Personal Finance and The Investor
If you wish to become a successful real estate investor, then a good personal finance policy is important. In most cases when beginning to invest a good amount of cash is needed. A person unable to save is also a person unlikely to invest. A personal finance policy can be defined as a philosophy of how you plan to manage your money on a daily, weekly, and monthly basis. It gives direction to how a person will put their money to work. Anyone that has a personal finance policy geared towards real estate investing is saving habitually.
To save money habitually having a budget system makes it an easier process. A budget reformats your personal finance policy into numbers, shows how much you are spending, and how much you are saving. It will essentially display if you are following your personal finance policy or not. The budget will tell you if you need to control your expenses more in order to increase your available cash for real estate investing.
Saving cash for the use of real estate investing is important, but saving for an emergency should already be an established habit prior to real estate investing. Real estate investing and the management of acquired properties can be unpredictable in some instances. Not all issues can be predicted, but a good investor is always prepared financially to deal with these issues. This should already be established in a new investor’s personal finances. They should be able to financially deal with unpredictable events through emergency savings. This type of savings is equivalent to a capital expenditure account (CAPEX account). A capex account is used for expensive real estate repairs,renovations, and/or issues.
Another less discussed part of a successful real estate investor’s personal finance policy is leverage. Leverage is the utilization of debt to increase income. The use of debt for necessities like a personal home mortgage or vehicle in an area with minimal public transportation is not included in this concept. An example of responsible leveraging for real estate would be utilizing a 0% interest credit line to fund a housing renovation that will create more equity in the property. The newfound equity can then be repurposed into cash (through a cash out refinance) and cover all or a portion of the credit line used while the future cash flow will cover the rest of the debt. It is not necessary to leverage, but it is necessary to increase the velocity of your money and to rapidly grow a real estate portfolio.
The cycle of money for a real estate investor is systematic and the less deviation from the system typically the more successful. To simplify a topic that is very expansive, when a real estate investor receives income it follows a very predictable path in this order: savings, investing, and then spending. Typically an average person follows a different path in this order: spending and then saving what is left. The thought of intentional investing is not even considered. The distinction between savings and investing is not even made and considered the same in some instances. Your philosophy for how money flows in and out of your pocket needs to change immediately if it is anything close to the average person’s money cycle.
Good management of your personal finances will lead to good management of your future real estate assets. Develop a solid personal finance policy to guide your money cycle and money making decisions. Create a budget to display your actions with money on a weekly or monthly basis, and adjust accordingly if it is not in line with your personal finance policy. Once a plan is set and your savings is established you can now establish an emergency fund and begin investing eventually when you’ve saved enough. Leverage is utilized as an investor becomes more advanced and confident in themselves, but they also have cash available for unexpected issues. Hopefully, this insight into a real estate investor’s personal finance methodology encourages you to apply it in your personal life in preparation for your first real estate investment.
