By Rent To Retirement | April 5, 2022
Real estate investing has tremendous upside and remains one of the most advantageous wealth building strategies. Beyond purchasing a property and allowing it grow in value over time, you can see passive income, tax benefits, and protection against inflation, just to name a few.
If you google “how to get into real estate” you’ll see countless articles that, when boiled down to their essence, all essentially say the same thing:
- Pick a strategy (wholesaling, buy-and-hold, BRRRR, commercial)
- Pick a market
- Run the numbers
- Purchase the property
Each one of the aforementioned points are important when getting into real estate. However, the one thing that nearly every blog post, book, or educator typically fails to mention, is one of the foundational components when getting into real estate investing: ensuring your personal finances are in order.
Basic personal finance is something that eludes a lot of people. Arguably it is a concept that should be as mandatory in school and history or algebra. You could even say it is more important.
In the US, the average U.S household with debt is now over $150,000 – up from 6.2% in 2021. Families are in debt with credit cards, mortgage and other loans.
Interestingly, almost 80% of Americans indicated that they have a budget. Most of the respondents indicated that either “increasing my wealth and savings” or “debt” was the reason to start budgeting.
It is surprising that while a significant portion of those surveyed indicate they have a budget, however, the amount of debt the average American carries, continues to increase. This suggests that either 1) the budget isn’t doing anything or 2) those people who don’t use a budget are acquiring a significant amount of debt – enough to continue to increase the overall household debt!
Why are Personal Finances Relevant?
Having a personal budget and following through on paying down debt, saving money and knowing where your money is going is an absolute most before you start in real estate investing. If you are unable to manage your own money, imagine what could happen with additional rental income?
Lack of fundamental understanding of personal finances will inevitably make owning rental properties a nightmare. Without having the discipline to closely evaluate rental income and allocating money to property management, vacancy costs, maintenance and repairs and capital expenditures, you are setting yourself up for failure.
Receiving rental income for the first time is a huge accomplishment – a sense of joy and excitement. Having an understanding of what to do with that rental income is a key factor that sets those who succeed in real estate investing apart from those that don’t. If you’re immediate response is to go spend that extra cash, instead of putting a certain percentage aside for unforeseen future issues, you’ll be forced to pay out of your own pocket. Prior to getting into real estate investing, it’s important to have a personal budget and be able to set aside money so you’re not living paycheck-to-paycheck. Additionally, every effort should be made to establish an emergency fund.
With all the headaches of COVID pandemic, there is one thing that continues to be true: things can and will go wrong.
- If your tenants decide not to pay rent (or simply can’t) can you cover the bill for 3? 6? Or even 12 months?
- What if you are unable to rent out your property? Can you overcome that with your current finances?
- Appliances go out?
- Main water line breaks?
All of these scenarios have occurred to me and we were able to weather the storm because we were putting rental income aside every month and had an emergency fund to save us from resorting to other options.
Before you venture down the path of real estate investing, make sure that you feel good about your own “personal” finances. Also, having an emergency fund will not only ensure that if an emergency occurs in your personal life, you’ll be to weather the storm but also if the emergency occurs with your rental property.
Real estate investing has the ability to transform individuals’ lives – but only if they understand how to handle money. In future discussions we will be discussing some important aspects of qualifying for loans, what goes into underwriting, and ensuring you are running the right numbers when analyzing your deals!