What to do before investing?

Question

Michael Boyer · Answer

Great idea to get your financial house in order before (literally) buying more houses.

If I had to generalize 3 basic skills a good real estate investor should have (or try to improve), they would be:

1) Property Skills: Broadly defined as knowing a bit about everything from the market to basic construction processes, finishes, handy skills, maintenance, what to look for (and look out for) etc.

2) People Skills: If you can't work productively with contractors, tenants, lenders, realtors, etc, it can limit your success and longevity in any enterprise (be it flips or buy and holds). Tenants will flee at the first chance and good professionals will avoid you like the plague if you are nightmare to work with...

3) Financial Skills: This third is most applicable to your prompt. I actually came up with it a few years in when I thought I had a perfect buyer for a rental property (husband a contractor, wife a property manager). It seemed ideal. Perfect fit for a hand off. Then they could not get funding do to debt, bankruptcy, etc. They could not get a loan and I was not going to finance them (I suspect they may not have been able to make the payments and  lost the place). So  I added this third key skill realizing if you cannot handle your own finances, you probably should not be handling even more bills, payments, loans, etc.

So I would actually look at clearing at least your car notes, credit cards, and any other high interest personal debts (i.e., not mortgage) before investing. Then maybe build reserves that might match your scale (like enough for worst case rental scenario--like a long vacancy, a new roof, HVAC goes kaput or something).

It will give you a better foundation. Plus, if you are paying high interest debt, it may be close to (or eclipse) your early returns in REI. Makes no sense to pay 15% interest on a card and earn a 10% return on a rental for example.

You might try a few Dave Ramsey podcasts for ideas, steps and motivation on getting some personal debts knocked down ; he also likes rentals but favors paying all cash for rentals (which is great but may not be reasonable for many folks, especially on the coasts and costly markets). He also is big on paying off the home mortgage, and I like his ideas in theory, but think it may delay some folks until very late in life to invest (i.e., no mortgage and enough cash to buy a nice rental outright in much of the US would start most investors very late in life--like when you may be looking at retirement). To each his own. But most would agree paying off high interest personal debt and building reserves is a smart prerequisite for investing.

While you firm up the financial foundation, you can also learn a ton about REI on Bigger Pockets.

Best of luck!

Matt K. · Answer

Get enough money in the bank that you could afford your investments even in the worst of times. Too many people rush into either paying off debt or making investments but don't have the reserves to save them IF something unexpected came up.

Thomas S. · Answer

Modify your life style. The vast majority of people over spend on pure luxury items and basically have zero money scenes. You should be able to live frugally on far less than you presently spend on eating out, cable TV, cell phones, entertainment, gifts etc.

Get rid of the cars and buy affordable used vehicles with cash, pay off all credit cards at the end of each month, work up your credit score and concentrate on increasing your income. The last thing you want is bad debt when beginning to invest. You need a solid income of surplus cash each month.

Investing is expensive and high risk. You must have savings and a life style that will survive the loss of all your investment money if things turn bad.

If you can not afford to lose it you can not afford to invest it.

Paul Allen · Answer

Determine the end before you begin.

As a financial advisor I am frequently asked "How should I invest?"

My answer often perplexes people: "What are you trying to achieve?"

Most people have a very difficult time setting specific investing goals. They say things like "I want more money" or "I want to retire comfortably".

I cannot plan for those non-specific goals. However...

"I want to retire at age 60 and have $20,000/month (2017 dollars) of income until I die at age 95" is something we can make a plan for.

So before you invest, determine your specific goal(s). It makes planning to achieve them reasonable.

Best of Luck on Your Real Estate Investing!

Scott Carson · Answer

Read and educate yourself.  Start attending REI Club meetings and jump on webinars to educate yourself.  Network with people who are actually closing deals and ask their counsel.  Avoid the idiots who have never pulled the trigger on deal but feel like they can advise you on your actions.

Steve Bracero · Answer

@Devonte Blackmon

Sounds like you are on the right path!

What to do before investing?

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