How does an investor go about creating the financial support needed to invest in real estate?
Many gurus will tell you that it is possible to invest in real estate without using your own credit or cash. This is true, and it is possible, but you must be prepared to work very hard, find the right partner(s) or investor(s), the funds you use may be expensive, and your returns will generally be lower than investors who have more cash readily available.
If you decide to start with wholesaling, as many new investors do, be prepared to spend some money on prospecting, whether that is for a direct mail campaign, bandit signs, or gas spent driving around. This is a business activity that may also require a laptop computer, a smart phone with a camera and internet access. All of these things cost money that you will need upfront.
If you are going after hard money or a conventional mortgage, you will be required to put some money down (“skin in the game”). Even sellers willing to carry a contract will usually want to see some cash paid up front. It is possible to find borrowed funds with 0% down, but again, this limits the investor’s options for both purchase and exit strategies.
Whatever your acquisition strategy, it is good to generate and maintain enough cash reserves to sustain you during lean times. Finding the funds is only one part of your strategy for creating financial freedom. Another important part is living a lifestyle that allows you to generate a sufficient cash cushion for both emergencies and investment.
As you set goals for the New Year, it is a great time to take stock of your financial state and net worth. To create more cash reserves, are there lifestyle changes that will help you get where you need to go in the short-term?
Here are a few examples.
Can you turn your primary residence into an asset, rather than a liability? Can you reduce your living costs for shelter to zero? Can you structure your living arrangements so that your rent, mortgage, insurance, taxes and utilities are paid by other people?
I do this by renting out short-term furnished room rentals in the house where I live – which I do not own. I own other properties, but not the house where I live. I have no mortgage to worry about, pay for no repairs, and do no yard maintenance. My rent and all my utilities are covered by the tenants to whom I rent rooms. I live for free, sometimes even make money, from my primary residence. I can come and go as I please, and there is always someone to take out the garbage, take in the mail, or meet the repairman. I have an intentional community of self-selected housemates who fill a significant part of my social network.
Not everyone wants to live this way, and as a licensed real estate professional, I have a huge advantage in understanding local laws, regulations and best practices in property management. But many other investors accomplish the same thing financially by living in a duplex, triplex, 4-plex or apartment building, where they collect more rent than the expenses it costs to live there. Plus, should they ever decide to sell, they benefit from the capital gains tax exclusion for a primary residence.
How long is your commute to work?
Mine is approximately twenty feet from my bedroom to my home office. Location makes a big difference in saving money. The closer you live to work, the less money you will spend on gas, parking and tolls.
Better yet, find alternative ways of commuting that save the cost and hassle of driving (or owning!) a car. I ride my electric bicycle whenever and wherever I can, saving the use of my car for long-distance trips, heavy loads or bad weather. I save thousands of dollars in transportation costs this way. At the same time, I get healthy exercise, save the planet by not polluting, and enjoy the scenery.
How often do you eat out? Chances are you can save more money, eat better and stay healthier by preparing more meals at home.
I often host business meetings at my home office, where I can offer guests snacks, tea or coffee which is less expensive and less time-consuming than going out to a coffee shop. This is not appropriate for all meetings, but it works well for most.
It doesn't hurt to examine your diet as well, and see where you can cut out sweets, alcohol or other toxins that hurt both your health and your pocketbook.
The bottom line: Look for lifestyle changes this year that allow you to put away more cash for the things that are important to you in getting your financial house in order.
You need more income coming in?
There are plenty of low-cost opportunities to start your own business, whether that is in real estate or in another line of work. Don’t wait for someone else to provide for you – consider where you can make a difference now and fill a need.
Keep searching for work in your chosen field, but don’t neglect the opportunities to benefit from multiple streams of income. Network marketing and franchises are great starter businesses for the new entrepreneur in that they are generally low-cost to buy in, and offer training and systems for success. Owning a business provides numerous tax benefits, as well as income. Keep your options (and your mind!) open to possibilities.