10 Financial Tips for First Time Real Estate Investors

10 Financial Tips for First Time Real Estate Investors
Aristotle Kumpis RealWealth Investment Counselor

Aristotle Kumpis

Becoming an investor, no matter your situation can be difficult if you don’t know where to start. In the early stages of your investing journey, your finances will be a major driving factor to your success. Keep reading along to identify ways in which you can evaluate, maintain, and improve your financial situation, so you can start investing.

Identify Why You Want to Invest

Becoming a real estate investor is sort of like becoming a business owner. As you start your investing career you should identify why you want to become an investor, just as a business owner would do if they were starting a business. Identifying the why, will help drive your future decisions as a real estate investor.

Like with any business, there are multiple routes you can take when it comes to investing in real estate. Knowing why you want to get into investing should help you identify what type of investor you want to be.

Here are some of the most common types of real estate investing with some context around why choose these investing routes.

Short-Term Rental Properties

Oftentimes these short-term rentals are known as vacation rental properties. Becoming a vacation rental property owner is great if you want to invest in a few expensive properties that will require hands-on maintenance and marketing.

Long-Term Rental Properties

Also known as buy and hold, owning rental properties long-term is more of the traditional investment route. Long-term rentals are great for investors that are interested in a more stable and less risky investment option.

Fixer-Upper Properties

For the more hands-on investor, fixer-upper properties are a great route to explore. These properties tend to cost less in the beginning, but by making improvements and repairs the houses can be flipped for a pretty penny. This strategy is much more risky, because there’s always the possibility that you won’t be able to sell for more money than you invested. Construction loans are also really expensive.

Multi-Family Properties

Many investors choose to purchase multi-family real estate. Buying duplexes, triplexes and quadplexes are a great option for investors looking to own multiple doors with one loan. Many younger investors also try house hacking, which is where you buy a multi-family property (or sometimes a single family) as a primary residence, live in one of the units or rooms and rent out the others. The goal of this investment strategy is to live for free, using the rental income generated from your tenant(s) to cover the entire mortgage.

Syndications & Crowdfunding

Real estate syndications are a great way for investors to pool their money together to invest in larger properties that they otherwise couldn’t afford on their own. The investment is oftentimes less than purchasing a single family or multi-family property and you usually get a guaranteed return of a certain percentage. While there are many advantages to investing in syndications, the most important thing to consider is the quality and experience of the person or group managing the project.

Raw Land

One of the most cost-effective types of investments to explore is investing in raw land. This is great if you have a tighter budget and live in a developing community or a community that is projected to grow in the future.

Don’t Hesitate

Almost everyone has heard the phrase the early bird gets the worm, but we do not always live by it. Far too often, people wait to follow their goals in life, especially when it comes to investing. A common misconception that young people have, is that you need to be older and established to be a real estate investor. While you may not be able to invest in the exact type of properties you want to while you are young, there are still plenty of opportunities for you within the industry.

Investing in real estate at a young age will only help you become a better investor in the future. We all need to start somewhere, but taking the first step can be difficult, especially in this industry.

As a young prospective investor, start building out your investing plans now. Think about the type of properties you want to invest in and what would be required from you to start investing now. Even if you aren’t completely ready to start your real estate journey, you can use this time to become more knowledgeable about the ins and outs of investing. Take this time to learn as much as you can about investing by reading expertly written articles, listening to podcasts and watching webinar replays here.

Assess Your Current Financial Situation

As you begin your journey to becoming a bonafide real estate investor, it would be a good idea to take a step back and evaluate your entire financial situation. As a young investor, there may be things within your financial profile that could deter you from investing.

Use the time now, during your transition into becoming a real estate investor, to identify areas within your financial portfolio that need some work. Some personal financial information to have handy would be; your net worth, debt-to-income ratio, credit score, and monthly spend breakdown.

Getting into real estate investing will require you to be financially healthy. Taking the step back to evaluate your current financial situation should help identify areas that need improvement before committing to your first investment.

Consolidate Existing Debts

The next step on the path along your real estate investing journey is to identify any debts you have and work towards consolidating them. As young professionals, we often have to take on debt to unlock opportunities. Taking out loans for school, housing, and other certifications all sound fine at the moment, but as your career progresses, these debts tend to hold you back. It can be nearly impossible to build up the money to buy a home, start a business, or get into investing when the average debt for a young adult is almost $80,000.

Luckily, there are a variety of options that can help you mitigate the amount of debt you have. If you have a large amount of debt, you can use a personal loan to help consolidate debt, which will allow you to be able to focus more on your next venture. Do make sure if you take out a loan with repayment terms and monthly payment amounts that make sense for your situation. The last thing you need is a higher monthly payment that will eat into your starting investment budget.

Besides using a loan, you can minimize any outstanding debts by setting a monthly budget, diverting more money to your savings, or by leaning on friends and family for outside assistance. Just remember that if you borrow any money from a family member or friend, treat it as seriously as if you borrowed money from the bank. Mixing your personal life with your investing life can be tricky. Using something like a legal loan agreement document will help keep the relationship professional.

Understand Your Credit Score

Many young people have trouble breaking into the industry due to a lack of credit history, or poor credit history. It is no secret that younger adults tend to have the lowest credit scores. This is due to a few reasons, including; missed or late credit card payments, higher credit utilization ratios, and a lack of credit history. While you cannot change what has happened in the past that may be impacting your credit score, you can make changes now, to build your score for the future.

First, you need to learn how to track your credit score and know what goes into calculating your score. There are three major credit bureaus, Experian, Equifax, and TransUnion, that are trusted by financial institutions across the country. These institutions all use slightly different formulas to assign credit scores, but the criteria is mostly the same. Each institution will be looking into things like, total amount of debt, payment history, type of credit used, length of credit, and recent credit changes.

If you happen to check your credit score and notice it is a bit lower than you’d like, do not panic, there are plenty of ways for you to repair your credit. Some ways to repair and start building your credit are;

  • Maintain Payments – Falling behind on payments is the most common way to lower your credit score. Setting up reminders and automatic payments is a good way to keep you on track each month.
  • Keep Credit Utilization Low – Agencies like to see that your credit utilization ratio is below 30%. If for instance you had one credit card with a $10,000 limit you should only be carrying a balance of $3,000 or less.
  • Pay Outstanding Debts – Paying down older debts, and larger debts can have a positive impact on your credit score.
  • Keep Accounts Open – Having a long credit history will play a factor in your credit score. Even if you have credit cards that are seldom used, it is wise to keep a few of them in your credit portfolio.
  • Fix Any Errors – Credit reporting agencies are not perfect, so with something as important as your credit score should be checked constantly for errors. A small reporting error is the last thing you want to be tanking your credit report.

If you need a more actionable way to start building your credit, you can look into taking out a beginner credit card. These cards are great for younger professionals who either don’t already have a credit card, or maybe only have one. While taking on more credit is not always good, there is a middle ground to be found that will help you maximize your credit score.

Establish a Budget

As you advance along in your journey to becoming a real estate investor, now is the time to start thinking about your starting budget. By now, you should have identified the types of properties you want to start with, taken stock of your current financial situation, and connected with some real estate professional, which will all help guide your budgeting process.

While you might not have this money already, taking the time to calculate how much you will need to start out will help you in the future. Going to a financial institution, or a investing group with a sound plan, which will include your budget will be crucial if you want to be approved for any financial assistance.

Right now, some things to prepare that will help identify your budget are; average cost of properties in your area, amount of properties you want to start with, type of property to invest in, amount of money currently in savings, amount of money going towards savings.

If you are unsure about how to set a realistic budget for investing, join RealWealth today! Our free membership will grant you access to webinars, live events, and connect you with advisors who can help answer any questions that you may have when just starting out.

Discover Alternative Income Sources

Real estate investing can be just one of your many sources of income. Most often, investors, especially when starting out, have more than one stream of income. This allows them to maximize the amount they are able to invest in real estate over time. Hopefully, after flipping a few properties, you can begin to cut-down on the amount of alternative income sources you have.

Some of the most common alternative income sources people explore today are;

  • Gig-Based Jobs – While these jobs will not provide you with money needed to invest in real estate, they will allow you to leave your day-job while bringing in an income during this transitional period.
  • Rent Out a Room – There is no better time to start building your realtor skills than now! Consider renting out a spare room if you have one as a way to build these skills, while also adding to your income stream. If you are interested, consider listing your room on a Property Listing Site.
  • Alternative Investments – Besides investing in real estate, there are plenty of other investment options for you to consider. Other investment options, such as cryptocurrency, stocks, and NFTs, all tend to have lower initial costs, but tend to be more volatile in nature. While not always guaranteed, you can try to flip these type of investments as a way to maintain a monthly income.

Maintaining and building up your monthly income will be crucial in determining your success as an early investor. It will be much easier to quit your day-job and commit to real estate if you have some other forms of income to support you.

Start Small

One of the easiest ways to put yourself in a corner as a new investor is to bite off more than you can chew. Starting small, especially when investing in real estate will be smarter in the beginning.

As you begin to identify properties that you think may fit your needs, take a step back to truly think about it. How will investing in this property impact your immediate financial standing? How much do you think you reasonably can make from the property? Is there maintenance that is out of your scope? Connecting with a real estate expert to discuss these types of questions, especially when you are buying your first few properties will be helpful in the long run.

Starting small is not a sign that you aren’t ready to be a true investor, but rather that you understand you are still in the early stages of your career and have a long time to scale up. Some easy ways to ensure you are starting small are, investing in lower-income areas, investing in land purchases only or by utilizing a house hacking strategy.

Choosing to start small will allow you to figure out exactly what type of investor you want to be, while also going through the expected growing pains of trying something new.

Consider Bringing On a Partner

Oftentimes in life we feel like we need to handle things completely on our own. This is especially true when it comes to starting a business, or investing in something new. The thing is, bringing on additional help in the form of a partner, can unlock more opportunities for you and will decrease the chances of something going awry.

As a young investor, it will be up to you to decide who you want to partner with. Your investing journey will be greatly shaped by the type of partner you decide to invest with.

For instance, if you decide to partner with a more seniored investor, they may have more buying power than you and treat you more as an employee than a partner. This can be great for people looking for a more guidance and for those interested in having more buying power in the beginning.

On the flip side, you can choose to partner with another young hot-shot investor, but your buying power, and knowledge share may suffer. The benefits of partnering with someone a bit more your age is that you will be their peer and be seen and treated as such. You both will be able to learn through trial and error, and your bond as partners will grow as you do in the industry.

Whatever route you decide to take, make sure that all the details of your partnership are completely agreed upon beforehand. Draw up a formal partnership agreement to ensure that everything that was agreed upon is in writing.

Never Stop Learning

The most important thing to remember is that this is your first time doing something like this, which means you won’t have 100% of the answers all the time.  This is okay! Investing is always changing and accepting that you will always be learning will be a crucial step in your development.

Leaning on outside resources such as our webinars, and support network is an easy way to continue learning. You never know who might be able to help you, or how you may be able to help someone else.

Besides leaning on our network of resources, try to attend some local investor meetings, networking events or RealWealth live events in your area. 

Also, always feel free to contact us with any questions as you set out on your real estate investing journey! To become a member, sign up today. Membership is always 100% free and signing up takes less than 5 minutes.

Aristotle Kumpis RealWealth Investment Counselor