Today, we have a guest post by Anton Ivanov. He is a US Navy veteran, real estate investor and entrepreneur with a 35 unit rental portfolio spread out across 4 states. Anton is the
founder of DealCheck – the leading real estate analysis software used by 50,000+ investors and agents to quickly analyze and compare investment properties.
5 Key Financial Moves for Becoming a Successful Real Estate Investor
Real estate is awesome when it comes to building a steady stream of passive income and growing your wealth. There aren’t many investments that will generate upward of 15% per year and give you a bunch of tax deductions at the same time.
But owning rental properties does come with added financial risk. A house is a physical asset that needs to be maintained and protected. Dealing with tenants can pose its own challenges and potentially expensive problems.
So before you start investing in real estate, it’s a good idea to review your finances and make sure your prepared. Not only will this give you some piece of mind, but will also help you grow your rental portfolio that much quicker.
Here is what you can start doing today:
1. Build Up Your Emergency Fund
Having a solid emergency fund is a no-brainer for anyone. But if you are considering buying rental properties, it becomes even more important.
Why? Well, there is a lot that can go wrong with a house. The roof may start leaking and need repair. The water heater, AC or HVAC may break down. The tenants could trash the property and skip town. Or you can simply have a longer than expected vacancy period and still be on the hook for the mortgage payments.
When you invest in real estate, your emergency fund needs to cover not only personal
emergencies, but also real estate emergencies as well.
In addition to saving the recommended 6 months’ worth of personal expenses, you may want to consider having a separate emergency fund for your properties. I keep a reserve of about 3-5 months’ worth of expenses for each property on top of my regular emergency fund.
It may sound like too much cash just sitting around, but it helps me feel prepared if things go wrong.
[Note from Drew: this is great advice. In fact, this is something that I recommended in 8 ways to crush if after graduation, in your 20s & beyond. Emergencies, whether personal or real estate related will always happen. Having an emergency fund will help you through tough times. I’ve incurred over $8,000 of emergency expenses before and was glad I had an emergency fund to bail me out.]
2. Pay Off High-Interest Debt
Investing in real estate (or other things like stocks) will grow your wealth by providing a positive return on your money. Each year, the cash you invested will bring in more cash.
You can look at your debt doing the opposite – because of the added interest, your debt is actually costing you money each month that you don’t pay it off. So effectively, it gives you a “negative return” on your money.
Having high-interest debt is counter-productive to investing in real estate. Think about it. Sure, you can take that $20k and buy a rental property that will yield a 12-15%.
But if you have a high-interest credit card or consumer debt at 16-18% interest, you’ll actually be better off paying that off first and then focusing on investing. You don’t want your money working against you.
[Note from Drew: again, this is great advice. High-interest rate consumer debt will kill your ability to create wealth. This is something I talked about in depth in the 6 steps to saving a 6-figure net worth.]
3. Work on Growing Your Income
Investing in real estate is capital intensive. What that means is that you’re going to need cash for down payments, closing costs and repairs before you can buy your first property. How much cash you’re going to need will depend on where you buy (and what financing strategies you’ll be using), but you’ll probably need at least $20-50k per property.
Until you build up your real estate portfolio to the point where it generates enough income, the up-front cash will need to come from your personal savings. Thus, having a high income (and a high savings rate) is the key to growing your portfolio quickly.
Most people understand the value of living a frugal lifestyle, but fewer realize that frugality can only take you so far. Increasing your income, on the other hand, is potentially limitless. And the more you make, the more you’ll be able to save and the faster you’ll be able to grow your rental portfolio.
There are many things you can do to increase your income. Here are a few ideas:
– Work up the corporate ladder and always look for better and more lucrative positions
– Consider switching careers or branching off to a new role if you feel you’re hitting a
– Look into doing freelancing, consulting or other part-time gigs in your spare time
– Start a side business or a side hustle that can bring in additional funds
This is by no means an all-inclusive list, so flex those brain muscles and come up with some creative ways you can bring in more money.
[Note from Drew: Anton knows what he is talking about. Earning more solves a lot of problems. Frugality will only take you so far and you’ll need capital to start investing in real estate. Personally, I am a fan of offensively building wealth.]
4. Increase Your Savings Rate
Having a high savings rate and living a frugal lifestyle goes hand in hand with increasing your income. What good is all of your take-home pay if you spend it all, right?
There are the obvious steps you can take (like having a budget and “paying yourself first”), but I think the biggest enemy we all face is lifestyle creep.
It’s natural to want better or bigger things as we progress through life. And when you get that raise at work, it oh so tempting to upgrade your car or your house, start going out more often or go on that dream vacation you’ve been putting off.
Before you know it, all of that extra income has been used up by the added expenses and your overall savings rate actually goes down. Definitely not what you want.
What has helped my wife and I stay consistent with our savings is to always re-calculate our savings/investment contributions after any raise or additional income. We bump them up accordingly to keep our savings rate exactly the same as it was.
This helps us keep saving more money, but at the same time gives us a little more spending budget to feel rewarded for our hard work.
[Note from Drew: Anton truly has a grasp around personal finance and real estate investing. This is rockstar advice and a great way to avoid lifestyle inflation.]
5. Find a Reliable Lender
In addition to being limited by your available cash, the second potential roadblock to growing your real estate portfolio will be your ability to acquire financing.
Finding a reliable, easy-to-work-with lender is absolutely crucial, and you should start looking for one way before you find that perfect investment deal.
For most new investors, it makes sense to start with financing their properties with
conventional, 30-year, fixed rate mortgages. They will have the best interest rates and will help you maximize your cash flow.
Most banks will have a mortgage program, but not all will be willing to work with investors. Check with your existing banks or credit unions first, but be prepared to look elsewhere if they can’t help you.
I like to work with mortgage brokers instead of lenders directly. These professionals can help you price loan programs from several different banks and find the one with the best interest rates and lowest closing costs.
There is usually no cost to you when working with mortgage brokers and they can help you submit all of the required documents just once, instead of doing it for every lender separately.
[Note from Drew: I couldn’t agree more. I’ve always said your mortgage broker is the most important member of your real estate team.]
Investing in real estate is exciting and many people can’t wait to start looking at potential properties right away.
But spending a little time getting your finances on track beforehand can not only help you protect yourself from the unexpected, but will also help you grow your portfolio that much quicker.
I promise you will thank yourself later!