One Crucial Step You Need to Take BEFORE Investing in Real Estate

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It’s five in the morning, and I can’t sleep; commonplace around here, actually. There is a cup of coffee next to me, with maple syrup for sweetener. I haven’t had an iota of processed bleached sugar that they sell in the store in my mouth in over a year; it’s horrible for you. Coffee tastes great with local, all natural, organic maple syrup — and with a wonderful additional flavor profile.

But while it’s waking up my body, it is kinda slow to do anything for my creativity — I cannot come up with a single writing idea to save my life…

Related: Property Investment: 5 1/2 Tips for Success

Well, you probably know what I do at times like these. Whenever stuck, my favorite solution is to see what my dear friend Brandon Turner’s been up to on this blog — and then good-heartedly pick him apart. Brandon is always highly enthusiastic about his content — and often offers a positive, optimistic outlook. I mean, this is not a bad thing, and in fact, this character trait is precisely why his wife Heather and his friend (Me) love him as we do. But this is also why Brandon’s content can be fertile ground for counterpoint from someone — someone who’s been around a while — someone like me… 🙂

Alas, as irresistible as this proposition seems at 5:30 AM, it’s not happening this morning. I must be getting old and losing my edge…

What I need to do instead is go check the Forums, the other method of coming up with things to write about. Surely somebody must have said something silly that I can cling on to. Hang on…

I am back — success!

I saw several people post the proverbial I am fully committed to Real Estate – where do I begin?  

This is lovely. Where do I begin…

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The First Thing to Do When Getting into Real Estate

Most of you are trying to break into real estate to solve a problem — a financial problem in your life.

Related: Newbie Real Estate Investors: The Path to Success Starts HERE

Am I right? Of course I am right, or Josh wouldn’t be paying me the big bucks. You most likely read a couple of articles from Brandon all about how you can make millions, and it’s easy, and it’s pleasant, and you can do it with no money, experience or brains. You probably read all about this “creative financing” that he likes to write about (all of which he learned from me), and thought – BINGO; Real Estate it is!

Well — I won’t tell you that he is wrong ’cause he is not.

You can indeed create solutions out of thin air using real estate as a vehicle. However, I think it’s important to understand that real estate is not where the solutions are created. The solutions come before; real estate simply amplifies those solutions when used correctly.

Let Me Paint You a Picture

Do you like to roller skate?

Naturally you do ’cause you are young, healthy and cool. But one day you fall down on asphalt and scrape your knee rather badly; nothing that won’t heal nicely if treated correctly, but something that could turn into a gangrene if left unchecked.

Let me ask you: do you think you ought to wash the wound out before covering it with a bandage, or do you think that simply putting a bandage on the problem will do the trick?  This ain’t rocket science — unless you want to end up with gangrene, you need to clean up the affected area first before covering it up.

You know this…

Why is it that you don’t get this as it relates to your financial aches and pains? Why is it that most of you think that your financial problems will “heal up” simply by jumping into RE? Real estate is the bandage that helps things to heal, but not if all you do is cover up problems without treating them first.

Before Doing ANYTHING Else

Thus, the first thing to do if you want to play the game of real estate should be your Financial Statement and Budget.

Whatever the reasons you are struggling, they are rooted in your behavior. A financial statement will illuminate the problems, and the budget will illuminate the behavior that causes those problems.

So, to start, if you don’t have a financial statement — build one. If you are not living on a budget — change that.

You need to “clean up” the wound that is your financial circumstance before attempting to lay a bandage on it!  And if you don’t know how to create a financial statement and a budget, then your problems are so much worse than you think.

One thing is for sure — buying property before cleaning your financial life up is going to result in disaster, guaranteed!

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

27 Comments

    • Hey, Mitchell.

      I can not, actually. All of this is so personal and is teed up by so many variables, that it is futile to make blanket statements on the subject. Depends – is the best that I can say. Check out my site for more thoughts on the subject.

      Thanks so much for reading!

  1. Hi Ben,

    Fantastic article. I agree whole heartedly and am in the process of doing exactly this before beginning to invest in real estate while holding a full-time job. My fiancée and I recently uprooted and moved to LA and since our move I have been literally just tracking everything in excel as stage 1 of an evolution. I have a perfect picture of where we stand now and created a reasonable budget, but my question for you is what are your thoughts about automating bill payments for rent, electricity etc. linked to a credit card which is then linked to a checking account. I’m exploring this idea because I think it a) will save time and b) ensure everything gets paid without something slipping into an excel abyss. This video sparked the idea so I’m just curious of your thoughts on the subject as the next phase of planning in order to focus more on REI: http://www.iwillteachyoutoberich.com/blog/automating-your-accounts-video/

    Again, great insight and thank you.
    Scott

  2. Hey, Scott!

    Sounds like you’re doing well. I looked at about 90 sec. of the video. This is overly basic, in my opinion. Not only that, but it is not possible for most entrepreneurs who have multiple revenue streams.

    I have everything automated, but things hit my accounts at all times of month. I have it set up this way to accommodate my revenue streams hitting my accounts.

    You are on the right track. Keep at it, Scott!

  3. Anthony Kaleta on

    Hi Ben – After reading the first paragraph of this article and hearing that you have maple syrup with your coffee, I was highly skeptical that anything of value would appear in the unread portion of the article…but I was pleasantly surprised that you’ve touched on something I think is ‘THE’ crucial step investors need to do before investing in real estate.

    Calculating and monitoring your net worth (an individuals assets less their liabilities) and a personal budget on a regular basis, gives you focus, important information (on your own personal spending, saving habits etc), shows discipline and can lead to a great deal of confidence. At worst, you can make better informed decisions. And remember, ‘if you cant measure it, you cant improve it’.

    One book I can highly recommend is Gary Keller’s ‘The millionaire real estate investor’ which focuses in detail on this topic. He has also provided some very useful excel s/sheet templates on how to calculate your ‘net worth’ and a ‘personal budget’ at his website: http://www.millionairesystems.com

    Looking forward to your next article Ben but in the meantime, why not try some natural cane sugar with your next early morning coffee?!

    Best,
    Anthony.

    • Hah – nice, Anthony. I guess you can’t judge a man by his coffee with maple syrup…

      Actually, those of us in the business for a long time generally know not to put much emphasis on Net Worth, as it is highly deceiving…The problem with Net Worth lies in the definition of what is an asset. As I see it, unless value is a function of income, then the resulting Net Worth means very little. A few thoughts:

      An asset is something of value that can be owned – right? Well, something can have value, but:

      1. It can earn Cash Flow
      2. Be Cash Flow neutral
      3. Be Cash Flow negative

      Many things of value, which the main-stream would classify as assets, either don’t make money, or even cost to own. These look good on the balance sheet in terms of the Net Worth, but they potentially kill people financially because they have negative impact on the income statement. Income statement is what pays for life…

      The kicker is that if we pay attention to the income statement, the balance sheet happens automatically over time 🙂

      Thanks so much for reading, Anthony!

      • Anthony Kaleta on

        Hey Ben – Thanks for taking the time out to provide a really useful response. Can I ask whether experienced real estate investment pro’s like yourself make a distinction between income and cash-flow? For example, when you refer to the income statement above, are you referring to cash-flow?

        Thanks again for your help Ben –

        Best,
        Anthony.

        • That’s a good question, Anthony.

          Yes – there is a difference. And NO – income doesn’t matter; Cash Flow is what this is all about.

          Income is only important in light of proportionality to CF. If, for instance, I realize that over the gamut of investments, my portfolio throws off 17.5% CF on 100% of income, then I can in broad strokes determine magnitude of income which will get me to the desired CF – in very, very broad strokes. But, that’s it for income. I focus on the cash flow…

          In fact, focusing on income can be very dangerous, since it takes your eye off the ball – psychologically, and by the numbers!

          Thank a lot, Anthony!

  4. Conor Flaherty on

    Nice article, Ben! I feel you on the 5 AM blank stare into the computer screen with the coffee going full blast. Money management is so important while owning real estate also!

  5. Ben,
    Funny thing, I woke up at 3:30 and got to reading this a little after 5:00. For something put together while still half asleep, it contains advice that everyone should understand and follow. As usual, great stuff!

  6. I enjoyed your article. I am torn about whether to start real estate investing or to wait. I have a lot of school loan debt (180K – which is normal for my career). I have a stable employment, actually just signed a contract for another year. I do a budget already and have focused on paying off all consumer debt and now only left with school debt.

    So, should someone in my similar situation continue to take pay down my debt with the extra in budget or use that money to invest in real estate and use some of the investment to pay off debt.

    • Lizina,

      I don’t know much about your situation, and as such it is difficult to offer suggestions. Having said this, your student loans are likely very inexpensive to carry in terms of interest rate, so one has to wonder whether prioritizing paying them off is the most advantageous strategy…

      On the other hand, your high income is resulting in very high income tax exposure. If you buy RE, you could benefit not only from the cash flow, but from considerable sheltering relative to taxation. Of course, consult your advisers, specifically your CPA, but RE seems to make good sense for your situation.

      And from here, the devil is in the details 🙂 Hope this helps.

  7. Hattie Dizmond on

    Ben,

    Great article and even better response about Financial Statements. Thanks for validating what I’ve always believed! How can my clothes, furnishings, etc. be considered assets at market or replacement cost? This has never been logical to me. Looking at it from an Income Statement perspective changes everything.

    Thank you!
    Hattie

  8. Ben, thanks for a great article. I recently read “the Millionaire Next Door”, and it discussed similar principles: that wealth and affluence are produced by habits, not just by income. I am proud to be a PAW, and grateful to be in real estate. Thanks again!

  9. Jonathon Lovell on

    Yes I agree absolutely. After my enthusiastic newbie post, I remain enthusiastic, but the reality of my situation hit hard. Those more experienced than I gave some good advice and stated there are few ways to make a million in 3 years (by the time I’m 30). But they primarily had real estate in mind.

    So I am currently working on building basic financial strength, so that I can take my first steps into real estate. I am discovering there are numerous ways to build six figure incomes with business. On the back of that, I would love to use real estate as a vehicle for holding and accelerating wealth.

    I find it interesting to see this post from you now though. As I had that moment where I realized I have no money and I’m getting nowhere fast and that working on these goals is gonna take a lot of right-now-hustle to get to the later bustle.

    Time to build my financial strength today to build tommorow’s financial giant.

    • Ben Leybovich

      In Real Estate money follows knowledge, Jonathon. I think I saw your post on the forums, though I don’t think I commented. Stop asking how to make money, and start asking how to learn more. Money will come only after your intellectual worth is there to know what to do with the money…

      Good Luck, and thank you indeed for reading!

  10. You are so spot on Ben! It’s taken me over 10 years and some serious bruises to realize how I manage my finances was the bigger problem. All I achieved was getting biggerEMPTYpockets! lol, but not lol… :\

    I think Ramit Sethi is a good starting point for some, especially Millenials. I kinda straddle the GenX and Millenial line and can connect with Sethi. That said, my wife and I have effectively implemented Dave Ramsey, with the help (accountability) of some friends.

    To those reading this, get your financial house in order first. Spending more than you make and being overleveraged with debt are recipes for disaster. It was for me.

    • Ben Leybovich

      Ruben,

      You are the second person to mention Ramit. I don’t know much about him, but I did check out the site and remember disagreeing with some basic premises. I think he is good for some, though. Ramsey – same thing, though I’ll burn in hell if you ever see me buy a single share of mutual fund 🙂

      Thank you so much!

  11. Ben thanks alot for your info it got me thinking that I was left hanging as far as what direction to go after I do my financial statement & budget. So, my question is when someone has bad debt, is it wise to start real estate investing with a wholesale strategy to aquire cash to pay off the bad debt then move on to another strategy like buy & hold for cash flow?

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