• Wed. Apr 24th, 2024

4 Things You Should Do Before You Investing in Real Estate

Byadmin

Feb 28, 2024 #estate, #Investing, #real

A property could have hidden flaws that end up costing thousands in repairs. The market could go south, and your property could lose value. It could be difficult to find a tenant, forcing you to dip into your savings to cover the mortgage payment.

But according to Kyle Mast, a certified financial planner, preparation can help mitigate fear when buying your first property. On a recent episode of the BiggerPockets Podcast, he shared six steps that new real-estate investors can take to be well-prepared for potential bumps in the road.

Establish a vision

The first is to develop a vision and a goal for where you want to go with real-estate investing and what you hope to achieve with it. This will inform how you form your plan of attack for the years ahead.

“Begin with the end in mind, and then just work your way back from there,” Mast said. “Do you want to be someone who owns 100 properties, is managing a team, you’re the CEO, or do you want to be the family man or the family wife that has a lot of free time, travels around, has maybe five properties, you’re financially independent, you don’t need a lot to live on? What is your goal down the road? And if you can define that, the rest will work itself out.”

Examine your balance sheet

Next, Mast said to look at your own finances and prior track record in dealing with money. If you have little debt and a big savings pile, you’re probably ready to buy a property. But if you don’t have a large sum set aside and you have a high level of credit card or student loan debt, you may have to adjust how you approach your spending and saving.

A good number to track, he said, is your net worth. This is the sum of your assets minus your liabilities. The bigger this number is, the better position you are in to both secure a lower mortgage rate and weather any real-estate investing storms.

“A bank’s not going to lend to you if you don’t have enough reserves or if you’re too thin on what you’re bringing in and what’s going out the door as far as debt payments,” he said.

Still, he said not to let having some debt stop you from starting the investing process — it’s more about how much of a handle on it you have based on your income and spending habits.

Set a budgeting plan so you can build up savings and pay down debt

Once you’ve looked at your personal balance sheet, come up with a budgeting plan to start saving up money and paying down debt, Mast said.

He shared two budgeting strategies he likes. One is to set up your direct deposit from your employer in a way that automatically puts a certain percentage of your paycheck into your savings. The other is to put your daily allowance into cash envelopes, forcing yourself to only spend the physical cash you have at your disposal. For instances where you need to use a bank card, have a “bank” envelope where you put that day’s cash in place of the card transaction.

Paying down debt is important because it allows cash flow to increase, allowing you to build up savings faster.

Dave Meyer, the host of the BiggerPockets Podcast, discussed two approaches for debt reduction. One is first tackling the source of debt with the highest interest rate, which snowballs the fastest. For example, this could be credit card debt, which is currently averaging more than 20% in the US. The second approach is to knock out the smallest balance first, and use that extra cash flow to knock down the second highest balance, and so on.

It’s also good to be building up an emergency fund, Mast said, in order to cover any unforeseen expenses that could arise, like problems with a property’s roof. This should probably be at least a few months worth of expenses.

“In the financial world, they’ll say three to six months’ worth of your expense is a good ballpark to start. And I’d say that’s a very good place to think about. So, if it costs you $3,000 a month to live, save up $9,000, maybe round it to 10,” he said. “But again, it’s personal to everybody and it depends on what you’ve got going on. If you plan to do a career transition in the next year, maybe bump that up a little bit more.”

Keep learning, and decide on a strategy

Finally, Mast said to be accumulating knowledge on real-estate investing by reading books, listening to podcasts, and meeting with investors in person. This will help you decide on which strategy you might want to use.

“Do you want to do house hacking, where you buy your own house and eventually turn it into a rental?” Mast said. “I would say one of the best things you can do is if you know somebody that does real-estate investing, buy them coffee, and just talk to them about it and see what they did.”

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