Financial independence is more attainable than most people think. And investing in real estate is a phenomenal way to turn average wealth into highly productive capital wealth.
Of course, no investment turns into profit overnight, but real estate investing is certainly one of the best ways to help reach your financial goals — offering a steady income stream, more control, diversification, and appreciation of an asset.
At K Wealth Advisors, we help you understand the journey and answer all your questions along the way. Interest rates are still at all-time lows, so if you’re ready to jump on this exciting investment opportunity, here are 5 crucial steps all real estate investors must follow as you start building your real estate portfolio.
Step 1: It All Starts with You
Before you invest in real estate, do a little soul searching. Yes, everyone wants to have a reliable income stream and create productive capital. But dig a little deeper before you take the leap. Ask yourself:
Can you commit your time and money? Investing in real estate isn’t a liquid investment. You’ll tie your money up for a few months at the least — or possibly a number of years — should you buy and hold. Plus your responsibilities as a landlord.
Is the potential income worth the time and effort you are willing to give? Before you buy any property, get as much rental history as you can if available. Make sure the cash flow (i.e. the difference between the principal, interest, taxes, insurance, and rent) will be enough for your family to justify how much you’re putting into it.
Have you done your research? Investing in real estate isn’t a sure thing and has its own ups and downs. It has many benefits, but like anything, it has downsides, too. In addition to the rental history, know the pitfalls specific to your area before jumping in headfirst.
Do you want to be a landlord? Are you ready to deal with tenant issues, 3 AM phone calls, working with contractors, or doing the work yourself for emergency repairs, and the unexpected vacancies that may occur are all things to consider. If you’re considering a property management group, just remember that’s an additional expense as well.
Will you be able to keep your full-time job when starting out? There are huge benefits to investing in real estate but your full-time job still has some great perks. A paycheck, plus health and other fringe benefits may all be worth keeping your full-time job — for now.
Step 2: Organize Your Personal Finances
Next, look at your finances. Have you prepared your financial self for this expenditure? Ask yourself these questions:
Do you have an emergency fund? You’ll need more than the typical 3 – 6 months of income when you invest in real estate. If you have that baseline set and take 15% of your expected income and open a second checking account, then how much more should you save for unexpected rental property issues?
Do you have good credit? Know your credit history. Check your score. If you have less than perfect credit, work on fixing it first. Bring all late payments current, pay down your debts, and don’t apply for any new credit before you buy an investment home. Be in control of your debts — not the other way around.
Do you have a financial plan and will you be able to stick to it? Don’t rob your future self just to invest in a home right now. Set time aside to craft your personal financial plan or work with a fee-only advisor to put you on the right track. Understand where you are financially today before making future plans. This means budgeting for retirement savings, and at the very least, taking advantage of your employer’s 401K employee match.
Step 3: Create a Business Plan — Keep it Simple!
Just like your personal financial planning, you need a business plan too. Because owning an investment home is a business.
Know the type of house(s) you want to invest in whether single-family, townhome, condo, or multi-family units
Quantify your preferred geographic location — in-state, within a mile of public transportation, college town, etc.
Learn the basic numbers needed to own a rental home, including maintenance, repairs, taxes, insurance, and an emergency/capital fund
Set up a budget for the rental home
If you’re considering a distressed property, use the BRRRR Method (Buy, Rehab, Rent, Refinance, Repeat)
Take advantage of this time to develop your repeatable processes to find, manage, and divest your property.
Step 4: Look for the Right Real Estate
This is the fun but emotional part. You’ve done your homework, now you can get out there and search for the right homes using these rules as your guide...
Put as little money down as you can while maximizing your cash flow.
Let everyone know you’re in the real estate investment game — word spreads fast and you never know when a good deal will land in your lap.
Use the 2% rule — the property’s rent should be at least 2% of the home’s purchase price.
Know the 50% rule – Estimate your investment property’s operating costs at 50% of the annual gross rents.
Follow the 70% rule – If you’re buying a rehab property, never spend more than 70% of the post-renovation value (after costs).
Don’t expect your first investment to be perfect by the numbers. The first property is always the hardest to close — but you are on your way to financial independence!
Step 5: Obtaining Financing
You should have already done some legwork regarding financing, but once you find a property, it’s really crunch time.
Make sure you stick to the budget you created. Don’t let the emotion of a “great deal” push you over the edge.
Look at the worst-case scenario in every situation to make sure you can afford it — no matter what happens.
Consider your financing options:
Conventional financing when you have at least a 20% down payment.
Seller financing when you don’t have great credit or a 20% down payment.
Find a reputable partner (family member or friend) and split the costs and cash flow 50/50.
Note, there are a lot of other creative financing options but focus on these for now.
That’s it! Now that you know how to get started, you can become a real estate investor with confidence. Finesse your process, rinse, and repeat to increase your cash flow and set yourself up for a successful retirement. That’s Productive Capital at its best!
K Wealth Advisors
If you are looking for personal guidance as you get started, reach out to K Wealth Advisors and schedule a GoodFit meeting. If you are looking for more general information on starting your real estate investing journey, try BiggerPockets.*
*K Wealth Advisors has no affiliation with BiggerPockets or its subsidiaries. It’s just a great website dedicated to Real-Estate investors of all types to help get you started.
Insightful Planning to Live Your Best Life. #IPtLYBL
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