Investing in real estate can be quite lucrative. However, you will need to do some work on the front end to get the best results. Additionally, you will need to do some personal work to make sure that your expectations are appropriate.
Budget: Determine Your Goal
How much do you need to live on each month? If you don’t know that, this is your time to figure it out. Go through credit card statements and carefully review your bank activity for the last six months. If possible, study your expenses for the last year.
Set up a spreadsheet that you can customize to allow you to track the categories that matter to you. If your kids are home-schooled, you or your partner are not probably not producing an income. If your kids are in private school, you may both need to work to cover the tuition. While your categories can flex, your spending history is the best indicator of your future spending.
Once your categories are set up and you have at least six months of data tracked, go ahead and divide the amount spent by the months tracked. You now have a basic budget structure to enable you to plan for your future monetary needs.
For those with families, make sure that your budget includes the cash for a term life insurance policy. Starting a real estate business may take up the majority of your ready cash. As you build the business, your insurance payout needs will be lower, but a decent payout in the early days can save your family from some really tough times.
Savings: Build a Reserve to Give You Flexibility
If 2020 has taught real estate investors anything, it’s that anything can happen. Once you know your basic budget needs, you will need to build up savings to cover at least 6 months of expenses. In the event of another shutdown, you will have enough to live on while you:
- apply for a loan to support your real estate business
- look for a W2 job to cover bills while you wait for lending assistance
- work with your lender to get an extension or a refinance on your existing loans
Before you leave your W2 job, make sure you have a conversation with your lender. Your personal financial statement will change a lot once you start living on your rental income. If they will allow you a slush fund in your account with them, deposit an extra payment for each property to avoid worries for you and risk for them before you transition to rental income only.
Read more: How to Become a Real Estate Appraiser
Lender: Work With a Bank That Supports Investors
If you’re just starting out, talk with your realtor about the best lenders for real estate investors in your area. You want to work with an established banker. Many lenders are getting into the investment market, but as a new lender, you need to borrow from professionals who know the investment market.
Depending on how you get paid, you may need to set up an electronic transfer option from your bank to the bank that you make your payments to. Try to set up this account with a savings or holding account so you can easily deposit money into this account without having to worry about making individual mortgage payments unless you are paying down one property early.
Realtor: Buy Smart
Work with a realtor who understands the mindset of investors. Investors need to
- move quickly
- work with wholesalers and bird doggers
- submit low-ball offers
A realtor who works with investors will be able to submit a low bid and not blink. They will also understand when the buyer needs to wait on responding to a counteroffer.
Waiting to counteroffer can be especially lucrative, especially if the seller is motivated or tired. A few days can be the difference between paying too much for a property and getting it for the initial offer. If you are prone to anxiety, you need a realtor who can calm you down.
Your realtor can also help you look for the next property. You will need multiple properties to build up a livable income. If at all possible, building up a variety of move-in dates and lease renewal rates will also be effective. If you lose a month of rental income from one property and have a nicely diversified portfolio, it will pinch but won’t be painful. If half of your tenants move out in April, May and June are going to be grim.
Rental Manager: Get the Right Tenants
The best property deal in the world won’t do you any good if your tenants tear up the house and skip out. Your rental manager should vet potential tenants to make sure that the people who move into your house do not:
- have a criminal history
- have terrible credit
- have a history of skipping out on properties
Calling former landlords is critical at this time in history. Many folks have recently taken a serious credit hit, but they may be very good tenants once they move in.
Rental managers with an established history will protect you in other ways. Over time, rental managers develop a pretty good gut check. If a potential renter hits their lie detector as being risky, they can tell you and save you a lot of worries.
Read more: How to Bird Dog Real Estate
Accountant: Use All the Tax Breaks
Accountants with knowledge of the world of real estate can guide you in several ways. You will be able to get information about deductions and options, including
- allowable deductions
- 1031 exchanges when you plan to sell
Real estate laws are constantly changing and your state may or may not require you to pay taxes on this income. You need an accountant who can guide you on what deductions are allowed. Your accountant can also help you to change your business entity type as your business grows. Because law changes will alter your tax burden, your original structure may not work over time.
Attorney: Plan Your Estate for Your Family
You will need an attorney to help you set up your business entity. This documentation is important and should be stored for as long as you own the business, as well as any changes to these documents. Your accountant and your attorney can actually save you a great deal of cash with the right entity set up.
Over time, your properties will pay off and your income will go up. Depending on the ownership structure of your rental business, your family will get the benefits of your percentage of the business should something happen to you. If you have business partners and they also have family dependents, you will need to make sure that both you, your partner, and both families will be covered should something happen to either of you as the primary partners.
If the business expands over time, you may need to bring in another partner. Your attorney needs to be included in every step of this expansion or contraction.
The short answer to the question of living off your real estate income is “yes!” However, you will need a decent savings reserve, a logical and realistic budget, and a great team on your side to make it happen.