Most aspiring real estate investors suffer from an insidious form of perfectionism. They possess all the tools to get started but get sidetracked by procrastination dressed as “preparation.” There’s always one more book to read, one more course to attend, and one more guru to contact.
But there’s another group of potential investors whose ambition is ready to conquer the world but they’re not ready to invest—yet. So, how do you know if you’re NOT ready to invest yet and what steps you need to take to get ready?
3 Telltale Signs You’re Definitely NOT Ready to Invest in Real Estate
1. You don’t have a long-term investment strategy.
There are plenty of ways to make short-term income in real estate: house flipping, wholesaling, bird-dogging, etc. But in my opinion, all those methods fall under the category of real estate “jobs” (or when done at scale, a real estate “business”), not real estate investing.
That’s not to say that you can’t utilize real estate “jobs” to help your quest to purchase long-term real estate investments if you have a competitive advantage over other players in the space. What skills, knowledge, or network do you bring to the table that give you an edge in flipping, wholesaling, or bird-dogging?
Perhaps you have superior knowledge of the local real estate market and the finishes that buyers prefer in that area. Or you might have a good network of contractors that can renovate properties at a similar quality for a lower price than competitors. Or maybe you have an established strong list of investors who will buy a deal from you if you bring it to them.
These are important questions to ask yourself.
But in the end, whether you’re flipping houses or wholesaling distressed deals to more established investors, you are essentially trading time for money. The income you are earning is tied to the time you are spending on the tasks that are generating it. The income is active, meaning, if you stop working, it stops coming in.
Now compare that with a long-term real estate investing strategy that involves the purchase of quality assets for the purpose of holding them over the long-term. There’s no question that you must work to find the deal, put it together, and stabilize the property with some quality tenants. Even if you’re working with professionals that are helping you with each of those tasks, you must manage those professionals and that requires work.
However, once the property has been stabilized, it’s an asset that works for you day and night. With each mortgage payment, it’s increasing your net worth. With each year that passes, the balance between assets and liabilities moves further in your favor. There’s definitely work involved but it’s high leverage work. Once the investment is established, you don’t have to trade time for dollars anymore. The income and net worth increases happen passively.
Don’t put the cart before the horse. Strategy comes first, and execution follows unless you want to be wandering in the wilderness for years. Let me be clear: Your real estate investing strategy doesn’t have to be some formal or fancy plan. But it does require that you spend some time thinking about where you are and where you want this strategy to take you financially. Then run the numbers on how many properties that will require, how much capital is necessary, and what steps you will take to execute.
Bottom line: If you don’t have a long-term investment strategy, you’re not ready to invest in real estate.
2. You don’t have your financial house in order.
What do you have to do to have your financial house in order?
First, you live on less than you make and save a healthy percentage of your income every month. It’s a bad idea to try to fix cash flow management problems by purchasing an investment property. That’s like trying to save a bad relationship by having a child. It just doesn’t work.
Second, you need to have three to six months of expenses in a liquid emergency fund. This will prevent you from impulsive, boneheaded moves (like selling in a down market) because you face a cash crunch.
Third, you protect the downside with inexpensive term life insurance equal to 10 to 12 times your current income. This is so you don’t build your real estate portfolio on a foundation that could crumble any day.
Related: 4 Toxic Habits That Sabotage Even the Most Promising New Investors
Last but not least, unless you’re planning to pay cash for your investments, you need to have a high enough credit rating that will allow you to easily secure financing. Perfect credit isn’t required but it sure helps, so you should at least be on a trajectory that eventually leads to perfect credit. If your financial house is not in order, you’re not ready to invest in real estate.
3. You haven’t saved sufficient capital.
This seems like another axiom from the Captain Obvious files, but a real estate investor needs to save up sufficient capital. Still, how do you know what amount of capital is sufficient? Sufficient capital is that amount that allows the investor to secure top-tier, long-term financing terms for the purchase of a quality asset that fits their risk profile.
If your risk profile calls for it, you should purchase a higher quality, lower risk property instead of purchasing whatever property your current saved capital will allow. If you’ve saved $20,000, that will allow you to purchase a $95,000 property with 20 percent down plus closing costs. If a high quality asset in the market costs $160,000, that means you need to save more capital, not purchase a lower quality asset that fits your available capital but not your risk profile.
If you haven’t saved sufficient capital to afford the purchase of an asset that fits your real estate investing strategy, you’re not ready to invest in real estate yet.
If you want to successfully invest in real estate long-term, there are three things you need to master before you are ready to invest. You must have a long-term investing strategy, get your financial house in order, and save sufficient capital for the right investment properties.
Do you disagree? Is there something else you’d add to this list?
Weigh in with a comment!