Tips On Getting Started With Real Estate Investing
Real Estate investing is a hot trend among the Gen X and Gen Y generations. It's seen as a way to diversify your wealth while simultaneously producing side income. On top of that, it also provides for the opportunity to own an asset that will hopefully appreciate overtime. Owning physical real estate has become even more popular as of late due to the shortage of available housing and the increased demand (more buyers). So how does one get started when it comes to expanding your investment portfolio into real estate, and what should all new real estate investors be aware of as they move into this new venture?
Key Takeaways:
Don't let your personal finances bring your real estate goals down.
Create a plan and continuously adjust along the way.
Resourcefulness could be your biggest asset.
Hire an accountant. Taxes and rental real estate is complicated.
Creating realistic expectations can save you from yourself.
It's a mundane topic but reviewing your property and casualty insurance policies is important. Use this complimentary checklist to help make the process a little less painful. What-Issues-Should-I-Consider-When-Reviewing-My-Property-038-Casualty-Insurance-Policies-2021.pdf
Don't have time to read a blog post? That's ok, we get it! To help, enjoy this short PharmD Video instead!
"The 0% Long Term Capital Gains Tax Bracket & Harvesting Taxable Gains"
Organized Your Personal Finances
Creating your own real estate investment portfolio will almost never go according to plan. Many times, unexpected events will happen that will put stress on your initial vision. It could be finding it difficult to get financing, keeping good tenants, or more recently an unexpected eviction moratorium. You have to account for this financially. Preparing your personal finances for the unexpected events that will pop-up is critical.
This usually means having strong primary income sources. Do you feel you have stable employment that you can count on if your real estate income isn't as profitable as you hoped? You may also want to save a little more in emergency reserve than you're used too. When you take on an additional mortgage, you may not have the corresponding rents every month to even it out. You should prepare yourself to have extra cash to use in that kind of shortfall situation.
Next, what is the ACTUAL reality of your current cash flow situation. It isn't good enough to create a budget and hope that your life will accommodate those wishes. You need to create an understanding of what the current cash flow situation in your life looks like right now. It's another reason why I'm a big fan of tracking your spending. Now you can start planning around the real cost of your current life and begin to factor in what the additional costs of acquiring real estate would look like. You can't let your personal expenses be the downfall of your real estate portfolio goals. It starts with awareness and building out a plan around that.
So get your financial situation organized. Figure out where you stand monetarily and how it will either be a benefit or a hinder to your real estate aspirations. This will give you the needed confidence and nerve (and you will need a lot of both!) that it will take to see your real estate goals through.
Create A Plan
So you've got a great understanding of your personal financial situation and you are confident that you are mentally and financially prepared to take on the challenges of investing into real estate. Great, now the real hustle can begin! How do you plan on getting financing? Are you handy enough for the ongoing home maintenance requirements? Will you hire out a property management team? Who will do the cleaning? Will you take advantage of Airbnb or VROB? What are the legalities you need to be aware of? What is the fair market value for rent and what can you do to get a premium?
The list of questions will go on a on. And you don't have to know the answer to everything right away. But you should have a solid plan in place that addresses a lot of them. A great place to start when creating your plan is to pick the brain of someone else who has experience doing this already. For the cost of a breakfast, coffee, or lunch you could gain the type of valuable insight that could make or break your venture. The best way to learn about how to capitalize on real estate investing is by learning from others' successes and mistakes.
Once you feel equipped to navigate all the muck that goes along with real estate investing, create a plan to move forward. Factor in all the expenses you anticipate will come up over the course of a properties life and then add some additional on to that. Create a schedule of incoming rent projections. Do your best to identify unexpected risks you may encounter. And once you've got most of it mapped out, create action steps with deadlines that will keep you on track. I would even go as far as systematizing a lot of these processes along the way. That way when it's time to expand, you already have your blueprint in place.
Get Resourceful
Ask anyone who has or is currently investing in real estate if it all goes according to plan. I would bet that all of them would say "no". Real estate investing, like many other endeavors in life, is not linear. It's not always a smooth ride. At some point you will hit a wall with no easy or traditional remedy available. This is when getting creative and resourceful will become extremely important.
Google is a great platform but it won't be able to answer all your questions or solve all of your problems. The old fashion way of picking up a phone and chasing down the information you need will become a requirement at some point. Don't avoid it but instead lean into it. Sharpen your resourcefulness and engage that deep and dark area of your brain that produces creative solutions. Embrace it because it's a unique skill that many are ill-equipped with. Getting good at becoming resourceful could end out saving you a lot of money down the road.
Hire An Accountant
If you've read any of my previous blogs or have listened to any PharmD Money podcasts or PharmD Video's, you know I'm a big fan of tax planning. But taxes are already confusing enough without throwing in all the peculiarities that go along with real estate investing. If you're a do-it-yourselfer when it comes to your taxes, I would recommend outsourcing that to a professional CPA when you begin your real estate journey.
At-Risk Rules and Passive Activity Loss rules are not easy to decipher. I don't care how many people on Tik Tok tell you that you can deduct all of your rental expenses from your personal income, it doesn't work that way. Hiring a professional to help guide you is part of the price you should consider when getting into real estate investing. I would also add in a trusted lawyer as well.
Another interesting tax situation real estate investors find themselves inquiring often about is Section 121 rules. There will be a lot to consider on the tax side of stuff. Use your unique ability on what your good at and offload the other stuff, like taxes, to a professional who can better handle it for you.
Set Realistic Expectations
Social media has done a wonderful job of skewing the realities of most things. I can hope on a lot of social platforms and be bombarded by people telling me that I can create a real estate empire in 12 months or less. Or how I can create a big enough real estate portfolio where I can quit my full time job in 6 months. Frankly, it's a lot of B.S. Like everything else in life, set proper expectations for yourself.
It's great to have goals, but don't burn your bridge before you cross it. Real estate can be a great compliment to your current job, but it probably won't replace it anytime soon. If it does, great! But don't let that exception be the basis of your decision making in the beginning. Keep a long term outlook and stay committed to your original plan. Envision the best and prepare for the worst.
It's also extremely important to keep the other people in your life up to date with everything that is going on. For example, if you have a spouse, keep them engaged in everything that is happening. It's also important to set proper expectations for them as well. Who knows, they may be the person who keeps you from making that one big mistake or the person who encourages you to take the big risk that pays off in the end. Set proper expectations for yourself and for anyone else that will have an interest in your real estate endeavors.
Bottom Line
Getting your real estate portfolio started isn't an easy process but it's definitely doable. It may take some sweat equity, resourcefulness, mental toughness, and maybe a few bottles of wine, but many PharmDs have done it before. Getting started on the right foot will give you the momentum you need to be successful. So use these tips as a basis when begin your journey of creating your own real estate empire!