7 Money Management Tips for Real Estate Investors
When investing in real estate, how you manage money can matter more than how much you have available. With so much cash changing hands and potential for loss should anything deviate from the plan, you need to know exactly what’s going on in your finances at any given time – and there’s little room for error. When things spiral even a little too far out of your grasp, it becomes increasingly more likely that what looked like a sure thing is actually a loss.
Instead of throwing caution to the wind and assuming everything will work out, take time to make your finances a top priority. With these seven money management tips for real estate investors, you can make sure you’re on solid financial footing.
Separate Personal from Investment Funds
In many ways, real estate investing is a job. The time, effort, and potential financial consequences are certainly very real, rivaling the circumstances surrounding a career job for many people. However, some investors don’t see things this way – and that’s a mistake.
Rather than viewing a real estate investment a regular life purchase, keep funds used to buy, maintain, fix, flip, lease, or sell real estate completely separate from your personal finances. It may seem unnecessary upon first glance – after all, money is money, right? – but co-mingling funds can be a bad idea for several reasons. First, buying or selling anything comes with tax implications. If you’re flipping properties for gain or serving as a landlord, you’ll likely have to pay tax on that money. It’s critical that you know how much you have and how much you’re investing to properly determine basis and accurately report transactions on your taxes. Second, it’s hard to know whether you’re turning a profit, breaking even, or losing big without a good way to track expenses. Sure, you may think you’re making money, but if you’re disregarding those extra little charges on your credit card, you may be investing more than you realize.
Seek Professional Advice
Real estate investing isn’t easy, but the results can be extremely fruitful. While the threshold for entrance into the industry is low, the bar for success is not, creating logistical hurdles that may take substantial time or effort to overcome. As such, it’s always best to approach transactions with eyes wide open and plenty of due diligence at your side.
While getting started in investing can theoretically succeed with just the information available on the web, there’s a lot to be gained from professionals in the real estate industry. They’re professionals, which includes real estate agents, brokers, other investors, or even economists, provide a broad view of what’s going on in the market, both on a local and national scale. By speaking directly to these experts, gaining other perspectives, and exploring opportunities otherwise unavailable and unknown, you’ll be better prepared to make a return on your investment. From interior design trends in home staging to the current going rate for apartment rentals in your metro, there’s no shortage of financially beneficial information out there.
Build an Emergency Fund
If the roof is in worse condition than you realized on the property you just bought, will you be able to fix it? If water pours through the windows and floods the basement, are there funds available to get things back up to par? Whether you’ve witnessed property disasters first hand or not, there’s no denying the surprise expenses that play a role in real estate investment.
While most investors have adequate cash on hand before they take a leap into investing, active investors know that it’s all too easy to get your hands in too many projects at once, or too many projects back to back, in a way that can result in cash running a little low. Instead of assuming that a future investment will refill your coffers, or you’ll eventually make back what you’ve spent, take time to be sure you always have enough cash on hand to cover property-related expenses. You never know what will come to pass, and you don’t want to be scrambling if things take a turn.
Perform Consistent Due Diligence
As all qualified investors know, real estate is a variable game. As the economy changes, population trends shift, and even home preferences come and go, it’s critically important for investors to stay on top of developments. Without remaining cognizant of what’s going on, both locally and nationally, it’s going to be easy to lose your way.
The research you do when you first dive into the deep end of property investment is certainly important, but just as in any field, education and research is an ongoing process. To stay competitive and to continue to maximize financial gains, you need to stay consistently informed, reading up on local trends, national developments, changes to legislation, and anything else that could potentially affect your next property transaction. As a successful real estate investor, you need to stay on top of your game at all times. By following industry trends, staying active in investor groups, and making sure your thumb is always squarely on the pulse, you’ll be ready for anything.
Most real estate investors have a preference when it comes to investing, from kinds of properties to neighborhoods. These kinds of inclinations can be an asset – an investor who knows all there is to know about a particular property type, demographic, or geographic area is more likely to excel in that particular arena – but they can also be a detriment, especially as things in your area develop or change. As such, being able to diversify can be a highly valuable skill.
Asset allocations are considered essential in investing. Effectively a way to balance the kinds of assets in your possession to hedge against risk and inflation, diversification is the hallmark of a portfolio built around long-term growth. And, as real estate isn’t an exception to the generally accepted policies surrounding investing, diversification is critical in portfolios of all shapes and sizes. While this means that it’s suggested to hold assets other than just real property – stocks, bonds, and mutual funds can be a good compliment – it also means that shaking up your property investment strategy can be a benefit. If, for example, the rental market in your town tanks, you’ll be glad your eggs are in more than one basket.
Record-keeping is nothing but a virtue, particularly in big-buck real estate transactions. Whether you’re spending a little bit on a new sink faucet or a lot on a new property to fix and flip, you need to know how much you’re spending, where you’re spending it, and what you’re spending it on. If you can’t keep track of the money that’s going into your projects, it’s impossible to turn a profit, and impossible to know how to improve for future investments.
Whether you choose a record-keeping methodology like accounting software, online budgeting platforms, or even pen and paper, you need a solid, reliable, and verifiable way to manage inflows and outflows. Every penny you spend on your property needs to be netted against the return on your investment, from big things like legal fees during closing to little expenses, like a box of screws from the hardware store. In managing your finances, more detail is always better, and you’ll be glad you took the time to keep things straight when it comes to evaluating your progress and calculating ROI.
Be Open to Change
Sunk cost fallacy can be a major deterrent to change in many areas of life, and real estate investing is no different. After investing significant time, energy, and planning to a financial strategy, it’s reasonable to commit rather than switching things up without adequate due diligence. However, when things aren’t working out quite as you expected, there’s no shame in taking a step back, re-evaluating, and coming up with a new strategy.
Unfortunately, investors new to the landscape often struggle to balance the dedication to a particular strategy with the need to switch things up. Falling victim to sunk cost fallacy, or the perception that resources wasted will become valuable if only more resources are invested, is easy to do in a wide variety of life circumstances but doing so in real estate investing can be costly. Rather than committing to a strategy that’s clearly not working in order to fulfill your innate instinct for loss aversion, be willing to change your thinking and adjust your strategies as the market, your needs and goals, and your available cash fluctuate.
Money management is a vital skill for anyone, but it means the most for investors. When you know how to manage your money and use it wisely, you’ll be in a better position to make wise investments – and increase your odds of turning the biggest possible profit!
Scott Clift is a licensed real estate broker with Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specialize in providing real estate loans for investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at (844) 574 LOAN or by visiting westparkloans.com.