In the future, we hope to invest in real estate properties as a side hustle. We have heard from many people in the FIRE community that it has helped them leverage their financial situation. Some were even able to retire early because of their rental income! However, it’s difficult to know where to begin.
There are so many different real estate investment options: from rentals, flips, REITs, and more. Whether you’re a beginner or a pro, it’s important to understand how each option will affect your time and money. That’s why we were happy to connect with Greg from Club Thrifty who can shed some light on when someone is ready to invest in real estate.
He is here to explain the four indicators you need to know and how real estate investing has affected his own financial journey.
If you have a unique perspective to share on money-related topics, reach out to us! We love sharing fellow money nerds’ stories and experiences.
Take it away, Greg!
Real estate can be a great way to earn huge returns on your investment dollars. In fact, it’s one of my favorite ways to invest.
Depending on how you do it, real estate investing isn’t always passive income – there can be quite a bit of work involved. Still, real estate can help you build a great stream of residual income that can benefit your family for years to come.
We’ve had great success with it, and I consider investing in real estate one of the best financial moves we’ve ever made. Our first real estate purchase was in 2007, and our properties are now a big part of our net worth. Plus, I just love houses. So it’s a win-win for me.
Real estate can help you make money in several ways. You might buy a house, fix it up, and make money on the sale; or, maybe you want to buy the property and hold onto it as a rental while it appreciates in value. Becoming a landlord can also help you make money in rental income.
As with any investment, I recommend taking a good look at your finances before you jump in. Real estate investing can soak up a big chunk of your money.
However, if you’ve been toying with the idea of making money in real estate and are considering being a landlord, here’s how to know you’re ready.
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Your Savings Account is Bursting at the Seams
Money in the bank is important for everyone, and that goes double for real estate investors. With homeownership, you need to have a significant amount of money available up-front. The down payment alone could be the biggest chunk of change you’ve ever spent.
Don’t forget about the maintenance costs and upkeep of hanging onto property, either. Repairs can be expensive and are often unexpected. If you’re purchasing a home for yourself, it’s always a smart idea to keep an emergency fund stocked with three to six months of expenses. When purchasing investment property, consider setting aside part of the rent each month so you’ll have cash for repairs when you need it. (And trust me, you will need it.)
If you’re interested in purchasing rental property but don’t have the capital for a down payment, consider crowdfunded real estate instead. There are several companies to choose from, and – with many of them – it doesn’t cost much to get started.
Buying your own physical properties is great, though. If you have a fully-funded emergency savings account and can save up enough money for the down payment, real estate investing can be rewarding.
You're Rocking a Great Credit Score
You know a credit score is an important piece of your financial picture, but do you know what your credit score actually is? If you don’t, you need to find out.
Unless you’re paying cash, you’ll need a loan to finance the property you buy. Having a higher credit score gives you a better chance of being approved for a mortgage. More importantly, it typically helps you secure a better interest rate.
- A credit score of at least 740 gives you a decent chance at getting approved by the bank. If your score is over 800, that’s even better.
- If your credit score is below 670, though, you’ve got some work to do. Even if the bank approves your loan, you could end up with a super high interest rate.
Investing in real estate is one of the best high-return investments around. But if your credit score causes you to pay more in interest, that means more money is going to the bank and less is going in your pocket.
You Can Fix a Leak
The biggest difference between owning and renting a property is the person who is responsible for fixing problems when they come up. Whether you’re dealing with an overflowing toilet or a furnace that quit working, it’s the property owner – not the renter – who needs to take care of it.
If you’ve owned real estate before, you’ll have an idea of the repairs and upkeep a house needs. Being a previous property owner isn’t a requirement (after all, you’ve got to start somewhere!), but having experience with home repairs can provide valuable insight into what it takes to keep up a home.
Your real estate adventure will go a lot smoother if you have the know-how to do minor home repairs. Otherwise, you’ll end up calling someone else to fix it. The repair costs can add up fast, so taking a DIY approach is often better for your bottom line.
Your Credit Cards are Paid Off
Credit card debt sucks. Plain and simple.
Once you get sucked in and start carrying the balance from month to month, breaking the cycle is hard. Worse, credit card debt is a symptom of a bigger problem. You either don’t have enough money or haven’t learned to manage the money you have.
To get the most out of investing in real estate, you’ve got to kick credit card debt to the curb.
You’ll want to cut all non-essential spending, such as going out to eat and that gym membership you aren’t using. Give your income a boost by picking up a second job or starting a side hustle. Doing so can help you pay off your debt even faster.
Are You Ready to Invest in Real Estate?
Investing in real estate isn’t a get-rich-quick strategy. In my opinion, playing the long game typically nets you the best returns.
We didn’t know a lot about real estate when we first started investing, but we knew we wanted to diversify our long-term investments. Since we love real estate, it only made sense that we bought into it.
For us, it’s worked out well. It’s been over ten years since we purchased our first rental home. Today, we own two rental houses and have even used the rental income to pay one of them off.
The residual income provided by our rentals comprises a big part of our financial plans moving forward. With the right planning, you can build wealth through real estate and reap the benefits of residual income, too.
When did you know you were ready to invest in real estate? Was it a hard decision? Let us know in the comments!