Financial literacy is a key component to success as a real estate investor. I always think of it as a house of cards. When your portfolio grows it can be over whelming. On my new book I am starting it with a section on financial literacy. The following is some of my thoughts on the topic.
Financial Literacy (main components)
1. Are you financially literate?
2. Do you know your credit rating or how to improve it?
3. Can you manage your own finances?
This is critical before you start investing in real estate otherwise your financial house of cards could crumble quick.
The bills start coming in, you sell a building and do not withhold enough tax, you do not build up a reserve, you are not properly insured, etc…
Credit Rating: This is important if you want to make life easier as an investor. I could write a book on credit, but for the purposes of this chapter, I will make it short (is good credit required? no, but it will make things easier).
You can get your report for free. Websites like credit Karma will provide you with a monthly update (although do not just walk in the bank based on their number and demand the best rates)
Many factors go into making up your credit score.
The fundamentals of a credit rating come down to your ability to pay your bills, not maxing out available credit, and having open credit facilities over an extended period of time.
Make sure to pay your bills, even if you disagree sometimes you are better off paying. I have seen many credit scores harmed by cell phone bills, cable / internet bills, power, and water bills. Many of these companies report late payments. Some more than others.
I mean what is better biting your tongue and paying a $500 bill that you disagree with or not paying it, having it lower your score and paying an additional point higher on your next mortgage with a difference that could cost you thousands. Even if you pay, you can still fight it after the fact. I will say one good thing is since utility companies especially cell phone companies are known for sending customers into collections, so they are not always taken to seriously.
The key is to have all your bills current. If you have credit cards and are unable to pay the entire balance each month, make sure not to max them out. Even if that means increasing the limit, maxing out will put downward pressure on your credit rating.
Credit lines are great. I would recommend getting unsecured credit lines. That way if you cannot pay off your credit card you can transfer money from the credit line (which will likely be a much lower rate).
How do you get a line of credit, just ask? Most do not have a monthly fee and only charge interest when you are carrying a balance. We have often received a credit line at the same time as a mortgage. They will often give you one to pay for renovations, furniture, those type of things. Never forget lending institutions want to lend you money. If you have a line of credit do not max it out.
I mean believe me when I have been working on real-estate projects, I have had everything maxed out, just try to limit the amount of time this happens. If you are doing a re-finance your lender will often add a stipulation that all or most of your current debt sources are paid off on closing of the deal.
One time a bank required us to pay out and cancel one of our credit lines to secure the mortgage. Then one week after the closing they send a letter offering a line of credit for almost the same amount of the one we were forced to close out.
If you go with a secured credit line (like a home equity line of credit or HELOC) you will likely get a rate break of 3+ percent.
The three main credit agencies are Equifax, Transunion & Experian. Some financial institutions will only use one of the three when they check credit (your mortgage professional will know).
The bottom line on credit, pay your bills and do not max out all your available credit.
If you run into trouble, think long and hard about your options. I am often shocked to find out how little amounts of money people will go bankrupt over. I have seen bankruptcy in the 20 – 30K range or even less. That will reflect worse than a large bankruptcy due to something like a business failure or major one-time life event. If you can prevent it, don’t let a divorce or breakup take down your credit.
You must also watch out when it comes to consumer proposals. These can be looked at as worse than a bankruptcy.
The good news about lending is that lenders want to lend, they also want low risk, so if you do get rejected, do not take it personally, take a hard look in the mirror, and ask yourself under what circumstances would you lend to you.
Budgets / Spending Habits / Living within your means
Budgets – I have read a lot of mixed reviews about budgets; however, they have always served me well. In fact, when I have fallen off track with my spending over the years, I have reverted to writing down everything I spend and making a strict plan. Even going to the bank every week and getting cash. As a real estate investor, you will need to set up a fund for repairs and maintenance, otherwise your budget will be off track on a regular basis due to “unexpected” expenses.
I do want to share with you that when you are broke and have perhaps only one source of income, it is way easier to budget. The more properties and sources of income you have the more complicated the budgeting process gets. I consider myself an optimistic budgeter, so often times I find myself off track due to repairs and maintenance expenses they tend to come in chunks. I can remember one year we had a way higher than average tenant turnover period, that was expensive. Then we have years where barely any tenants move.
Spending habits – Spending habits can hold you back or propel you ahead. As your income increases you will need to keep a close eye on this. I refer to the overspending concept as leakage, you see when you have very little money to spend and are on a tight budget it is much easier to track your spending. For example, you might have eat out money in your budget that allows you to eat out once per week. The challenge is when your income increases you can easily loose track of your spending, this can add up quick if you are addicted to Amazon shopping, or physical shopping once you start making amounts of money over and above your monthly bills / obligations you can start over spending by thousands, which can hold you back in the long run. It can sneak up on you, I mean before you know it you have a staff working for you, clothes in your closet you don’t wear, subscriptions to I-Tunes, Prime, Crave, Netflix, etc. If you are raising kids it can be even worse (they always have their hands out). Even online grocery shopping can lead to over spending.
My point to all this is to watch out for leakage when you start making cash. If you feel you are in this situation, just get a notebook and write down everything you spend money on for a 30 day period.
Living within your means – I have often read about the concept of living within your means. I often consider this a choice because it is subjective. What I mean is that if I lived with in my means from 20 years ago, I could be stuck financially.
What I do is turn this concept around and think I could live within my means or get more means.
I do not want to confuse this with spending recklessly, or going wildly into debt driving a Ferrari, I am talking about thinking big. Using your imagination (which is often beat out of all of us as we age).
I am talking about making a plan that leads to what you have imagined, and for someone like me I find the end goal is a moving target. I challenge myself daily to think bigger than what I can see before me, I challenge myself to look beyond my current circumstances. This all leads to me trying to live in the now and enjoy the journey.
I do have a flip side to this argument, and often times I think wow, I wish I had a simpler life. That simple life is available at anytime, and I take comfort in knowing that. Life is short, so you should absolutely live the life you want to live.
What makes you happy is a personal choice, so step one is to run your own race, and do not compare yourself to others (I wrestle with this almost daily).
Real estate investing offers incredible choices, I mean you could literally just buy one 6 – plex, live in one unit, and let the others pay all your bills. It can be that simple. If I could go back in time before I had a family, I would have started this way.
I established a career first, then invested in real estate. A much more costly way to do it, however, I really can’t complain, since it has worked out really well.
What you need to decide is what is important in your life and go for it.
Until next time,
Design your landlord experience,
Michael P Currie
Landlord by Design
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