3 Steps to Financially Preparing to Invest in Real Estate

The elusive "No Money Down" Real Estate investing strategy is possible through a variety of strategies discussed here on the forums, in the BP Podcast, through the Webinars, and in the countless books available on real estate investing...oh and yes those midnight telemarketing sales pitches too! However, as many people on BP are quick to point out - even when investing with other people's money you HAVE to have access to additional funds (whether they be your own or not) to cover the inevitable unexpected expense. This post will just tackle one aspect - the personal finance side. 

The 3 Steps to Financially Prepare for Real Estate Investing:

1) Make a Budget!

It would surprise you how many people I work with don't have a budget. Or, their only budget is occasionally logging into their checking account and seeing how much money they have left to spend in the month. This inevitably leads to too much month left at the end of a paycheck. There are so many tools available in today to track spending trends (such as free online resources like Mint) that there really isn't too much of an excuse to not know where the paycheck goes each month. Once you know where your money goes, you can take charge and shape what you want your financial month to look like.

2) Get DTI under control!

The vast majority of young working professionals have a substantial amount of student loans. When shopping around for real estate financing options, the lowest rates are going to be conventional mortgages. However, you will have a heck of a lot more difficult of a time securing favorable financing terms if the Debt to Income is out of whack. By virtue of the equation (Monthly Debt Expenditures / Monthly Income) there are two ways to improve this metric. Lower debt or increase income. Get creative with each of these! It takes a whole heck of a lot of hustle to get started. I have spent hours Ubering, tutoring on Chegg and running errands for people to boost my income as I get started in Real Estate. 

3) Build Liquidity!

Even the no-money down strategies such as BRRRR require significant capital up front. Whether or not you use a conventional 15-25% down mortgage or more creative financing techniques, real estate is still a capital intensive game and you will need to have some sort of reserve to cover the inevitable vacancy, midnight plumbing emergency, or tenant that trashes your place. The same techniques described in the last two steps will help you build that reserve fund - namely hustle and controlling spending. 

None of these hurdles need to prevent action - they just need to be acknowledged and accounted for in the planning phases. These can be done concurrently with your education phase, property search, and even while you have a property under contract! We like to focus on the real estate knowledge aspect (which is undoubtedly very important - all of these steps are worthless if we don't know our own business) but we don't spend enough time talking about putting ourselves in a position of financial strength. It only opens up more options!