The 6 Beginner Steps to Take Before Investing in Real Estate

David:
This is the BiggerPockets Podcast, show 901. What’s going on, everyone? I’m your host, David Greene. And this is the BiggerPockets Real Estate Podcast. And today is the man, the mystery, the marvel, Rob Abasolo.

Rob:
I don’t think I’ve ever heard all of those words in the same sentence about me. So, I am honored and excited to bring a very powerful show today called The Steps Before You Invest in 2024. See, at BiggerPockets, we believe that you should have a strong financial foundation and habits before you start investing in real estate. So, consider this episode step zero to prepare you to invest and start your real estate journey.

David:
That’s right. As you’re educating yourself and learning how to become a real estate investor, you should simultaneously be working on your financial foundation so that you’re ready to take action and weather the storm once you get into the game.
We’re bringing none other than Kyle Mast, a regular contributor to the BiggerPockets Money Podcast to help us out today on the show. Kyle is a certified financial planner and a real estate investor who has reached financial freedom himself.

Rob:
And a certified friend of the BiggerPockets show. Let’s bring him on.

David:
Kyle Mast, welcome back to the BiggerPockets podcast. Before we get into tactics, why do you think that it’s important to build a strong financial foundation before investing in real estate?

Kyle:
So many people listen to podcasts and read books, and you really want to jump right in. I’d say the most important thing is staying power. If you come into a new investment, you come into a new endeavor of any sort, you’re bound to have some hiccups right at the beginning.
How many people in real estate can tell stories of their first rental where the furnace was up in the attic and the condensation pan leaked over down their wall and ripped out some sheetrock issues with that first rental? Not saying that that really happened to me in my first rental, but the foundation that you have ahead of time allows you to weather some of those storms initially. It’s just something that I’d say with people in any investment.
One of the best things that can happen to someone when they’re investing in stocks, in single stocks, is to really get burned really bad with the first one because then they learn how hard it is to do single stocks and they’ll most likely do index funds going forward, but if they have put all their money into that one stock, they have no financial foundation ahead of time.
Same with real estate. You get wiped out, and then you’re very hesitant to even keep going or try it again. So, that’s one of the main reasons. You got to hang in there. And you can’t do it without a good foundation.

David:
We often talk about how you could make money in real estate, but we don’t always talk about how you could lose money in real estate. And you’re going to have to weather storms of losing money to make it in the long run. Rob, do you have any stories of ways that you lost money when you started investing that you were not expected or prepared for?

Rob:
Yeah. I would say, for the most part, CapEx and CapEx reserves is not really something you think about getting into properties. I would set aside maintenance budgets. And I’d say, “Hey, I’m going to set aside 5% of revenue to go towards upkeeping the property.” But as most people find out in the world of real estate, when it rains, it pours.
And you have one thing go out from a busted AC to a busted water heater to a roof repair. And if a couple of CapEx things happen over the course of the first or second year, it could really wipe you out for a little while. So, that was something that took me a little while to actually learn and budget for. And now, it’s something that I scrutinize at a very, very astringent level just because I hate when CapEx creeps in. It is so frustrating.

David:
All right. So, Kyle, step one in the steps before you invest is to define your investing goals. How have you done that for yourself? And what would you recommend to our audience when it comes to creating attainable goals?

Kyle:
I would say, for most people, you just have to think about where you want to end up. Begin with the end in mind, and then just work your way back from there. And there’s all kinds of goal planning systems. There’s all kinds of ways that you can tackle your next project, your next task. You can just nerd out on this as much as you want to. And of course, I do, being a financial planner.
That’s just right up my alley. But the first step is what do you want to be? 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’s 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. You just take steps back from those main goals where you want to end up in the future. And that will give you the tools that you need for the next actions to get there.

Rob:
I feel like that goal changes pretty often. Do you feel like you’ve flip-flopped at a few points in your career, David, or do you feel like you’ve always had a pretty steady vision for where you want to go?

David:
Oh, I am always flip-flopping. It never ends. It’s actually very frustrating when people say, “Well, what is it you want to do?” I’m like, “Well, I don’t usually know until I start to do the thing. And then I figure out what I liked about it, what I didn’t like, and then other things pop up.”
And so, I’m on the path of, “Hey, you need to be going somewhere north, but how you get there is very open until you find the thing that you love.” Did you have a similar experience, Kyle, or have you always been a steady Eddie?

Kyle:
No. That’s a really good point, both of you, guys. If you can have that North Star of where you’re heading, maybe it’s financial independence or maybe it’s in different areas of your life, whatever it is, if you’re just starting out, you have a direction, but I think it’s totally fine to get a few years in and be like, “Hey, this is not the path I want to go.” Say, real estate, “I don’t want to go residential. I want to go storage.”
As long as you’re not chasing the shiny object syndrome all the time. But of course, correct. That’s what makes life fun. How many businesses have you done, David, and you, too, Rob? That’s when you can try something new. I did financial planning for 10 years. And I transitioned to something else because it’s just fun to try new stuff. So, nothing wrong with that.

Rob:
And obviously, you got into the real estate world, but prior to real estate, what were the types of goals that you started with?

Kyle:
As far as my goals in the future, I always try to develop a picture of the person I want to be. And then I can craft things back from there. And that could be if I want to be a standup guy in the community that’s able to help out emotionally, physically, financially, when people need help with resources, what do I need to do to get there? Maybe real estate is a way to get there. Maybe some other form of investing is a way to get there.
Maybe just working a really high-paying job where you save a lot in your 401k is a way to get there. But defining those things down the road where you want to be really helps dictate that… When you come to that fork in the road, when you have two different ways to go, if you have something further down the road, you can say, “Which is going to be more preferential in getting me to where I need to be, to be the person that I want to be in the future?”

Rob:
So, step one, defining a vision. Start road mapping where you want to go, who you want to be, when you’re getting into this world of real estate. But next, a person needs to evaluate their financial positions. So, what are things that people can look at to really start to understand where they are financially?

Kyle:
There’s several things that you can look at. I would say the first thing is to look at your past track record with money. Are you a spender? Are you a saver? What happens with money? What’s your past? Look at your family stuff. How do you deal with money? Because that’s going to give you an idea of what you need to watch out for going forward.
But you also need to take a snapshot of where you’re at, your debts, your liabilities. Debts and liabilities, those are interchangeable words. It just means things that you owe. It could be a car payment. Could be credit card. It could be student loans. It could be a mortgage on a house.
Your net worth. Your net worth is the things that you own, the value that you own, minus the things that you owe to other people. So, quick, easy example, if you have a house that’s worth $100,000, you owe $80,000 on it, your net worth, if that house is your whole financial picture, is $20,000, just to keep it real simple.
But you could put all this in a Spreadsheet, you could put it somewhere, but you can add up the value of your car, the value of your house, the value of your savings account, all the things that have value, add them up, minus all the things that you owe, the amount of student loan that you owe, the amount of mortgage you owe, the car payment you owe, the credit card payments you owe.
That is one of the best practices you can do to get a picture of where you’re at currently. And that’s such a big deal because a lot of people will continue to go through life moving along, working, making money, but not really know if you’re progressing in this net worth area, which is not the end all, be all of progression in your life, but it really does show you your track record when it comes to money just to be able to track that net worth over time. What was it this year? What was it last year? What will it be next year? What’s your goal for next year?

Rob:
David, what do you think? Because I know, obviously, this is a big aspect of pillars of wealth, debt, liabilities, current net worth. Is there anything that you would add to that?

David:
That’s a great point there, Kyle. And, yeah, Rob, they are. In pillars of wealth, I talk about you measure wealth through your net worth, like what Kyle just said, the cash flow that you have coming in every single month, and then the headache factor. How much do I enjoy the life that I have? Because you can make good money but hate every single day.
And you’re not a wealthy person there. I would also add to this income-producing opportunities. You need to be looking at, before you get into this, “What are areas where I can make more income so I can get more capital to invest in real estate and get myself out of a jam if I get into one?”
Most people have a W2 job, but there’s no law that says you can’t go put together a side hustle, work to get promoted at that job, start a business, and start learning something new while you’re working in it, which can coincidentally be related to real estate. So, before people get into real estate investing, I think they should also look at, “What are some things I could do to earn more money to help build that safety net?”

Rob:
And I imagine that you want to understand this because, first of all, you need to understand how much money’s coming in, how much money’s coming out, saving it, because if you get into real estate and you buy your first property, you need to budget or understand the money that’s going to… how your financial position is going to change as a result of owning that property.
You might make some money. Are you ready to lose money? And, like I said at the beginning of the show, are you ready for that CapEx? And all of that plays into this intricate spiderweb of debts, liabilities, net worth, and money that you’re making I’m sure.

David:
Awesome. So, once you understand your financial position and what you’re aiming for, what comes next? If you’re starting with debt, how can you manage that and still invest? And what are the fundamentals of investing that everyone should know before they start? All that after this quick break. And we’re back. We’re here with financial expert, Kyle Mast. And he’s walking us through all the steps an investor should take before they invest. So, let’s jump back in.

Rob:
All of this plays into that intricate web of debts, liabilities, current net worth, and how much money you’re making. So, with that, budgeting, I think, is a very important and scary word, the B-word in financial investing. How do you recommend our audience start budgeting? What are some tactical ways people can actually do this? Because it seems like a scary concept, but I’m sure there are some very easy things that people can start to do.

Kyle:
Yeah, definitely. And I would say, through this whole episode, reading is something that’s very important. There are well-written books that outline every different one of these aspects. And you might find something that works better for you. And something different would work better for somebody else.
For me, personally, and from what I had seen with clients in my financial planning firm and just in a lot of what seems to stick out there in the financial independence world, there’s two budgets that I would usually recommend. And the one is I usually call it the lazy-person budget.
It has different names, but basically, if you have a goal of saving for the down payment of an investment property or you want to make sure that you’re saving a certain amount for an emergency fund, make it super-easy. Set up automatic payments into a savings account. Set up a direct deposit automatically from your employer to a savings account. Everything else comes into your checking account, you’re allowed to spend. Just simple as that.
When you run out, you’re done. That’s it. You want to go lazy, you don’t want to track everything, make sure you cover everything you have to cover to meet your goals, to meet your obligations, and then spend what’s left. If you have $6 left to buy your clothes at the end of the month, well, you get online and buy a $6 t-shirt. That’s the lazy-person budget.
I would say, after you’ve done that, or if you want to get a little bit more detailed than that, and if you want to start out and really make things stick, a lot of times, if you do it electronically, it’s overwhelming. You might have all these categories of different things. Mint.com has been something for a long time that people have used, but there’s a whole bunch of other electronic ways of budgeting out there. I am a big fan of the cash budget.
And I have been a big fan since I was right out of college. And actually, when I sold my firm, my wife and I, we went to a cash budget again just to see what our expenses were. And basically, you can do this and still live in a digital world. And the way you do it is you just make sure that you always keep receipts. You have a cash budget where you put cash in each month into envelopes for the upcoming month for the items that you need to spend on.
And if you can, you spend in cash, which is a novel thing these days, but if you don’t, if you’re out and you have cash, you have to buy some gas, you use your Costco card or whatever you’re using, keep the receipt when you get home, just put the receipt on the table, move the cash from the gas envelope to the bank envelope, and you’re done. It’s just an easy way to do your budgeting.
And the brilliance of the cash system, and this is something that Dave Ramsey, in the budgeting world, will harp on all the time, is that it hurts more. You see it more. You feel it move more. Electronic numbers in your card are so fast. You don’t feel it. You don’t see it.
And if you can train yourself to feel it, you can go away from budgeting down the road or such specific budgeting down the road. But especially, when you’re getting started out or at a transition in life, if you’re transitioning jobs, transitioning careers, the cash budget, you just can’t beat it. In my opinion, you cannot beat it.

Rob:
Can I ask a clarifying question here? You mentioned the bank envelope. Does that mean that whatever is not spent from your cash budget, do you deposit that back into the bank? Explain that one a little bit.

Kyle:
Sorry. Yeah, I went over that. So, you actually create an envelope that is the bank envelope. So, it’s like your cash bank. So, you keep a certain amount in cash as a savings account. So, if you imagine you’ve got a folder with 10 envelopes in it. And then you have an 11th envelope that you just call the bank or your savings envelope.
And all those 10 are your different budget items, your transportation, your eating out, your date money, your kids’ clothes, all these different envelopes. And then you have a bank envelope that you go to the bank, you pull out $3,000 for the month, you stick it in that bank envelope, and then you fill up each one of your other envelopes with the amount that you need for that month for those envelopes.
And then if you accidentally spend with a card when you’re out and about, you just move money from the gas envelope back into that bank envelope. And you use that to replenish it the next month. Sorry. I’m glad you asked for clarification on that.

Rob:
No, that makes sense. No, it’s practical. And I agree. I think digital just feels like you’re seeing numbers transfer from account to account, but when you deplete cash, you feel that. It’s like a literal, like you’re giving it away with your hands. So, I want to talk a little bit about liabilities. We started talking about debt and liabilities, but I want to talk about for the people that might have some liabilities on their back, how could you start to pay off liabilities and debts?

Kyle:
We’ve already covered the good steps of knowing where you’re at with your net worth, your liabilities, your assets. And then your budget helps you understand the cash flow you’ve got coming in, what’s coming in, what’s going out. And then to start paying down debts, you need extra. So, that difference each month of what’s coming in more than what’s going out, that’s what you use to pay down your debts, pay down your liabilities, to free up more cash flow in the future.
And I’ll let David jump on this one, but there’s generally two different ways, because he mentions it in his book, too. And it’s out there in the financial independence world. There’s the snowball method, where you use basically the small payment, get that one done first, or the avalanche method. And they’ve got all these weird terms that, over the years, they’ve added onto in the avalanches, where you take the highest interest rate debt, pay that off. But, David, you can explain that a little bit more.

David:
Yeah, that’s exactly right. For a lot of people that are, say, “Hey, I want to get started investing in real estate, but now I’m hearing people tell me maybe my financial picture needs to be a little cleaned up,” you don’t have to be completely debt-free, but you definitely want to have a lot of breathing room. You don’t want to be in that point where you’re month-to-month. You run out a month before you get new money.
That’s a problem. It’s stressful when you do that. You don’t want to do this to make your life worse. So, when it comes to approaching how to pay down debt, there’s two very simple approaches you can take. The first is more practical. And the second is more fun. So, depending on your personality, pick one.
The practical approach is to pick your highest interest rate debt and just focus all of your savings on paying that off and let it motivate you to pick up extra shifts, work some side hustles, maybe sell some things you don’t need, and put that money all towards paying down that higher interest rate debt.
Now, the idea of doing that is that it’s going to save you the most money when you could get it paid down. This is definitely going to be things like credit card debt before you pay down student loans or maybe paying off a personal loan or a hard money debt before you pay off your car note. Now, the other one is what we call the snowball method.
And with that method, it’s a little bit more fun because you get some immediate gratification. You pay off your lowest loan balance regardless of the interest rate. And maybe that saves you 200 bucks a month. Well, you take that 200. And you put it towards the money that you were saving every month. And you put it towards your next lowest loan balance.
And maybe that one saves you 250 a month. Well, now, you have 450 that you’re putting. And you slowly just start eliminating your lowest loan balances, and then get to the top ones and tackle it. And along that path, you’ll find, “Okay. I’ve got a lot of breathing room. I’ve got several thousand dollars a month that I’m saving based on what I made and what I budgeted. Now, I feel comfortable investing in real estate.”

Rob:
Yeah, that’s practical right there.

Kyle:
I think another thing you touched on, too, is you’re talking about that breathing room. One of the things that you also need oftentimes for investing in real estate, if you’re going to do a conventional loan route, the less debt payments you have per month, the more likely you’re able to actually qualify for a loan to buy a property, too.
So, there’s the benefit of definitely having the breathing room and the reserves that build up with that extra cash coming in each month, but 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.

Rob:
So, that brings up a good question. Do you think that someone should eliminate all debt and maybe have no debt at all before they start investing in real estate?

Kyle:
The famous answer, it depends, but if I had to answer that in one word, I would say no. I think a lot of people can maybe get behind the ball if they say that they want to pay off all debt before they invest in real estate. You wouldn’t tell someone to pay off all their debt before getting their 401k match from their employer at work. So, here, maybe this’ll help. I try to think in rules of thumb as far as an investment return and a return on time.
And one of the cool things about paying off debt is it’s a guaranteed return. There are no investments, in my opinion, that are a guaranteed return. Some people will say, U.S. government bonds are guaranteed return. And I would differ. History says no. But when you pay off debt, you are guaranteed the return of that interest rate that you were paying to that lender, whether it’s a car note, whether it’s a house, whether it’s a credit card payment.
So, that’s very high value. So, I would say if there’s something that is 10-plus percent, it’s a pretty easy decision to pay that off before investing in real estate. You could maybe even go a little higher. You could say 12% or 15%-plus, which is basically going to be your credit cards, your non-secured consumer debt, the bad debt is probably a good way to say it.
But as far as debt like student loans that perhaps you got it, and it’s a 4% fixed rate for 20 years, you’re really going to do yourself a favor in the long run if you responsibly invest rather than waiting until you have that completely paid off. And you’re playing a little bit of a mathematical and a behavioral game at the same time.
And you have to be careful because you can’t just say, “Well, I’m just going to invest in real estate even though I have all these other payments out there. There needs to be a balance there. David was talking about it earlier. This difference that you have each month, this breathing room, is a big deal.
And what we talked about right at the beginning of the show, building the foundation allows you to have the staying power when something goes wrong. So, if you start investing in real estate too early and you’re too tight, you’re not going to be staying in it. And that can be rough.

Rob:
What do you think over there, David? I see the wheel’s turning.

David:
It’s funny that Kyle’s saying this because it’s right out of pillars of wealth, this financial approach to preparing yourself to be successful at real estate versus just trying to throw yourself into it and figure it out as you go, where a lot of people get hurt. I was thinking as he was talking how it’s very difficult to find a cash-on-cash return right now. You’ve got real estate investors scouring the earth trying to find them.
And when you can’t find something on market, you go to off market. And it really puts you in a vulnerable position a lot of the time because wholesalers will come along and say, “I got a great cash-on-cash deal,” but it’s a terrible area. They’re selling it to you over market value. You’re not getting an appraisal on it, so you don’t know that you’re overpaying. It really just puts investors in a position where they can get hurt financially.
But when you’re paying off debt like what Kyle said, you’re getting a guaranteed return on that. Not only are you eliminating the debt, which is positive, but you’re eliminating the interest rate you were paying on that debt. So, if it was an 8% rate, that’s the same as an 8% return. It’s actually better than an 8% return because you get taxed on the 8% return. You’re not getting taxed on the money that you’re paying off.
And then like we said, it puts you in a stronger position to get a loan. Your debt-to-income ratio improves. You’re going to get better interest rates on the money that you borrow from a bank. It allows you to buy more real estate in the future. And it helps you to become disciplined.
And, Rob, you know this as someone who manages a portfolio. You have to be disciplined with the money of the property. Every property has a profit and loss statement. It gets out of hand very quick, especially when you have other people managing it.
When you get other property managers involved, when you’ve grown a portfolio that you can’t pay attention to it, it’s amazing how fast that money starts walking out the door and going towards things that you’re overpaying for because somebody else is spending it. So, these principles that we’re talking about, they don’t only benefit you immediately, they will absolutely pay dividends for you once you become a real estate investor.

Rob:
I do want to say, I’m not someone that would necessarily staunchly say, “You have to pay all debt before you get into real estate,” but going back to the principles you’re talking about, Kyle, student loan debt, credit card debt. I would say the biggest relief I’ve ever had in my life was the day that I paid off my credit cards. Before I got into real estate, really what stopped me was that I was in $20,000 of credit card debt with my wife for five years.
For a long time, I was always trying to pay it. And I was just very diligently always using my tax returns, my tax refunds, to pay off the credit card debt. And I remember the moment I paid off my credit card debt was the day that I felt like my second life started. And that’s when I started doing the real estate thing.
And that’s when everything took off. So, while I don’t think that was 100% necessary, it did feel pretty nice. And sometimes, that momentum that you build from paying off a balance can really breathe new life into what you want to do next with your investing journey.

David:
Man, I just want to emphasize for everyone the story that Rob just mentioned there. We’re just touching on something that’s super important in this whole financial journey. And that is your peace of mind through the journey. There is a huge benefit to getting from one place of financial tightness to a place of financial flexibility.
And as we talked about earlier on when we were talking about goals and having the North Star of where you’re heading, but if an opportunity comes along and you need to go a different way, if you are so tight in your finances that you can’t adjust at all to maybe take a little bit less cash flow for a season, maybe a year or two, but to follow a really good opportunity, you’re going to miss that.
So, there’s definitely value in paying off even low interest rate debt if it frees up that monthly payment to allow future flexibility. Along the same lines, when we sold our first house, my wife and I, the most optimal thing to do would have been to buy another house, re-leverage it, but we took what we made on it and we paid off our student loan debt.
And the reason was that we wanted her to be able to work less and for me to be able to build the firm that I was building. And our goal was just to have less outlay each month so that it wasn’t stressful for us. And it turned out great. So, everyone needs to keep that in mind. And that is just, man, Rob, thank you for telling that story. That is just so good.
All right. So, we’ve got the principles down. We’re good with money. We’ve improved ourselves. We’re probably also getting fit and buff while we’re at it because now we develop discipline. We’re listening to BiggerPockets every day. Our life’s getting better. And soon, we’re going to be wearing clothes that are as stylish as Rob right now. Side note, you should be watching this on YouTube if you’re not seeing how handsome he looks.

Rob:
The same shirt I wear every show.

David:
We’re going to take one more quick break, but when we come back, we’ll talk about the smartest, fastest ways to save, and the fundamentals of real estate investing you should know before you jump in. So, stick around.

Rob:
Welcome back everyone. We’re here with Kyle Mast. And we are breaking down the fundamentals of finance and real estate that every investor should know before they start. So, let’s pick up where we left off.

David:
Now that we’ve paid off the debts, Kyle, we want to start building up a nest egg before we invest in real estate because, like we said, not only do you want extra money coming in every month, but you want some reserves set aside. So, if that roof goes bad or that HVAC goes out, you’re okay. So, what are some things that people need to be aware of when it comes to building an emergency fund? And how big do you think it should be?

Kyle:
We’ve touched on this already, so we’ll make it real quick. 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. 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.
Live leaner, spend less, save more so you have a bigger emergency fund. If you really want to go for a property that maybe might need a little bit more work, bump that up a little bit so that you have a little bit more in reserve. But it really just depends on what your goals are and where you’re heading, but it really is about that staying power and be able to stay the course if something comes up.

Rob:
Do you think you can maybe just talk a little bit and explain the difference between how an emergency fund is different than the money that you’re saving to invest in real estate?

Kyle:
Yeah, definitely. Your emergency fund is if you think it’s your personal life. This is where you’re building this buffer to be flexible and to be able to adapt to what life throws your way, whether it comes from your career, whether it comes from a sickness in the family, whether it comes from anything.
The emergency fund is something that can help you weather something that’s big enough where you have to go into your pocket, pull out some cash to spend it on it rather than going into more debt. The emergency fund is this buffer that continues to help you move forward on your financial journey instead of taking the step back.
And if you have to use it for something, then you just rebuild it up in the coming months after that. My clients used to be really angry about having to use their emergency fund. And I would tell them, “It’s actually really good that you had an emergency fund. What’s it for? You had an emergency. You used it. That’s great. You just build it back up again.” Life is full of emergencies. That’s what these funds are for.

Rob:
So, just to be ultra clear here, your emergency fund is its own special rainy day like, “Hey, if everything fails, I’ve got this fund.” And that’s different than your savings. And that’s even different than money that you’re saving to go into real estate. It’s all different buckets, right?

Kyle:
Totally. It’s no touchy. Don’t touch the emergency fund. It’s not there’s a cool new jacket I don’t want to buy. You don’t touch the emergency fund. It’s when life throws you a curve ball that you can’t handle just from your normal income that’s coming in.

Rob:
Yes, I actually have mine in a high interest savings account. And I just like being a lot more liquid in something like that versus dumping it all into index funds, which probably do have a better return, but I like to keep things in different categories in different places.

Kyle:
You should think of your emergency funds as being boring. It should be something boring that’s it’s invested in. It shouldn’t be something that’s risky that goes up and down. So, your 4.5% savings account, great.

Rob:
Which is great right now. 4.6 is awesome.

David:
Your savings account should be like my wardrobe. Got it. All right. So, you’ve paid off your debts. You’ve saved up some money. You’ve got an emergency fund. You’re in a stronger financial position. What do you need to know before you actually start buying real estate, Kyle?

Kyle:
Oh, this is a huge question. Don’t get analysis paralysis for one thing, but you do need to learn. You need to do some reading. You need to listen to BiggerPockets podcasts. You got to find out, we’ve already talked about it on this show a little bit, what’s the strategy you want to go? Do you want to do house hacking, where you buy your own house and eventually turn it into a rental?
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. We could make a whole another show just on that question that you asked, but, Rob and David, chime in here. What are the things that you think first they should know about the real estate investment before jumping in?

Rob:
I’m a big advocate of taking action and that you’re not tied to buying the house if you make the offer and it gets accepted. So, I’m with you. I am a little bit more aggressive there where I’m like, “Dude, just make the offer.” And honestly, I like hearing a no first.
So, make an egregious offer, get the no, shake it out of your system, and then jump into it because I agree, analysis paralysis, especially when you’re talking about money stuff, especially when you’re talking about budgeting, it’s super overwhelming.
So, you have to just break through that with quick action and then adjust from there. And so, for me, if an offer got accepted, I’d be like, “Okay. Cool.” I got due diligence time. I can do inspections. There are moments for me to walk away, but I tend not to let so many aspects of everything ever stop me from making a move. I think making a move is the most powerful thing someone can do.

David:
I got a couple of things here. I don’t think anyone should buy real estate until they understand the fundamentals that I’m about to get into. And you don’t have to be able to write a book on it, but you would have to be able to explain it to your aunt or your cousin. If they said, “Well, tell me about your real estate strategy,” you had better be able to answer these questions with some type of a coherent response.
The first is the relationship between appreciation and cashflow. They’re not the same, and they’re not always different, but there is some sort of an inverse relationship where the properties that appreciate more tend to cashflow less, and vice versa. So, understand what areas are good for which of them and what your strategy is going to be towards what you pursue. The next is the importance of having capital to invest and sufficient reserves, like we’ve talked about.
You should be able to articulate to someone, “If something bad happens, X, my plan is that I have this much money saved or I’ve got this much money set aside. I can handle this much disaster but not this much. So, if too much happens, this is my exit strategy. I’m going to sell the property. I have private money lined up somewhere else. I have a forbearance opportunity. I can get a partner to come in and float me. I have a HELOC somewhere else.”
You have to be able to answer those contingency questions. You need to understand delayed gratification. Do you need cash flow right now, or can you wait on that? Because in my experience, the longer that you can wait before you start spending that cash flow, the safer your investments will be. Rob talks about how all of his cash flow from his portfolio goes right back into the portfolio. And he just keeps building up that snowball.
And then the last is you have to understand how to add value to various asset classes. So, you really want to start with the end in mind. If you want to be a residential real estate investor, how are these properties valued? You have to understand the comparable approach. You have to understand the comparable sales approach and what you do to make these properties worth more.
If you want to get into apartment complex investing, you would need to understand how NOI and cap rate work together to determine the value of a property and how you would add value to that. If you want to be a triple net investor, if you want to be a short-term rental investor, whatever you’re getting into, know how the property is valued and how you can add value to it at, at least a rudimentary level. What do you, guys, think?

Rob:
I think it’s good. And I agree with all of that. And that is stuff that I feel like I’ve learned along the way. I don’t know if that’s stuff that I learned before deciding my strategy and getting into the game. So, I agree with all of it, but I feel like I’ve learned all that through experience more so like the research I did before getting into real estate.

David:
But what year did you get into real estate investing?

Rob:
2016.

David:
Yeah. Right. That was a much healthier environment with a lot more forgiveness. And you caught a really good run. I think that the environment we’re in right now is trickier than it was before. You can learn, but you better be in a really strong financial position if you’re going to jump in before you at least understand the fundamentals of it. And that’s why we’re talking about this.
I think that there were people that had no money, no clues, no skill, no credit, and they got in at 2015, 2016. They made a bunch of money because we had a huge run. And I don’t know that the market we’re in right now is going to be as forgiving as what it was in the past.

Rob:
Yeah, completely agree.

Kyle:
Yeah, this is good. This is the right dichotomy here between the two different taking action and education ahead of time. You need to have a certain amount of education, 50% to 60% of the knowledge, but the rest of the important knowledge is going to come when you actually jump in and do it. But that’s what this whole show that we’ve talked about, this financial foundation, when you jump into it, there’s going to be a lot of stuff you don’t know.
And you’re going to find out what you don’t know. No matter how much you read, no matter how many podcasts you listen to, you’re going to not know some things. And if you don’t have a financial foundation, some emergency funds, know where your net worth is, know where your budget is, you’re going to fall flat really quick. You’re not going to be able to weather those things. And you’re not going to be able to learn and then do better going forward.
Rob started in 2016. Maybe there were some easier times then, but Rob has learned and learned. And he’s still going right now in a more difficult environment because he learned before some things, got in, learned more things, and you continue to evolve as you go. So, you got to do both.
I would say, I’m just going to throw a couple of book recommendations out there because this is one of the best ways for people to get a good, concise, well-written idea of how to get started. Set for Life that Scott Trench wrote from BiggerPockets is one of the best, more concise starting out investing financial books that is out there.
And I’m not just doing it a plug because it’s BiggerPockets. I recommended this to clients before I did any podcasting with BiggerPockets. Rich Dad, Poor Dad, a Real Estate book. Great one. Richest Man in Babylon is a wonderful one about the principles of money.
And I’ll add David Greene’s Pillars of Wealth book here that he just wrote to there as well. It gives a good overview. So, those four books. There’s a lot more out there, but those really solid ones. If people want to dive a little bit more into learning what this all means and which direction you want to go, those are great places to start.

David:
Appreciate that, Kyle. You just earned yourself one last question because you threw my book into your mix there. Very quickly here. Do you have any tips to increase someone’s ability to generate wealth and get into investing faster if they’re hearing this conversation and they’re just roaring to go?

Kyle:
Yes. And this is something that you’ve actually harped down over the years. You need to learn to love good, hard work, at least for a season. And you need to have the ability to save an uncommon amount of income. Those two things will make a huge difference. And these are the things that I’m going to teach my boys. I have three boys, age seven and younger. Learn to love good, hard work for a season.
Don’t burn out, but learn to enjoy the pursuit of something fun, good, and hard. You will make money. You will enjoy it. You will build something. But also, at the same time, learn to not have lifestyle creep. Learn to save an uncommon amount of money. And by that, I mean half of your money. Save a lot of money while you can. And those two things, that’s what I would leave people with. If you want to accelerate your wealth generation, you can’t go wrong with those two things.

Rob:
So good, man. I wish we weren’t just glossing over lifestyle creep at the very end here because that’s its own thing where people get into this game and they start making money and they’re like, “Oh, I’m making 2,000 bucks. I’m going to buy this.” And it’s very real.
And you have to be very controlled to basically say, “Yes, the money I make in real estate is cool, but it’s not mine. I’m just going to keep putting it in.” And if you can be very frugal and not let the lifestyle creep set in, I think you’ll have a much more successful real estate career. I can tell you that, from experience, it’s very hard, but it’s worth it.

Kyle:
100%.

David:
Awesome. Well, gentlemen, thank you for joining me on this journey of bringing the truth to the people. It’s so easy to hear someone on YouTube or Instagram or TikTok telling you about all the money they made from real estate and not doing anything to prepare you for what happens. And what you don’t hear are the stories of people who lost their shirt, got hammered, brought a lot of pain into their life and their family’s life, losing money in real estate.
And so, we are here to give you the real deal. Kyle, thanks for joining us today. If you guys would like to get more information about Kyle and how to reach him, you can find it in today’s show notes, where mine and Rob’s info will be as well. Rob, anything you want to add before we go?

Rob:
No.

David:
This is David Greene for Rob “No” Abasolo, signing off.