The first step towards investing in real estate is to get your own finances in order. If you don’t have your own financial house in order adding more debt to your life through investing will compound your issues. There are several steps you should take before you start investing, be it real estate or anything else.
The first step is to have a positive cash flow in your regular life. If your salary (and that of your spouse) isn’t enough to pay your household bills, then you shouldn’t even begin to think about investing. Review your personal income and expenses and see if you can increase your income or cut costs.
Next, you should deal with high interest debt. Pay off high interest loans (like credit card debt) first. Paying your credit cards in full at the end of the month and not having any interest charges is the same as getting a 19% return on investment.
There are two types of debt: positive and negative. Positive is debt that helps to make you money or buys an asset that appreciates. Examples of this would be a retirement saving plan loan, the mortgage on your house, or borrowing money for a real estate investment. Providing your investment produces a positive cash flow don’t be afraid of positive debt.
Negative debt would be debt that you incur to buy things that either don’t appreciate or have extremely high interest rates. Examples of this would be a loan to buy a nice boat with a matching trailer or a really large TV. Most of us go through a stage right out of high school or college when we get our first real job and go nuts buying toys. That is negative debt. My advice for you is to sell your toys, pay off the negative debt and use your credit card wisely for only stuff you need. The toys can come back later.
Throughout this entire process you should be saving. Save as much as you can each month. Put gifts, inheritances, or windfalls into savings. Ideally you should try to save 10% of your net earnings but every little bit helps.
At that same time you need to (legally) minimize the taxes you pay. I am not condoning tax avoidance, which is illegal, but proper tax planning, which is perfectly acceptable. Get some professional help here. Any tax money you legally don’t have to pay is money you can eventually invest.
At this stage you are ready to invest. I, obviously, would prefer you to invest in real estate but once your finances are stable you have a good base for any structured investment you may wish to tackle. When you invest, don’t try to hit a home run. A lifetime of singles and doubles with very few strike outs will leave you with a very nice retirement.
