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All Real Estate Investors NEED to Have This Document… Do You?

by Tom Sylvester on January 27, 2014 · 15 comments

  
Need to Have Document

Last week, Ben Leybovich basically wrote the post that I was planning to write this week.

I’m actually glad that Ben wrote the article (even though it now means a little more work for me, thanks Ben!) because he came at it from a different perspective.

Ben’s article was titled Building a One Page Financial Statement to Change Your Financial Future and he is absolutely correct.

Since this topic is critical for real estate investors, I wanted to dig  a little deeper and help those who do not have a personal financial statement get started.

Know the Numbers

The single biggest mistake I see when coaching new real estate investors is that they don’t know/understand the numbers.  If you don’t know the numbers, you are almost guaranteed to fail with real estate investing because the devil is in the details.

Before we even get to the point where we are evaluating real estate, we should all start to evaluate ourselves and our personal financial situation.  Many people look to real estate as a way to generate extra income and build wealth.

Just like those “You Are Here” maps in the mall, you need to understand where you are now before you can figure out your next step.

For some, it may be getting started in real estate investing.  For others, it may be spending some time paying off debt or getting your personal finances in order.

Using Cashflow 101 To Get Started

I’ve previously described the Cashflow 101 board game and how it helped me define my investing strategy.  In addition to helping define your investing strategy, it can also help understand your personal financial situation.

You see, each person in the game starts out by drawing a profession card.  This card defines your profession, as well as your income, expenses, assets and liabilities.

The “Business Manager” Profession Card

The first step in the game is to copy the information from your profession card onto your personal financial statement sheet.  This is pretty easy as they personal financial sheet is structured the same way as the profession card.

The Business Manager Personal Financial Statement

From there, you play with game and work to build your passive income.

One alternative way to play the game is to create your own profession card with your information.  I absolutely love this approach for a few reasons:

  • It forces you to find and understand your own numbers.
  • When you play the game, you are now modeling your financial situation and you get a real understanding for where you stand.

I have done this with a few students, and the results are incredible.  In one example, the person did not realize that their monthly cashflow was actually negative!  And they wondered why they could not get ahead.

On another occasion, the couples realized that they had more credit card debt than they realized as each person kept their own checking account and credit cards.  Regardless, it allowed people to create their first personal financial statement without having to know a lot about personal finance.

Try It Yourself

I really love actionable content.  Instead of just reading a blog and thinking “that’s great” and moving on, I want you to try out this activity.  Take the blank profession card below, print it out and fill it in with your own information.  It might take you a little bit of time, but I guarantee you it will be worth it when you finish.

A Blank Profession Card to Get You Started

Now that you are done, copy the numbers over to a blank personal financial statement from the game, then review it.  Is it what you expected?  Are there any abnormalities in the numbers that really surprised you (such as the guy who had a negative monthly cashflow)?  This card may be tough to look at, but please realize that you just took a critical first step.

You took a look at your personal financial life and just pasted a giant “You Are Here” star on your own financial map!  You now know where you are and can map out where you want to go.

If you have the Cashflow 101 game, I’d recommend playing a round of it with your personal profession card.  If you don’t own it, you should be able to find a local meetup to play with like minded people.  It is amazing to see the game using your own numbers.  If you have a lot of debt, the game may be a little more difficult.

This will allow you to understand how things might play out in real life and you may have to adjust your strategy.  Maybe you spend some time paying off debt before you jump into real estate.  Or maybe the numbers are better than you thought and now is the right time.

Conclusion

It all comes down to numbers, and one of the most important pieces of paper that you have is your personal financial statement.  In Rich Dad Poor Dad, Robert Kiyosaki likens it to your “adult report card.”  I really liked this analogy as it puts your financial situation in perspective.

Treat it like a report card and give yourself one every 4 months.  By doing this, you will be able to see how your financial situation is changing over time and some trends.  This will help you pivot and adjust as needed and help guide you to your goals.

This is just a starting point.  Like Ben mentioned, I would also recommend creating your own personal financial statement in a spreadsheet.  Don’t ask someone else for theirs, spend some time and create your own.  However long this takes, it will be worth it.  If you are not familiar with using a spreadsheet, this activity will give you some of the basics.

Additionally, by entering in the different types of information, you will start to learn and really understand how the numbers connect.  Both of these are key skills that you can then use when you start to analyze investments.

Do you use a personal financial statement?  Please share your thoughts and experiences below.

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{ 15 comments… read them below or add one }

Lisa Phillips January 27, 2014 at 12:17 pm

Thank you both! When I first started, I did not use the documents. However, the further along you are in the game, the more these more sophisticated documents are needed, you and guys are showing this right in time! Im going to use this model to at least have the basics down, its just that time in the game when its absolutely necessary, and not a “nice to have.” Thanks for sharing!

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Mike Carr January 27, 2014 at 8:13 pm

Great article! I was reading J Scott’s book on flipping houses and he mentioned the importance of a financial statement as well. I’m going to start writing mine out.

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Tom Sylvester January 28, 2014 at 1:51 am

@Mike – Awesome. J’s books are great and he is spot in with his recommendations.

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Tom Sylvester January 28, 2014 at 1:50 am

@Lisa – Thanks and glad it came at a good time for you.

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Mike Hill January 27, 2014 at 4:37 pm

Using your own information for the profession card is a great idea! I never even thought of that but I love it!

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Tom Sylvester January 28, 2014 at 1:54 am

It is great, but let me warn you it can be difficult. The first time I played with my own information, things got scary. I was young, engaged and had a decent amount of debt and my first job. Before it was just a game, but using my own information it suddenly became my life. The good thing is, it gave m an even more real experience since I was using my real life financial details.

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Victoria January 28, 2014 at 12:42 am

Hey Both,
Thanks for sharing such a helpful info here.I never used any document of this type but now looking forward to opt this one for my financial statement.

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Tom Sylvester January 29, 2014 at 6:54 pm

Awesome Victoria. The time spent to create and use it is definitely worth it.

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Jordan Thibodeau January 30, 2014 at 9:01 am

Great post Tom! I use this in conjunction with Mint to give me a real time view of my finances.

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Tom Sylvester January 30, 2014 at 6:01 pm

Thanks Jordan. We also use Mint. It is so nice to be able to see all of our personal financial information in one place in real time.

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Shari Posey January 30, 2014 at 9:53 am

We have a detailed system set up on the computer on a spreadsheet and we keep track monthly. We love seeing the assets go up every month! Very motivating!

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Tom Sylvester January 30, 2014 at 6:02 pm

Shari – That is great! We do the same. We have spreadsheets from 5 years ago. It is a great feeling to pull up an old financial statement and do the comparisons.

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Aurelia P January 30, 2014 at 4:10 pm

Thanks for the document. I will begin creating mine now!

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Tom Sylvester January 30, 2014 at 6:03 pm

No problem. It will be one of the best things that you have done for your personal finances as well as any real estate/business ventures.

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Nikola January 30, 2014 at 10:48 pm

I found a great xls file of this statement directly from the resource page of Robert kiyosaki’s websitei. It is very useful for knowing where I am and finding the way to where I want to be with my finances. I already put a goal for the next time I fill it in. :-)

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