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5 Personal Finance Aspects To Assess Before Investing In Property
There are basically 2 groups of real estate investors.
There is the group that has an almost unlimited appetite for risks who smile with glee whenever they come across no money down opportunities.
Then there is the more prudent group who like more predictability rather than a step into the unknown so that their portfolios don’t take them on a roller coaster ride.
It is important to note that there is no right or wrong way to approach property investing.
Thousands of people have taken on the risky route and emerged victorious. And similarly, there is no shortage of success stories of investors who take on the more risk-adverse approach to build and accumulate wealth.
However, there has always been a tendency for academics to lean towards the slower but steadier methods of investing.
And if you prefer the more “sensible” approach, here are some key personal financial aspects to analyze about yourself before getting your feet wet in the world of real estate investing.
1) Credit score
For someone who has first realized the existence of credit scoring, he might feel that he is the lead actor in one of those Hollywood spy movies.
This is because every adult with credit facilities like credit cards, auto loans, study loans, etc, will have a record with the credit bureau.
This logs all the activities related to credit an individual has performed.
- How many credit cards he owns
- Any accounts being involuntarily closed
- The timeliness of payments due
- History of bad debts
With these information, lenders paint a picture of the credit behavior of borrowers. This will then affect their decisions on whether to lend and on what terms to lend.
The FICO score is basically a score tabulated based on all these credit records. The higher the score represents a borrower who has been a “good” boy. It’s not far fetched to suggest that this is the first step of credit profiling.
While this score will not play a regular role in everyday life, it can wreak havoc on your real estate investing activities in terms of mortgages and other areas of funding.
If you have a risk-adverse investment profile, it is highly likely that you will very much prefer typical mortgages over creative financing options when funding your property acquisitions.
This makes your credit score even more essential as failing to obtain a mortgage or being subject to high interest rates will hurt your bottom line greatly.
Some advanced ratios can be used to go more in-depth with this assessment.
2) Personal net worth
Personal net worth is basically calculated by summing up your assets and subtracting the liabilities from it.
This will give an observer a idea of whether you are really as rich or poor as you appear to be on the surface.
If you are already in negative territory after working the numbers, it is highly recommended that you rethink your acquisition strategy.
Having a high net worth can sometimes also get you preferential treatment from lenders. This is because some banks might have a different or more relaxed credit criteria for borrowers they deem as high net worth.
This can result in easier loan approvals or lower interest rates.
While personally having a high net worth could be something to brag about with friends, your cash and cash flow are still essential elements to success in real estate.
Having a lot of money “locked” in assets that are not liquid will not help you buy property at all.
Ever heard of the phrase “house rich but cash poor”? This is a popular expression for people who find themselves in poor cash positions.
Because real estate is a cash flow operation more than anything, it is always better to be in a financial position as liquid as possible.
This enable you to navigate around temporary cash flow problems or unpredictable setbacks.
If you are holding onto a lot of non-liquid assets and have little cash to close a deal, and it’s not clear-cut whether you are able to finance it, it is best to sell some of these assets before proceeding with purchasing any property.
You can’t depend on the faith that you can sell them fast when cash is needed for closing next week!
4) Monthly income
When you are just starting out with property investments, you cannot really expect your investments to start putting money into your pockets from the start.
It could very well be months or even years before you can truly counting the collected rental as profits.
This is why it is definitely desirable to continue generating a consistent monthly income while your investments go through the process of muscle building.
A lender would also put a lot of weight on this figure when evaluating loan applications.
It is recommended that new investors be frugal and prudent with expenses as they learn the ropes of landlording.
Calculate your current residual monthly income and take action in maximizing them.
A very serious question you need to brutally ask yourself is “how much do yo intend to make in 5 or 10 years?”
Financial goals help us to get more specific and get a clearer picture of what needs to be done in order to achieve those goals.
For example, if you can work out a specific level of profits as a goal in 10 years, then you should be able to work backwards to calculate how many properties will be required to meet those goals.
If the types of rental properties you are looking at will not deliver the results, then what type of real estate is needed?
A lot of new real estate investors get into the game without having a clear idea of what they can make out of it. This leave them disappointed later and even regret their decisions when they later realize that the gain in reality fall far short of their imaginary expectations.
The very first steps to property investing is not in seeking and buying a house with great potential.
It should be to assess your own financial positions so that you can find out the perimeter you are working within and serve as boundaries to warn not to step out or face financial disaster.