ways to put your money to work for you, but it’s an investment that has severe consequences if done incorrectly. Just ask any failed investor.
But, if you follow the steps outlined above, you’ll be fully prepared to embark on an amazing journey that will allow you to earn more passive income, and give you more freedom than you can imagine.
You’ll truly be set up for financial success.
Brandon Turner is cohost of the BiggerPockets Podcast, a show produced by BiggerPockets.com that features off-the-cuff interviews with investors of various backgrounds, niches, and experience levels. An active investor in Washington State, Brandon is also the author of several real estate books, including The Book on Rental Property Investing.