How to Financially Prepare Before Investing in Real Estate

by Sudarsan

Real estate is and perhaps will always be one of the most profitable investments that one can make. More often than not, properties increase in value over time. Furthermore, there is always going to be a demand for real estate—people need a place to live and put up businesses, meaning real estate is that one commodity that will never become non-essential.

However, investing in real estate is not easy. For one, you would need quite a sizeable capital, whether you are doing a fix-and-flip or buying a multifamily lot. And in order to secure your investment, you need to have a good foundation of knowledge on the market you’re buying in, as well as the current demand.

For this article, let’s focus on the financial side of things. Just like with any other investment, you shouldn’t dive headfirst without preparing your finances. That said, here are some of the best ways to ensure that you are financially prepared before buying your first property:

Build separate personal and business emergency funds

Just like a regular business, every real estate investor should have emergency funds for both personal and business finances. For your personal emergency fund, the general recommendation is to have at least three to six months of living expenses saved up. For a business emergency fund, on the other hand, it depends on what kind of investment you’re doing.

For example, if you’re doing a fix-and-flip, have a buffer (at least 5% to 10%) for your renovation budget set aside in case something goes wrong. If the contractor makes a mistake or you find a problem that you didn’t catch during the inspection, the emergency fund will help you keep things on track without having to dip into your personal finances.

Learn different financing methods

When it comes to real estate, there are plenty of ways you can finance your investment. However, not all of them will be applicable to you. For instance, FHA multifamily HUD loans allow you to borrow money for multifamily investments with favorable interest rates—but you will have to meet certain criteria, mostly when it comes to your personal and business finances.

That said, it pays to do your research before dipping your toe in any kind of investment. Learn about the different ways you can finance a property, such as value-add loans, refinancing, purchase & acquisition, and more. In this way, you can find a method of financing that works best for you and will fit your overall investment goals.

Find other investors

If you don’t have enough capital, finding other investors to increase your buying power is the next best step. There are several ways you can do this, including:

  • Asking family and friends. Some of your loved ones might be interested in joining your investing ventures. If you’re going to find people to invest with you, tap into your current network first. They likely already know your work ethic because they know you personally, so it may be easier to procure funds from them once you ask. In any case, remember to keep it formal; business and personal relationships should always be kept separate, even if they are your friend or family member.
  • Find a real estate investment club. Joining a local real estate investment club helps you expand your network and build connections with people with similar goals. Within this circle, you may find a private investor who will want to work with you on your first deal—or perhaps a mentor who can guide you in buying your first property.
  • Invest in another person’s deal. A big disadvantage of being a new investor is that not a lot of people will trust you enough to put money into your deal. So, why not invest in their deals instead? Aside from helping you gain first-hand experience in real estate investing, working with other people also provides the potential of building long-standing business partnerships.

Avoid big purchases

If you’re going to finance your first deal through traditional lending, your credit score needs to be in the best shape possible. One of the best ways to ensure that is to avoid big purchases for now. Aside from helping you keep your credit score high, doing so will also help you achieve a stable cash flow.

There is no such thing as being overprepared when it comes to investing in real estate. In fact, doing your utmost in preparing your finances before investing in your first property is the best way to protect your money along the way—as well as build good financial habits as you build your real estate portfolio.

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