3 Telltale Signs You’re Definitely NOT Ready to Invest in Real Estate

by | BiggerPockets.com

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 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?

investment-plan

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 before you embark in a side hustle real estate job or business.    

Related: 3 Questions New Investors NEED to Ask But Don’t

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 the 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 10-12 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.

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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% 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.

In Conclusion

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, put 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!

About Author

Erion Shehaj

Erion Shehaj is the founder of Investing Architect. I help successful professionals design and execute a custom Blueprint Real Estate Investing™ strategy so they can achieve financial independence, retire early and gain the freedom to live the life they always wanted. Side effects might include: Early retirement, wealth and piece of mind. Follow on Twitter if that’s your thing.

13 Comments

  1. Patrick Geers

    Interesting take, it caught my eye because I’m currently wondering if I’m ready to start investing. I understand how the first two would be signs you’re not ready for investing and maybe it’s my naivety but isn’t the whole concept of using OPM a counter argument for #3? I’ve heard so many people on BP podcasts and real-life use OPM to give them the ability to start investing and continue investing. So I see where you’re coming from but unless I’ve been incredibly deceived, how is “You haven’t saved sufficient capital” a valid tell-tale sign you’re not ready to invest?

    • Alexander Araniba

      Great question! I thought the exact same thing when I read this. I can see the OP’s point–can you RESPONSIBLY save money, then put it towards investment. If you read one of his statements on point #2, he states, “This will prevent you from impulsive ,boneheaded moves (like selling in a down market) because you face a cash crunch.” But Patrick, you’re right. If we concern ourselves with saving, saving, saving, then that’ll hurt our changes of finding the right, good deal. It also limits our search criteria because we’re worried how much cash we can actually save.

    • Erion Shehaj

      Hi Patrick

      Thank you for your comment. GREAT question.

      My take on OPM might be a little controversial. 🙂

      There’s two kinds of OPM that an investor can put to use.

      On one hand, you have mortgage debt that you can leverage to control a much higher asset value with 1/5 of the capital coming from you. This kind of leverage can 5x your returns. If you make a smart investment decision and have positive returns you enjoy 5x the positive return. But the opposite is also true: If you make a bad investment and have negative returns, leverage magnifies those as well. Used prudently, this type of OPM is one of the best tools available to real estate investors.

      On the other hand, OPM used to make up for a lack of investment capital can be just like it sounds …Opium 🙂 It’s very insidious for several reasons the most prominent of which are: 1) It largely removes “skin in the game” for the investor which tends to lead to bad investment decisions 2) It usually comes with bad terms which hurt the performance of your property over time. The scenario where you find a property that is priced at such a discount that you can finance the entire cost of the purchase without injecting any of your own capital is the exception that proves the rule.

  2. Patrick Horgan

    Erion, thanks for writing this article. I have a “real estate job” I am flipping a house now, but look to move to rentals next and actually start investing. I like all three points you made. In response to Patrick Geers question about using OPM to start investing and therefore not needing sufficient capital, perhaps “sufficient capital” isn’t’ a down payment, but 6 months of living expenses to prevent you from making any drastic decisions when something goes wrong.

    • Erion Shehaj

      Hey Patrick #2 🙂

      The emergency funds are definitely an important part of the picture. I would put them in the “get your financial house in order” camp, though. I was referring to saving the capital required for a down payment that would allow the investor to get the best rate and financing terms for the property.

  3. Patrick Geers

    Patrick, first off… great name. Secondly, I couldn’t pull that from #3 but I definetly agree with your take on it. Seems like Erion is focusing on the capital needed to purchase the property for the optimal financing. The investors personal reserves aspect to the equation always seems to be underrated. Thanks for your take!

  4. chris schu

    I mention in another BP article the fact that ‘…the average personal debt of American’s is about $8-10k and that most of them don’t have enough savings to last beyond 2-3 months of unemployment’ yet these same people jump head first into real estate looking for a financial “fix” to their dismal state of affairs.

    “Horgan” posted:
    “…using OPM to start investing and therefore not needing sufficient capital, perhaps “sufficient capital” isn’t’ a down payment, but 6 months of living expenses to prevent you from making any drastic decisions when something goes wrong.”

    Very true!

    The article speaks of “sufficient capital” otherwise known as “core/contingency funds”, “reserve account”, etc.

    This is the perennial reason most small buinesses (almost 80%) go belly up in five years or less – insufficient capital, they never had it from the get go.

    Woe to any investor that ignores the strategy/risk profile/capital triade. As the article states, getting your “financial house in order” is a critical foundation for long term success. Unfortunately, the thrill of being an owner/partner in real estate seems to override common sense more times than not.

    Even seasoned commercial RE “experts” make dumb decisions as recently witnessed by the Lucky Dragon hotel/casino bankruptcy after barely a year in operation. Too many assumptions made at the executive level were way off base and the ultimate price was paid.

    Not so lucky after all.

    • John Teachout

      I agree that not having one’s financial house in order is a recipe for disaster. This should be an important step in everyone’s life regardless of your investment goals. Having a healthy amount of reserve cash is a huge stress reliever. Go without your take out coffees for a while or whatever it takes to sock away some funds.

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