Real estate investing is a great way to build wealth. If done correctly, you can earn passive income from rental properties without having to spend much time managing them. However, there are some things that every investor should consider before jumping into the real estate market, points out Joseph Haymore.
Before you start investing in real estate, you need to determine whether or not you have enough capital to invest in real estate. There are also other important considerations such as finding a good property manager and understanding the legal aspects of buying and selling real estate.
1. Knowing Their Numbers
Before you start investing, make sure you know how much money you need to invest. If you don’t have a clear idea about what amount of money you want to save, how much you earn and how much you spend – then you’re not ready to invest! You have to have goals before starting anything. Make sure they’re realistic ones, otherwise you’ll never reach them. Start by asking yourself some questions to determine how much money you need and where you’d like to invest it.
How much do you think you should be saving? What is your yearly income? How much do you spend per month? Then decide whether you want to buy a house now or later. Do you plan to buy right away or wait until after you’ve saved enough money? Think about it and write down your answers.
2. Stick To Your Budget by Joseph Haymore
Once you have your budget planned out, stick to it. Don’t go over your allotted spending without being willing to cut back elsewhere. You won’t lose everything if you go over, but you might damage your financial future. Try to keep your total monthly expenses below 30%. Remember that you have to factor in things like rent or mortgage payments, utility bills, insurance, and food costs. You can always increase your budget as you save and build your savings.
3. A Solid Financial Plan
A good financial plan should have three major components claims Joseph:
- An income statement.
- A balance sheet.
- A cash flow forecast.
- Income Statement
The income statement shows you how much money you’re bringing in each month. If you’re investing in real estate, then you’ll use the income statement to determine how many units you’ll need to purchase, how much rent you’ll charge per unit, and how much profit you’ll earn off of those units. You’ll also use the income statement to figure out if you’re making enough money to cover your expenses.
- Balance Sheet
The balance sheet shows you how much money your business has at any given time. It includes assets (like land), liabilities (like loans), equity (the value of your business minus its debts), and net worth (your total assets minus your total liabilities).
- Cash Flow Forecast
The cash flow forecast tells you how much money you need each month to pay your bills and keep your business running smoothly. It also helps you calculate how much money you‘ll need to reinvest in your business over time.
These three elements are what allow you to make sound decisions about how much money you need to invest, where you want to invest it, and how long you expect it to take to get back your initial investment.
4. Determine Your Risk Tolerance
According to Joseph Haymore, Risk tolerance is defined as how much risk you are willing to take on in order to achieve a particular goal. Joseph says that in real estate investing, risk tolerance refers to how much money you are willing to invest in a property without having to sell it at a loss.
- How Can You Calculate Risk Tolerance?
Once you’ve identified what you want and how much you’re willing to lose, you can calculate your risk tolerance using the following formula:
(Your desired return) x (your amount of money you are willing to lose) Your risk tolerance. For example, if you want to earn 10% on $100,000, multiply $100,000 by.10 and divide by 1,000. That gives you a risk tolerance of 9%. If you are only willing to lose 5%, then you would use the same equation except you’d divide by 100 rather than 1000.
- Is There Any Way To Increase Risk Tolerance?
Yes! There are many ways to increase your risk tolerance. One of the easiest ways to boost your risk tolerance is to diversify. Diversification means spreading your investment dollars across different types of investments. You can spread them across single-family homes, multifamily buildings, commercial properties, and even REITs. By doing this, you reduce the chance that you’ll lose everything and increase the chances that you’ll gain back some of your losses.
Takeaway
In short, it’s important to know how much money you will need to invest in order to reach your goals. You may also want to consider investing in rental properties instead of purchasing them outright. Joseph Haymore makes it clear that investing in real estate may seem like the most attractive option for many investors, but it’s also one of the riskiest. Before making any decisions, it’s important to consider whether investing in real estate makes sense for you.
