Every investment is reliant on a series of steps that will put it in a framework or guideline to success. Real estate investing requires the same steps as any other business, commercial or stock investment a person can undertake. The factors that can ensure the success of your potential real estate investment are planning, knowledge, and managerial skills. The area where most real estate investors face the hardest time in terms of organizing and understanding fully is probably the most important one of them all – financial planning. This is because every real estate investment requires a deep and thorough financial planning to understand if the money invested will bring back profits or losses.
So, why do beginners in real estate investing particularly need to go through careful financial planning? The answer is quite simple. New investors in real estate are inexperienced and unaware of what it takes for them to achieve success, i.e., profit from their investment. Even some experienced real estate investors find it difficult to do financial planning properly for their long term plans. The idea of financial planning is simple, it is basically a subcategory of an investor’s overall investment plan, albeit the financial part of it. It is considered the most important one because it gives you a general insight on current and future financial strengths and weaknesses before engaging in a property investment hastily.
The process of financial planning for real estate investors should not be a short-term one, but rather a long term investment strategy. Any property purchase in today’s market will cost significant money to an investor, which means that it will either be paid for through savings or a mortgage that will be returned over a number of years. This is why the process of investing should begin years before the actual purchase of an investment property, unless you have the money saved up already.
Guidelines for Solid Financial Planning in Real Estate
Understand Your Income and Savings
When it comes to financial planning, the very first step is to understand where you personally are in terms of income and savings. Purchasing a rental property can be very expensive if the aim is investing in a nice neighborhood in a metropolitan area. This is why you should take a look at how much income you make monthly and how much you are able to save after all expenses have been paid. If you already have money saved up to buy an investment property fully, then it becomes easier to understand your finances, because no extra expenses will be paid. However, for those who plan to buy properties by taking a loan, it is trickier.
If a potential real estate investor roughly makes around $3,000 per month, and the expenses for his/her household are around $2,500 per month, are the $500 that is being saved enough to pay for a mortgage and interest expense every month for 30 years? That will depend on the finances of the investment property the investor wants to buy. Nonetheless, it is always important to analyze and study your income and savings before making any real estate investment.
Related: How to Save Money on an Income Property
Financial Planning for Your Investment
Let’s say you have made up your mind on purchasing a rental property. It is a rental property that can provide you with a monthly cash flow, which could ease some of the expenses you have to pay. Another form of financial planning is obviously needed here. Purchasing a property for the purposes of renting needs to be accompanied by a calculated expected profit, because otherwise the entire investment would be deemed a failure. If after calculating the expenses of the property, the mortgage payments, and other costs, you are expecting a negative cash flow, then it is financially a wrong investment. In real estate, it is not advisable to go into a bad investment because it is cheaper and then hope to turn its fortunes around in the future by hoping to start to receive positive cash flow at some point.
Bad investments in real estate must be avoided. Start your financial planning by calculating every single detail of the investment. This will include repairs, agent’s fees, closing fees, monthly expenses, utility expenses, mortgage payments, and property taxes. Gather information about the average rental income for that area to see if the income you make will exceed the expenses you incur. If not, then it is advisable to start looking for a new property that might offer you good return on investment.
Related: How To Budget For An Investment Property and Cash Flow
Future Financial Planning
The thing about real estate investing is that it gives you the ability to grow and expand. Most beginners real estate investors actually think that planning ahead financially is unnecessary because it’s better to focus on the current issues at hand. However, as many famous investors would testify, future financial planning is one of the main reasons for their success.
Setting goals and financial ambitions is a main motivator to achieve success in the world of real estate investing. For example, it is highly advisable to have a financial target to save up a certain amount of money from your first investment property after an X number of years in order to invest in your second property. This is just one example of financial planning in real estate investments. Having planned your finances for the future gives you a sense of security as well as some preparedness in case something goes wrong. Being financially prepared for worst-case scenarios by having financial contingency plans is what differentiates successful real estate investors from common ones.
If you have an aim to become a real estate tycoon, then planning your finances and understanding them well is all you need. Having planned and being prepared is only the first step, but in order to maximize on your profits, then you must find ways to be a level above your competitors at all times. While this is not a direct financial planning step, it is one that affects it greatly directly or indirectly.
Related: When Is Buying a Second Home to Rent Out a Good Idea?
Investing in a rental property can be tricky if you have never done it before, however, it is never too late to gain a basic understanding of financial planning to boost your chances of success. Start your financial planning with easy steps at first by sorting out what you have already and build on from there by drafting an annual financial plan for 5 or 10 years. That level of planning is what forges successful real estate moguls.