Pick out the question below that you believe is the very first question any new aspiring real estate investor should ask themselves.
A) “What type of investor do I want to be? What will my exit plan be?”
B) “Do I know how to analyze a property to determine if it is a deal or not?”
C) “How well do I understand the market I am looking to invest in?”
D) None of the above.
If you chose D, congratulations. I have either a smiley face sticker or a gold star sticker I will send you. All you have to do is ‘Like’ my Facebook page… (I’m pretty sly huh? See that shameless self plug???)
Those above questions are certainly important and ones that need to be asked near the beginning of your quest to become a real estate investor; however, there is one that seems to get overlooked quite a bit but is just as important. In fact, I would argue that it is THE most important question.
Before I get to the question though, I want to first give you the context of my viewpoint. While I won’t go as far as saying this is the case 100% of the time, I feel very comfortable saying that 95% of the time, you will need money upfront to get started investing in real estate.
Now, if you are striving to become a real estate investor and you already have cash to work with, then this question really doesn’t pertain to you since you already have cash on hand. But, if you are like the majority of people who are entering into real estate, you have very little capital to work with or none at all.
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The Unavoidable Real Estate Costs
Yea, yea, yea. I know about all those “no money out of pocket” real estate strategies. Bottom line, nothing is free and nothing can be done without $0 cash. Let’s take a look at some of these costs…
- $ for Marketing. You need to find the properties right? Direct mail, bandit signs, flyers, etc. All cost $$$. Even if you plan on using lease options, Sub-2 or whatever “no cash out of your pocket” strategy, you still need to locate these properties.
- $ for Protection. If you are okay with losing your home and personal possessions, then skip over this bullet point. Creating a LLC is something that needs to be done. Besides the whole personal protection aspect, it also just makes you look that much more professional.
- $ for Marketing. Make people want to work with you. If you think you will be saving money by simply going to your local real estate group networking events in order to find deals and investors, think again. When they ask you, “Can I get your card?” and you say, “I don’t have one, let me scribble down my name and number on a napkin!” ask yourself, do you really think they are taking you seriously and will keep you in their “call this person” folder?
- $ for Transportation. Car. Bus. Boat. Horse and buggy. These things cost money. Whether you are driving to see a property that your marketing has located or driving to your local real estate investing group, transportation is not free. Gas prices only trend in one direction, and it isn’t ‘down’, so you better be ready to spend money to keep your fuel tank full. (or, if you are using horse and buggy, make sure you are buying plenty of food to feed those horses!)
- $ for Marketing. This slot is for all the other marketing costs that pop up that I’m forgetting about right now. If you haven’t made the connection yet, marketing is THE most important part of any real estate strategy.
The Good News…
You will notice there is no category for “education”. No guru courses required. I will go into more of this later on, but now let’s get to the question…
The All Important Real Estate Question
If you are thinking of getting into real estate and have very little or no capital, then ask yourself…
How does my month-to-month budget look?
As I’ve established, the only way you are going to get your feet off the ground and have any success as an investor is with cash. The only way you’re going to get cash is by saving money. And finally, the only way you’re going to save money is by looking at your budget.
Don’t have a budget? Unless you are the United States government, this is not good for you. To be brutally honest, you better create a budget, or just don’t even try the business of real estate. If you have no motivation or desire to understand your personal (family) finances, then you have NO CHANCE at success in real estate. Considering real estate is all about budgeting and numbers, the business wouldn’t be catering to your strengths/desires.
Alright, if you are still reading, I’m assuming you fall into one of two camps. You either already have a budget, or you are going to sit down and draw one up.
Time to Go Hunting
Put on your hunting hat. Put on your camouflage. Grab your red pen. It’s time to do some slashing. You are looking for cost-savings. You need to get some money.
The fastest way to do this is figure out what costs you can live without. Go through your budget…
- Mortgage Payment – need that… no cut.
- Groceries – need that… no cut.
- Insurance Payments – need that… no cut.
- Cable TV with HBO… hmmm…
- Friday Night “Fun $”… hmmm…
- Netflix Subscription… hmmm…
- Lottery Tickets… hmmm…
- Date with Husband/Wife $… negotiable…
- New Video Game/Movie $… hmm…
Hopefully you are getting the point. How much do you spend on things each month that aren’t required? Now I’m not saying you slash it ALL out of your budget, but I am suggesting you slash some of it.
How much do I slash? That’s a question only you can answer. The reason I can’t answer it is because I don’t know “how bad/fast you want to succeed”. The more slashing you do, the fast the money adds up. The faster the money adds up, the quicker you can start marketing and getting things rolling.
A Realistic Scenario and Suggestion
To reiterate again, only YOU can answer how much you slash, but I wanted to put some numbers to my logic so you at least have a baseline.
Let’s say you slash $100 worth of unnecessary costs per month. As Benjamin Franklin said, “A penny saved is a penny earned.” so now that you are “saving” $100 per month, you just increased your monthly income by $100. You are now putting this $100 into a new category, “Real Estate Start-Up”.
Remember that good news about education not being an expense? Here’s where it comes into play. While you save up money, you get an education. Where? The internet! More specifically, BiggerPockets!!! Create an account. Start reading. Ask questions. There is so much knowledge here, and the best part is it is unbiased knowledge. No one is trying to sell you a $997 course, they’re just helping you out.
The ONLY cost associated with this education is time. That’s it.
Let’s recap. You are making $100 per month (via cost cutting) and getting educated.
Do this for 6 months.
You now have a boatload of knowledge and $500 worth of start-up money. My math is not off. The reason this is NOT $600 is me trying to keep things realistic. You probably spent $100 or so on real estate related stuff during this 6 months. Maybe you…
- Bought a book on Amazon for additional motivation. $ well spent!
- Drove to a couple local real estate events. Fuel cost money, however, $ well spent!
- Purchased some preliminary marketing material.
Whatever the expense, let’s just say you now have $500 left at the end of 6 months. Let’s look at the numbers a bit closer.
- LLC Formation (do this online!) $175
- Business Cards – $50
- Stamps & Direct Mailing Supplies – $150
- Fuel – $50
This all amounts to $425.
So now let’s recap where you stand…
- You are now protected with an LLC. Not to mention, you look extra professional!
- You can now begin marketing via direct mail (or whatever method you choose).
- You can now pull out a business card and hand it over at your networking events.
- You can have no worries about driving to check out properties because “gas prices are high”.
- You still have $75 sitting there waiting for you to put it to work.
- You are educated since you’ve spent the last 6 months on Bigger Pockets asking questions and soaking it all in.
Your Real Estate Dreams Are All on YOU
6 months?!?!?! I can’t wait that long! If that’s you, then great… no problem! You will just need to do more slashing and spend more time on BiggerPockets each day.
That’s why I LOVE being an entrepreneur. Everything rest on your shoulders. Everything is a function of “how bad do I want it?”
Regardless of the amount of slashing or the amount of time, it’s all up to you.
Finally, there is another method. If you can’t slash anything, then head out and find another part-time job. Increasing your income is always another option to create “cushion” in your monthly budget. I personally would prefer the slashing method, but you can increase revenues too by finding another job. The trade-off here is now you have less time for education.
Do what works for you. That’s what entrepreneurship is all about.
How about you, BiggerPockets nation? Any budget tricks that you can share to free up cash? How did you build up cash when first getting started? Please comment below and let us know.