5 Financial Steps To Take Before You Invest in Real Estate
5 Financial Steps to Take Before You Invest in Real Estate
BY JIM WANG at Biggerpockets.com
1. Fill Your Emergency Fund
Your emergency fund is a pool of savings you set aside to pay for emergencies. It’s self insurance for things you can’t insure.
Whether it’s a major car repair, unexpected medical bill, or the loss of a job, having an emergency fund can help bridge the the financial gap. Instead of turning to high interest credit cards for funding, you can turn to your emergency fund.
Before you think about investing, you need to have this account set up, adequately funded, and set aside from the rest of your assets. It’s your moat. Your protection against the unknown. If something bad happens, your emergency fund will save the day.
Your emergency fund should be set aside in a liquid account, like a savings account or certificate of deposit, so you can access it quickly.
Experts recommend you save six to twelve months of expenses in your emergency fund, with six months being the bare minimum. If you have a tenuous job situation, you might want 12 months of savings. If you have an older car or know there’s a major appliance in your house that might need to be replaced, make this fund bigger until the risk is mitigated.
2. Pay Off High Interest Debt
Next, or concurrently with the emergency fund, pay off all high interest debt. If you are paying interest on credit card debt, you should be investing in yourself and paying down your debt as quickly as possible before investing.
Every dollar you put towards your debt offers a guaranteed return. The more expensive the debt, the better the return! Not only is the return great, it’s risk-free!
If you try to invest while carrying debt, you’ll be taking one step back for every three steps forward. Earning a 10% return sounds great, unless you’re also paying 18% to a credit card on a balance.
3. Get “Free Money” From Your Employer
If you’re working for a company and the company offers a retirement package, make sure you take full advantage of any financial benefits they offer. Many employers that offer 401(k) plans will offer an employer match to your contributions. Make sure you contribute as much as you can to take advantage of the free money. It’s an instant doubling of your investment!
4. Build a Financial Roadmap
You need to build a financial road map. This road map will help you understand where the real estate investments fit in your broader financial picture.
What is your 20-year goal? What are some financial milestones, perhaps every 5 years?
Where does the real estate investment fit in that overall Investment portfolio?
By understanding your plan, what your returns need to be on certain investments, you can make smarter decisions when it comes to the investments you consider. Do you need cash flow or are you looking for equity appreciation? Are you looking to generate a return with a flip or hold for the longer term? These are all questions that are best answered with a plan in hand.
5. Be Aware of Common Investment Scams
Finally, study the common real estate investment scams and scandals of the last twenty or thirty years. Be aware of what happened, how they could be avoided, how they could be mitigated, and how you can spot them as they happen.
When you start investing, you’ll start seeing a lot of opportunities. Some of those are genuine. Others won’t be. Seasoned professional scammers will smell the green on you and pounce if you aren’t careful. It’s not common, but when it happens, it’s extremely painful. You wouldn’t think those emails from “Nigerian princes who just need $10,000 to secure their throne” would work — but they do enough that you still get the emails.
If possible, find a mentor in your area who you can take out to coffee or a meal. Someone with knowledge and experience will help give you confidence that your investment decisions are wise for the long term.