How Do I Invest in Real Estate with little money? Tough Love: Getting Your Money Right to Invest
Most people say that the hardest part about starting up in real estate investing is getting that first chunk of money to invest with, especially if you don't come from money or have a high paying job... or are marrying into money. I definitely agree with this! The cold hard truth is that if you want to become a real estate investor you have to get your finances in order first, period. I'm not saying that it is not possible to make a purchase with zero down or get your first "wholesaling deal." Anything is possible, technically. But it's not super realistic for a novice, especially someone who doesn't already have ties or connections in the real estate business yet.
A solid foundation financially is going to be the base that you build your business on. Think about it, every time you go to purchase a new property, creditors or investors will be scrutinizing your finances to see if they can trust you to repay them. You wouldn't lend someone money if you felt they wouldn't actually be able to pay you back? It's the same thing for them, naturally. If you fail to get your finances and spending habits in order now, before you start investing, whatever properties you do eventually purchase may not be sustainable and you will most likely not be able to continue to get the cash you need if you can't manage it well. Remember, the first deal is not just about getting the property, it's about KEEPING it and GROWING your portfolio.
They always say begin before you are ready. Sound advice and I am a firm believer of this. Begin to get your finances in order now. As you are doing that, you will have time to start researching and developing your individualized investment strategy (more on that in a future blog post). None of that will be able to happen though if you don't have a solid financial foundation to work from. So here are the first crucial steps I would recommend:
Step 1: Determine if you are a spender or saver.
If you are a spender, stop. Literally, just stop. Quit cold turkey! (Well, okay, you can have groceries and pay rent, but quit buying crap you don't need! And maybe downsize to a smaller more affordable place?) Be brutally honest with yourself, do the self work to figure out why you get such a high out of buying new things. The truth is you don't really need them; no one needs that many things. It's not your fault either. We were all raised in a consumer driven society that is based around making more stuff, therefore needing to sell more stuff, in order for the almighty "GDP" to keep growing to new highs. But just because you were raised one way, doesn't mean it's not now your responsibility to change your habits. It is. How does the other saying go? Once you know better, you must do better?
Aside from the fact that a recent study from the Federal Reserve said that if 40% of Americans had an true emergency, they would not be able to come up with $400 at all, is very telling. Not having financial security affects more than just your wallet and credit card balances and limits your ability to invest in real estate. More importantly, it affects your mental health significantly, which impacts every part of your life! Not to nerd out too much but there are so many studies out now that link our desire to have more "stuff" to increasing rates of anxiety, low self esteem, and depression. A great book that goes into this in much more depth than I ever could, written by Michael G. Marmot is titled: The Health Gap: The Challenge of an Unequal World. Check it out!
I share all this with you to say, take the reigns and save yourself! If you are going to be a real estate investor, you will need to have access to cash and regularly be asking people for money. People will only lend to you if you show you can manage money well so Marie Kondo the shit out of your place! Experience the joy of getting rid of stuff that simply is taking up space in your life and don't buy more stuff to replace it. That is worth me repeating, I said, DON'T BUY MORE STUFF TO REPLACE IT!!! Train your mind to get more satisfaction out of saving money rather than spending it. Shift your consumerism to consuming more intentionally, and less overall.
Now for those of you who are savers, great! You probably already get pleasure from paying yourself first. It's still worthy of a quick glance through your credit card statement though to see which items you can reduce or eliminate. It can't hurt, and in your case, you would probably find it to be really fun! I definitely do.
Step 2: Figure out your financial goal and set your specific game plan.
There are a million real estate investment strategies out there: buy and flip, buy and hold, BRRRR, wholesaling, etc. We are not at a loss for strategies (more on the specifics of different strategies in future blog posts), however, strategies are useless if you don't know what you want or how comfortable (or uncomfortable) you are with taking risks. You have to start there.
So, what is it that you want? Do you have a ton of credit card debt that you feel you need to pay down first in order to even be able to breathe first? Do you want to have enough cash for a down payment on a property by the end of this year and are willing to put off paying down other debts aggressively in order to get there? Or do you want to simultaneously pay down your debt and save up, even if it takes a bit longer? It's really up to you.
I would suggest first though that you start by reading book after book about how to get your finances in order (for ideas on books check out my previous blog post titled: Top15 Books that Changed My Perspective About Money). Each book you read will help you to figure out the path that you are most comfortable with personally. People will tell you what you should or shouldn't do. People are never short of opinions. The problem with that is you never know if their suggestions are rooted in firm experience, or just what they think they know on the topic of finances.
The difference with books is that the advice has been vetted and scrutinized at the very least. Reading books will give you different perspectives from people you might not have access to through your own social network. For example, I didn't know anyone who was a landlord or invested in real estate growing up. I need advice from someone who has actually done that because that is part of my investment strategy. Without knowing someone in the beginning, I turned towards books. They will guide you towards prioritizing what you need to do first to get your finances in order based on where you are starting in order to meet your specific goals.
For me, I personally eliminated my student loans first. In all fairness, I did that because I didn't really know about investing at the time, aside from maxing out my 401k. So I did both simultaneously before I ever thought it would even be possible for me to buy a property. Looking back and knowing what I know now, I probably would have done this a bit different. Although having no debt when going to purchase your first property, and having a pretty stacked 401K was beneficial and ultimately allowed me to only put only 5% cash down. That enabled me to jump the moment I unexpectedly found a really good deal. So coulda, shoulda, woulda... in my experience it always works out how it was meant to. You just have to figure out which path and order you are most comfortable with and then actually do it!
Step 3: Beef up your credit score.
Now I'm going to drop some tough love here. Your credit score has to do with your integrity. There is a direct correlation. If you say you are going to pay a bill, you pay it. That's living with integrity. People who pay their bills on time every time have very high credit scores, those who don't, don't. While there are certain strategies you can take to quickly raise your credit score up a bit, the only way to have the highest level of credit is to pay your bills with integrity which means always and always on time.
If you can't pay for something right now you shouldn't buy it. Go without. Sit on the urge until you save up enough money to pay cash. If/when that time comes and your desire is still strong enough to buy it, do so then. Most often you will find that you've lost the motivation by then and would rather keep your hard-saved money for a bigger goal.
Now, I know some people are going to feel some type of way about me saying this, and that's okay. What I'm saying here is taboo in our society, but I know I'm preaching the painful truth: Most people who surround you in your daily life that dress nicer, or have the nicer car, or live in the nicer house are doing it because they are living beyond their means. Plain and simple. These individuals are never going walk around and share this fact with you because let's face it! Who really wants to openly admit that they are failing in some way? Not I! (And no one that I know). That hurts way too much, but it's true. Most people are living off borrowed money, and ultimately borrowed time because there will be a point when creditors stop extending credit and then the house of cards will fall. It's tragic, but true. Remember the housing bubble of 2009? That was a direct result of people living beyond their means and purchasing houses when they couldn't really afford it. And what happened? Bankruptcy and huge losses for most. So quit comparing what you have with what someone else has. Don't use that to justify a purchase that you are just using to keep up with the Joneses. That sort of spending provides fleeting joy and leads to more anxiety sooner rather than later.
Now I hear you saying, "Wow. That was way harsh Tai!" Yes. Yes it was. But you needed to hear it so #sorrynotsorry.
I'm not totally heartless though. I do understand there are extenuating circumstances. But if you are constantly in a position where you don't have enough to cover your bills, it's not an extenuating circumstance, it's a habit. A bad habit of you living above your means.
The moment you start living within your means (and ideally way below) your credit score will start climbing. Pay all your bills on time, every time and cut back the spending if that is what you need to do in order to get back on track.
Once you are in that flow, there are certainly other things you can do to further expedite the increase in your credit score like:
Quit opening credit cards (because every time you allow someone to check your credit score, that deducts a couple points from your overall score).
Close all the cards that you have if they charge you an annual fee, except for your two longest running ones. (The longer a card has been open, the more history you have which, when you pay regularly on time, is a good thing). Why two cards? You need one to use regularly--as long as you can pay it off at the end of each month--and one for emergencies, if and only if, the occasion arise.
Increase the credit limit on your primary card. It will improve your credit utilization ratio ratio, which essentially means how much money you have available to you should an emergency arise. The higher that phantom number compared to what you actually have, the better.
Again, I'm no expert. There are books written on this topic out there than can help you out in this area more. But pay your bills with integrity day in and day out and your credit score will soar, which is exactly what you need to not only get that loan on your first property, but to get the best possible interest rate, which is a bigger deal than people realize and will absolutely increase your ROI exponentially (more on that in a future post).
Step 4: Develop a social life that isn't dependent upon going out and spending money.
Too many people are constantly running around spending money, and posting about every little thing they do on Instagram to try and impress others and become "influencers." It's counterintuitive. This day and age there are so many things to do for free, especially if you live in a thriving city like I do! There are free concerts, free museum days, free parks, free beaches, free comedy shows, free film screenings, you name it!
Now I'm not saying don't ever spend money on something you want to see or do, in fact I'm saying the exact opposite! Spend money only on those things that you really want to do. Limit it too for special occasions. It will make you appreciate and enjoy them more and not have a money hangover the next morning.
Additionally, work on being part homebody and being okay with that. Cook in, read more (library books of course because they are FREE!), snuggle your puppies more. There are more introverts in the world than we realize. It's okay to stay home and recharge. Don't discount how sweet that can be.
I say all this to say getting stability in your financial life and developing healthier financial habits is the foundation in which ALL your investments will be built on. Don't build a house of straw and watch it get blown away by the big bad wolf (insert IRS, litigious tenant, flash flood, etc.) because you didn't ground your investment strategy in bedrock. You have to start by learning to manage your money and live below your means now because the only way investing in real estate works is when you are able to sleep easy at night knowing that you have more than enough money to cover your debt, which will be an essential part of building your wealth (but more on that in a later blog post too). So happy money dieting! I am right there with you, day in and day out looking for ways that I can slim down my cash calories. Feel free to add any of your nuggets of wisdom in terms of improving your finances to the comment section below. I certainly will use them.
Forever grateful for your wisdom,