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
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
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
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
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
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.
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.
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.
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.