Do you think you are ready to invest in real estate?
Many people want to invest in real estate before they should.
People see the success of others in real estate, and want that for themselves.
But it is as simple as it looks?
You are not ready to invest in real estate until you have:
- your debt under control
- regular contributions to retirement accounts
- the right knowledge about where you will invest
- the correct type of mentor
Why do we want to invest before we should?
We have FOMO.
Fear of missing out.
We are under barrage from podcasts, books, lame blogs (like this one), and for some of us old people that can remember, Carleton Sheets infomercials.
Real estate investing is made to look easy.
It’s made to look oooo so much easier than investing in the lame stock market.
Wasting your time on silly things like 401ks, IRAs, and brokerage accounts.
Have you seen that podcast where someone had no savings, was deep in debt, and used other people’s money, Grandma’s retirement savings, and credit card advances to buy their first property?
The podcast continues with them repeating this process until a year later they are worth millions.
Ever seen an info-mercial that promised the world, but then you saw small, small print at the bottom of the screen that said something like:
“These results are not typical. Actual results may vary.”
There is currently no requirement to put that statement on a podcast, book, coaching program, or real estate course.
But there should be.
I’ve outlined an extreme case, but the attitude of anyone can invest now, no money-no problem is a little too pervasive in the real estate education world.
This attitude has a lot to do with marketing.
Easy money sells.
Don’t fall for it.
I’m a conservative real estate investor.
I’ve made good money in real estate, but I made money first by getting out of debt and saving and investing well.
Investing in real estate is smart. There are, however, things you should do financially before real estate investing.
Invest from a financial position of strength.
In other words, if your finances are crap, don’t use real estate to turn that around.
Fix the problems with your finances first and prepare yourself for success in real estate.
This approach to finances is almost UNHEARD OF in real estate guru investing circles.
Gurus can’t sell you an expensive course or coaching program if you aren’t ready to invest yet!
So guess what.
If you ask, they’ll say you’re ready!
People want simple solutions to their problems.
How do I lose weight without dieting?
How do I become successful without working hard?
How do I make money in real estate when I have no knowledge and no money?
None of these things are possible without doing the real work.
I know a lot of people that make money convincing you it’s possible with their help.
The first thing to consider when deciding if you are ready to invest is your debt situation.
A fellow military member heard about the real estate I owned and asked me to help him get started.
He wanted to buy several properties quickly.
I asked about his debt situation. He explained he has no savings, student loans over $100k, two new car loans, and a loan on a ski boat. This is in addition to his $20k in credit card debt.
My advice was to get out of debt, save up a downpayment, and then come talk to me again.
He told me that’s not the help he’s looking for. He wants to invest in real estate.
There’s this idea that you can use real estate investing to get out of debt. Maybe use it as a tool to fix your bad financial situation.
I would disagree.
You’re in debt. That sucks. Real estate isn’t the answer. It’s a good investment, but not good enough to fix your debt problems.
Make some changes in your life, and start eliminating your debt.
This will take selling the overpriced items you’ve purchased. You’ve got to free up more money to pay off this debt. There are really two ways to do it:
- Cut Expenses
- Make More Money
There is not a shortcut for this. Not a course, not a book, not a podcast.
I can’t say how much debt you should eliminate before you invest in real estate, but it’s safe to say get rid of all credit card and luxury items debt.
Don’t be driving sweet rides until you got the income and assets to back it up.
Your debt is under control now, but you’re not putting money away for retirement.
Wait, I don’t need a retirement account, that’s what real estate is for!?!
Owning real estate is an investment. It’s actually a business. It has tax benefits and leverage can be used to boost your returns.
It’s smart, but is it smart to do before, or even instead of having traditional retirement accounts?
The simple answer to this question is no.
There is such a thing as financial common sense.
Most financial advisors with a sophisticated understanding of investments agree on this.
You should take advantage of retirement accounts before investing in real estate.
Read the above sentence again.
Retirement accounts are essentially a legal way to cheat on taxes.
These accounts also require no time or work and aren’t subject to many of the random problems that can arise with tenants, mother nature, and bad luck.
While it goes beyond the scope of this article, investing in a smart portfolio over the long term and not touching that money till retirement age is an extremely important step to wealth building.
The fact that this money is compounding, being added to consistently, and tax-advantaged, makes it a powerful investment that would be unwise to not take advantage of.
Most people are eligible to invest in an individual retirement account (IRA) as well as a employee sponsored plan such as a thrift savings plan (TSP) for military or a 401k.
401k’s and TSPs often have matching contributions from your employer, so take advantage of this for sure. The maximum that you can contribute to these plans in 2020 is $19,500.
IRA’s are something you open yourself (instead of your employer), and there is more choices for investments than a 401k. The max you can contribute in 2020 is $6,000.
If you want to be Rich on Money, you should be taking advantage of these consistently each year before setting money aside to invest in real estate.
How much should I invest?
In a perfect world, you would max both of these out each year.
In the real world, make sure you put in enough to get matching, and contribute the most you can.
Also, be consistent each year in your investing. This happen before real estate and before vacations and luxury items.
Ok, so money-wise you’re in a good place to start investing in real estate now.
Debt is handled and retirement accounts set.
So are you ready?
Do you have the knowledge to invest in your chosen area?
I think people usually get certain things about real estate investing knowledge prep right. I’ll talk about those a little.
I really want to focus on the knowledge parts that most new real estate investors totally jack up.
Of course you’ve read some real estate books. You are listening to podcasts, especially the popular ones, where everybody talks about how successful they are in real estate and how fast they made their money.
Actual results may vary.
I think there are enough free resources to learn the basics and be able to find answers to almost any question you have.
So what is it that everyone is missing about knowledge.
It’s area expertise.
This is especially tricky because most people are investing long-distance.
People try to make money in cities they’ve never been to and haven’t done deep research on.
They start looking at Zillow and MLS listings for a city. They think they’re going to call a property management company and put this whole thing on auto-pilot.
Just like that guru in the podcast!
If you are going to invest long distance, you will need to spend some time there in person.
You will also need to do deep research to understand the history and current investment trends in the city.
Most importantly, you’ll need to know which neighborhoods are great and which to avoid for your investment type and style.
So you think you are currently ready to invest.
Can you answer these questions about your city?
What do investors think of each of the property management companies?
What are the property management fee structures and how do they differ from each other?
What neighborhood have you decided to invest in and why?
What streets in that neighborhood are a little better than the rest? Which are worse?
How far down certain streets do you need to go before it starts getting rougher?
How are you going to get this info?
- Google your city name and real estate investment association (REIA). They often have Facebook groups.
- Participate in the Biggerpockets forums (free) for your city
- Talk to property managers and investor-friendly real estate agents
- Look for other real estate groups in the your city
- Do anything else you can to talk to investors in your city.
Unfortunately, you are still not ready. There is something that new real estate investors lack even more than local knowledge.
Everyone tells you to get a mentor.
What does that even mean?
I’ll tell you some ways I see people doing this wrong, then I’ll tell you how to do it right.
Even with all the knowledge from books and podcasts, you can’t navigate real estate successfully without personal help on your specific situation in your specific market.
Some people try to make up for this by hiring a coach. They often get sucked into coaching as an upsell at a real estate investing conference.
This is not what you need. It is extremely overpriced help that you probably aren’t ready to benefit from yet.
Some invest in expensive online courses. This may or may not help, but it will not give you the individualized help you need in your market!
What to do?
Get a mentor!
Want the long story about getting a mentor?
The short story is this.
Don’t use the “M” word.
When a busy, successful person sees someone they don’t know well ask them to be their mentor, they turn around and run as fast as they can.
Or just delete your lame email.
Don’t ask somebody you heard on a Biggerpockets podcast to be your mentor.
Don’t ask the wealthiest investor you know to be your mentor.
Asking someone you just met to be your mentor is like asking someone to marry you on the first date. -Quote from Brandon Turner
Don’t go after a celebrity mentor. Go after a peer mentor. This is someone that is a few properties ahead of you.
Develop a relationship with them naturally. Biggerpockets forums, real estate investing groups, conferences are all great locations for this.
Bring something to the table.
Don’t just ask someone to be your mentor. Ask them for some help in your real estate investing, and then find a way to help them in what they are working on.
This will hopefully evolve into a natural mentor-mentee relationship without bringing up the dreaded “M” word!
In summary, these are the things you need to be ready to invest in real estate.
Is your debt and income situation good?
Are you taking advantage of retirement accounts?
Do you have the right knowledge and mentorship?
Then go buy a house!
Maybe you are an experienced investor, and you’ve done fine ignoring all my advice.
Real estate is the only investment you need and retirement accounts suck.
Unfortunately, you’re still wrong.
While you may have somehow done well without worrying about debt and retirement accounts, the fact is, most people will end up worse off with a singular focus on real estate.
Most people will come out ahead if they invest as described in this post.
Rich on Money, out.
Rich on Money