This article is Part 1 in a 2-part series to help readers navigate their financial responsibilities when preparing to invest in real estate.
Before getting started in real estate investing, it's crucial to do a financial self-assessment to ensure you're set up for a long, successful investing career. Let's walk through some key questions, helping you determine whether you're ready to invest in real estate and, if so, the Part 2 follow-up to this article will walk through which strategy aligns best with your financial objectives.
Is all of my high-interest debt paid off?
Importance: High
Clearing high-interest debt should be a top priority before shelling out dollars to real estate deals.
High interest debt is usually defined by any debt with a 7% interest rate or higher. When it comes to investing, you’re always wanting your returns to beat your costs. So, if you have debt that is costing you 12% interest, but you’re only managing a 10% return, you’re losing money. Pay off that high-interest debt, then consider investing.
Have I contributed to my tax-advantaged accounts?
Importance: High
Contributing to tax-advantaged accounts, such as 401(k)/403(b), HSA, FSA, or IRAs, provides valuable tax benefits and should be addressed before allocating funds to real estate. Tax-advantaged accounts offer a strategic way to build a financial foundation while minimizing tax liabilities. To max out your contribution amount or not is up to you, but consider using the accounts available to you while you can, and certainly meet any matching limits!
Do I have a liquid emergency fund?
Importance: High
Liquidity is when you have near-instant access to your money. This is important in cases of emergency when you might need to write an unexpected, large check. Retirement accounts are not liquid since you may have to pay large fees to withdraw money before retirement age. Stock market funds are not ideal as liquidity because you want to leave money growing in the stock market and not be forced to sell stocks when they’re down. Having a high-yield savings account is a good way to keep emergency funds. The amount you need to save will vary depending on your family’s situation, your monthly living expenses, as well as what assets you may own. One rule of thumb is to aim for 3-6 months of expenses.
Where to put an emergency fund? A High-Yield Savings Account, or HYSA, is an account designed to give you a higher savings rate than what you’d get from your bank. While these rates are typically much lower than a rate of return in most investment accounts, HYSAs are risk-free and have a lower, but guaranteed rate of return, and allow you to pull that money out when you need it. Do your research here! Many institutions offering HYSAs charge fees and/or have high minimums. Some pay even charge a penalty for withdrawing funds before a certain period of time. Research these stipulations and find the account that's right for you.
Do I already have money in traditional, taxable accounts?
Importance: Moderate
While we’re all about investing in real estate, we strongly believe it makes sense to have a diversified portfolio. This means you should have investments in stocks and real estate. Since investing in the stock market often requires less money and research to get started, we recommend doing that first before (or in parallel to!) starting to invest in real estate.
If you've answered "yes" to all the above questions, you're poised to explore various real estate investment strategies! Part 2 of this series will delve into these strategies and dissect the appropriate goals, skillset, time allocation, and capital required for each.
Get the Quick-Start Guide on Real Estate Investing here.
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