5 Ways to Know You’re NOT Ready to Invest in Real Estate

by | BiggerPockets.com

I love investors, because like myself, they tend to nerd out over spreadsheets and let the numbers do the talking. They are risk takers who have found a way to maximize their money, so much so that they are very comfortable, and/or may not need a job all together.

Because that’s a pretty awesome place to be financially, I meet a lot of aspiring investors who want to be in that world. And while it may not be easy for them to tell if they are ready or not, it is fairly easy for me to tell 1.) if they are ready; and 2.) if they are someone I’d like to work with. Below I’ll break down some indicators that you’re not ready, plus some ways to help you become more prepared for the investing world.

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1. You Have Not Read a Single Book on Investing

I know some people might push back and say they listen to podcasts or contribute to BiggerPockets forums, but I say having read at least one book on investing is important. Reading a book takes more effort than listening to a podcast or occasionally going to a forum. It’s deliberate. It takes time. It requires a commitment. And, if you can’t commit to 250 pages on something you say you want to do, then maybe it’s not something you really want to do. (Need book suggestions? Here’s a few excellent books on real estate and investing: Rich Dad, Poor Dad (Robert Kawasaki), Long-Distance Real Estate Investing (David Green) and the E-Myth Real Estate Investor (Michael Gerber).

2. You Have Not Adjusted Your Spending

You spend your money on what you value, and there is no right or wrong on that. But, reviewing your finances will give you a good idea of whether or not your lifestyle reflects your goal. If it’s not, maybe it’s not actually your goal. Are you still going out to eat a lot? Still paying for glamour coffees? Been on two international vacations this year? That sounds awesome. It honestly sounds like my perfect year. But it doesn’t sound like a good way to prepare for an investment.

Related: 4 Signs You Are Ready To Get Started Investing In Real Estate

advice-for-millennials

3. You Haven’t Talked to a Lender Yet

Assuming you aren’t planning on paying all cash (and you likely shouldn’t, because paying all cash means you are buying one property instead of leveraging your money for multiple properties), you should talk to a lender. This is true whether you are a first-time home buyer or a serious investor. Talk to a lender as soon as you can. They will run your finances, build out a plan for you, and help you really understand where your finances are.

4. You Focus on Too Many Metrics

Analysis paralysis is a real thing. Pick one metric and know it well. Know why you picked that metric, and know why it matters to you. The metric I use for my two rental properties in Denver is cash flow, because I value having someone else pay my mortgage on a property that is appreciating fast. So, if it cash flows, I’m happy.

Related: Blogger Roundup: 21 Reasons Newbies Struggle to Close Their First Deal (& How to Overcome Them!)

5. You Have Unrealistic Expectations About Your Market

“I want a multiplex for $250k within two miles of downtown Denver,” and/or “Looking for off market properties that fit 1 percent rule, prefer 2 percent.” I get emails like this all the time, and while I understand where this comes from, and I admire the optimism, it needs to coincide with reality. Investors do like to tie their numbers to cap rates, cash-on-cash, etc. but they also understand where they can get those numbers (Denver isn’t great for it, Pueblo is better), and it’s not in a super hot market with a lack of inventory. Worse yet, this commentary can make you seem unserious and limit your relationships with the kind of serious professionals that can get you a good deal.

You can help prevent this from happening by doing two things: 1) access Redfin for different markets and run deals on properties similar to what you want. You’ll quickly learn what is aspirational versus unrealistic. 2) Call a few real estate agents and just ask: What seems realistic for an investment with this amount of money? You should be noticing a pattern, and you should be weary of outliers.

I hope I haven’t scared you off because I think investing is very smart, and a great way to set up your future. I’m just trying to help you do a little leg work that will help you decide if investing is really for you.

How do you gauge when you’re ready for something big?

Share your experiences in the comments below!

 

About Author

Erin Spradlin

Erin Spradlin co-owns James Carlson Real Estate. She loves working with first-time homebuyers for their enthusiasm and excitement, and loves working with investors because she’s a fellow spreadsheet nerd. She and her husband own three properties in metro Denver and are currently in the process of acquiring a duplex in Colorado Springs. You can find Erin’s blogs here: https://www.biggerpockets.com/renewsblog/author/erinspradlin/ and her airbnb video series here: https://www.youtube.com/playlist?list=PLgSUZKLPRI9tK3Vd-qpH3Sk2Rh-_pIrNN.

17 Comments

  1. jorge vazquez

    Educate yourself toward profitably investing in real estate, or else your education will turn into a hobby.

    Attending seminars, buying books, and watching videos can help. However, these educational tools should be used with precise goals in mind. Don’t be caught in the trap of endlessly buying books and courses without putting your knowledge into action resulting in profiting from real estate.

  2. Ali Hashemi

    Very interesting to hear what others look for! I’ll keep those in mind.

    I also am wary of too much optimism. When someone is gung-ho and in such a rush to jump on a deal it tells me they haven’t learned the patience and discipline needed to invest.

    To me the best investors are patient and disciplined. Which I think is inline with your points above.

    • Erin Spradlin

      Patient and disciplined is important- for sure… but I think it’s important to note that you want to avoid being overly picky. To my statement above about metrics, narrowing in on one and knowing why is really important. Thanks for your feedback!

  3. Nathan G.

    In the Air Force we used to say someone had “all thrust and no vector” meaning they had tons of energy but no ability to control their direction. People like that tend to crash and burn. No matter where we are at in life, it’s important to regularly evaluate our situation and adjust accordingly.

  4. Eric Cecere

    Excellent tips here. We changed the old “location, location, location” saying to “education, location, location”. Know your market and as you said what is realistic to achieve and you can go far. Keep us posted on your next deal. Good luck!

  5. Kyle Jones

    This confirms that I’m in the right place. Not having a mentor would’ve been #6 on my list. Developing a great relationship with someone in the game is significant to me. After all, would you rather read a map or ride with someone who knows the way there?

    Great post.

  6. Michael Saye

    I am a newbie to RE investing. About 6 months ago I read “Rich Dad Poor Dad” and it really sparked an interest in me to exit the rat race and be able to spend more time with my family. I have read several other books on different RE investing vehicles and have determined that I want to get into buy and holds or BRRRR’s. My wife and I have about $200,000 in debt from student loans and our current income allows us to pay an extra $2000 a month toward that debt. I have talked with the bank and they are willing to lend us $88,000 (pre-approved) for an investment property. Would you recommend us waiting to get our personal debt payed off before investing or should we use the money to buy a property? I am nervous about taking the leap without a financial safety net.

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