Laying the Groundwork - Investing in Real Estate

“It takes a bigger foundation for a courthouse than it does for an outhouse”. I can remember reciting this phrase when people would make fun of size of my feet. There is a similar principle: a large building needs a big foundation in order to support the structure, similarly you need to build a strong "investment" foundation as preparation to build a strong real estate investment portfolio.

Therefore, you must begin your investments by creating a strong financial foundation that will carry you through your investment deals.

Here are some of the basics:

The 80% rule. It is imperative that you maintain a good credit score and the easiest way I have found to do this is to live beneath your means. In general you should live on 80% (or less) of your take home pay. If you have overspent and are unable to live at that level, you have two options. One, begin spending less immediately (pay off debt, etc) or two you can make more money. Professionals in all fields who excel at the basics are successful in athletics and investing and in life. Being diligent with your finances and saving a portion of each paycheck is simply a pre-requisite to successful living--throughout your life.

Keep Your Day Job: In the initial stages of investing in real estate it is nearly impossible to live on the excess cash flow. Property expenses and debt service take up nearly everything that you have coming in every month. Additionally, if you take money out every month it is difficult to build up the cash needed for the occasions when capital repairs or improvements are needed on the property. The benefit in the early years is that you are building equity in your investment that will allow you to live on in the later years. Remember the child’s fable of the tortoise and the hare. The hare-type person wants to take money out of his investment immediately, while the tortoise-type person is content to wait and roll all of the cash into the property each month. The tortoise is the one that crosses the finish line first in the fable and the tortoise-type in real estate investing

Cash Is King: Banks love to see a borrower with cash on hand. My recommendation is that you build up $100K (or more) of cash as soon as possible and have it on hand with your local bank. It seems like a lot of money but it is a great way to rapidly get a banker working for you in completing your deals. In most of your deals you should not need to leverage this cash toward individual transactions.