Investing in real estate is a great way to help you grow your wealth, but if you don’t have your finances in order then you have to overcome that roadblock first. Before you leap into an investment with little or no money, make sure your financial foundation is established. This requires you take a deep dive into your own money habits and identify the ways your habits and your lifestyle are preventing you from generating wealth.
You can follow top investing tips, read all the financial blogs, and listen to the top 10 best money-focused podcasts, but none of that will help you hit your investment and savings goals if your bad money habits are quietly draining your hard-earned cash.
The irony is, you don’t know what you don’t know. Usually, it’s easy to pick out what someone else is doing wrong, but hardest to scrutinize your own behaviors.
With bad financial habits hanging around, every good financial habit you try, whether that be following the stock market, investing in real estate, trading mutual funds, or attempting to build a robust savings account, will be undone.
So, to avoid a forever-frustrating personal finance loop, learn about these nine bad financial habits, take an honest look at your personal financial life and implement boundaries, seek help from professionals, and start breaking these bad money habits this year.
Bad Money Habits To Drop and Good Money Habits To Build
There are 9 sneaky bad money habits you probably don’t even know exist in your life right now that are sabotaging your best efforts.
1. You spend more than you earn.
Credit cards and credit lines frequently lead to financial struggles. You start by spending just a little beyond your income. Then, to make ends meet, you rely on your credit card.
Even though you fully intend to “catch up next month,” it rarely works that way, and you wind up trapped in a cycle of dependency on high-interest-rate debt. This is how one seemingly small moment of emotional spending can snowball into a financial disaster.
Excess spending can quickly derail savings goals, eat up your paychecks, and pour cash toward fees and interest over the years. So if you’re ready to begin investing, start to build good money habits by spending less than you earn.
First, look at your spending over the last year, your total taxable income, and how much money is currently in your bank account.
In some situations, reducing unnecessary spending and trimming monthly expenses might be a fantastic method to meet your financial goals.
In areas where you must spend money, set a tighter budget, use coupons, search for used items on Facebook Marketplace instead of buying new ones, and look for discounts.
If it’s apparent your income does not cover your monthly spending, tackle your credit card debt, and allow you to invest in a retirement plan, find ways to increase your income. Even if you have the best money habits on Earth, a low income will leave you scraping by, no matter how much you trim your expenses.
Taking swift action to make more money now will allow you to eliminate debt faster, increase your cash flow so you avoid debt, and shore up the monthly budget, allowing you to invest and grow your portfolio in the long term.
2. You’re carrying too much credit card debt and too little productive debt
While I just harped on paying off debt in bad money habit #1, did you know there’s such a thing as productive debt?
Well, there is! One of the best-kept secrets of the wealthy is not that they are debt-free but that they only carry productive debt. Productive debt is an amount owed on appreciating assets, like business investments, rental properties, or fine art.
So, while you should reduce your credit card and consumer debt (unproductive debt) by following the good money habits I suggested earlier, simultaneously consider ways in which you could use other people’s money (the bank’s) to invest in assets that grow in value over time and generate passive income
Let’s pretend you take on debt to buy investment real estate properties. You do the math to triple-check the rental income more than covers the minimum payment on the mortgage loan, allows you to establish a solid emergency fund for each property, and that there’s a little extra money left over to pad your personal finances as well.
By taking a calculated risk with productive debt on rental real estate in this example, you increased your income, became a real estate investor, and set yourself up to increase your net worth substantially as the properties appreciate.
3. Your emergency fund is practically non-existent
If you don’t have an emergency fund, set one up today. You can log into your bank’s online portal and open up a separate account next to your personal checking account.
Even if you have automatic savings deposits and a solid retirement plan, unanticipated expenditures may cause problems with your savings account, short-term goals, and financial success.
If you’re in the beginning stages of creating a financial plan, things are tight, and you’re working hard to save money, then just build to $1,000- $5,000.
Most financial experts recommend storing 3-6 months’ worth of income in case of an apocalypse, pandemic, weather-related catastrophe, job layoff, or even a surprise medical event.
4. You don’t invest because you heard it’s risky
Investing is risky, but it’s a sure way to grow your money. I know it’s easy to think of a million excuses not to – you may think you’re too young, too old, don’t make enough, haven’t saved enough, or you might find yourself bartering with time or how much money you make.
Some people say they’ll start “next year” every single year or worse, they’ll start when they make more money. The problem with these financial goals is that they aren’t goals at all – they are wishes without an action plan.
Investing is a positive money habit that requires calculated risk. As an example, real estate syndications carry risk, but they also have the potential for cash flow, appreciation, and tax benefits, not to mention that value-add multifamily syndication deals positively impact entire communities. In this case, the potential reward outweighs the risk.
As with any big endeavor, find a mentor who can guide you, take the time to learn what fundamentals make good investment choices, and invest an amount that won’t hinder your financial future.
5. You don’t know how much money you should be saving
A rule of thumb is to save 20% of your income; however, this may be too much or too little, depending on your current money habits. When you look at the difference between your income and your living expenses, and you have less money than expected, you’ve got to make some tweaks before you can willy-nilly decide to save 20%.
That’s when you create a budget based on your income and necessary expenses, set a reasonable savings percentage or value, trim costs, and increase income until you reach that savings goal.
Financial independence can only be reached when your investments are generating enough cash flow to replace your income. Work backward from those dreams and financial goals to create a year-by-year plan to generate your desired financial future.
6. You aren’t using tax breaks to save money
Most people aren’t using the correct financial products for their income level, you included. It’s probably time to engage a financial planner and review your performance monthly.
Your tax refund is frequently the simplest approach to finding extra money each year.
Make sure you’re properly taking advantage of the tax benefits of student loans, mortgage interest, and especially those available through passive real estate investing. Missing out on these benefits can be costing you thousands.
It’s also a good idea to check your present retirement savings and taxable brokerage account to see whether they’re assisting you in accumulating wealth. If not, it won’t take long to fix, but correcting it should be your top priority.
7. Your credit score is lackluster
Suppose old medical bills, personal loans, and credit cards from life’s unexpected expenses have negatively impacted your credit score. In that case, it’s likely you’re being charged higher interest rates across the board and higher rates on insurance.
Your credit score will automatically improve as you correct bad money habits by paying off unproductive/consumer debt, saving more, and spending within your means. In fact, you’re more likely to curb spending habits, arrange automatic savings deposits, and pay additional money toward your loan and credit card balances.
8. You tap into your retirement accounts too early.
The most fundamental financial advice that will assist you in achieving wealth or preventing you from inadvertently draining it is to invest regularly.
But once you are invested,
Don’t pull money from your retirement savings unless you absolutely must.
Your retirement account isn’t a payday advance opportunity. You face steep fees and financial penalties even if you use your retirement withdrawals to purchase financial products or invest in real estate or the stock market. 401K loans are a terribly sneaky way in which you pay fees and interest to borrow your own savings while also missing out on the growth those invested dollars would have produced for your future.
If you’re facing true financial hardship over the course of a year, you may want to reach out to a professional in the financial world to discuss early withdrawal options.
9. You’re pushing for diversification too quickly
Letting impatience take the wheel is the quickest way to waste money while investing. While nobody likes seeing a low-cost index fund or a Roth IRA fall short, you must concentrate on the fundamentals and your portfolio’s long-term goals.
The good news is it’s very easy to lose your discipline when things are going well, but the bad news is that you must conduct your research and avoid changing your portfolio in a reactionary manner.
Build strong financial relationships with professionals who exhibit good money habits like saving and investing more money than they spend, thinking strategically about building good money habits, and creating ways to build wealth. Ask good questions about saving money, about how to build better money habits, and about how they determine when and where to invest.
How To Implement Money Habits Of The Wealthy This Year
Now that you’re acutely aware of 9 detrimental financial habits take some time to examine your personal behaviors with money. Are any of them sabotaging your financial stability?
Once your personal financial foundation is in order, it is time to begin investing. There are several ways to get started real estate investing, even if you don’t have thousands of dollars available. So, let’s take a look at a few of the ways you can start investing in real estate right now.
Real Estate Investing with “No Money”
This is a very common buzz phrase right now and simply illustrates how someone with very little capital on hand can still invest in real estate by using other sources of capital to begin their real estate investing journey.
Some of the most successful real estate investors swear by using capital from other sources to finance their own real estate endeavors. Let’s look at some of the most common ways real estate investors find the capital needed to purchase an investment property.
Purchasing an Investment Property with a Hard Money or a Private Money Loan
Hard Money Loans
A hard money loan is a short-term, non-conforming loan only provided by non-traditional lenders that may be used for a real estate investment property.
It is called a hard loan because this loan is backed by the real estate property as collateral. Hard money lenders are generally only interested in an investment if they feel the deal provided is a good opportunity.
Hard money lenders allow a shorter approval process because they don’t follow traditional mortgage procedures and don’t mind your credit history. To access a hard money loan, you must have a real estate broker license. These loans are ideal for quick closings and generally have higher interest rates.
Private Money Loans
Private money loans are similar to hard money loans but can come from anyone looking to get a good return on their cash investment, so this could be a friend, a relative, an associate, a business, or even a structured lender.
Private money lenders don’t have any set rules or regulations; therefore, all parts of the deal are up for negotiation. You can negotiate the terms of your interest rate, repayment options, timelines, and anything else associated with the deal.
Since private money lenders are putting their cash on the line for your investment deals, it’s imperative your strategy and due diligence is presented favorably.
Use an Equity Partnership to Make a Real Estate Investment
Many people would desire to invest in commercial real estate but don’t have the time or know how to do it. They would be happy to use their capital to help fund deals, provided they don’t have to do all the heavy work that comes with owning real estate investments.
Striking a deal with a business partner like this would be a win-win situation for both parties.
If you do decide to go this route, experienced investors recommend you set up a business structure (many begin with an LLC) and register the business to help protect you and your partner’s personal assets in case something should go awry with the rental properties or the partnership.
Real Estate Investing through Seller Financing or Rent-to-Own
If you have little or no money to put down and are looking to purchase a real estate property, you still have a couple of options. These investment strategies do work but generally require you do all the leg work.
Seller Financing is a type of loan agreement where the seller sets the terms of the agreement rather than a bank or a financial institution; essentially, the seller acts as the bank.
These loans are great for rental property (perhaps a single family home) with no existing mortgage. The previous property owner charges the new investor/buyer a monthly, agreed upon rate, without a traditional loan involved. These deals are common with inherited property and in cases of tired landlords.
To start investing through seller-financed opportunities, reach out to owners of abandoned or run-down homes in your area, attend local real estate meetings try to find a connection to someone looking to off-load a property, or find a rental property where the landlord doesn’t live in the area and contact them to see if they are willing to make a deal.
Rent-to-own homes or lease-to-buy options are where the property owner charges the buyer a monthly or yearly premium on top of the monthly rent payments. These extra fees accumulate toward the property’s purchase price.
This strategy is best used when a property owner or a landlord is interested in selling but is hesitant about timing. By making higher rental payments, you can acquire a property without taking legal ownership of it until a later date set forth by the owner of the property.
Using Existing Assets to Become a Real Estate Investor
If you own your home, then you are already investing in real estate. Does this mean your home is making you money? Not necessarily, but this does mean you have potential to earn passive cash flow.
If you have no money to put down for a real estate investment property but have owned your home for longer than a year, then you can use your home’s equity for capital. Especially in this market, since home values have been rising rapidly over the past couple of years.
You have a couple of options to get the funding you need for investing out of your home’s equity. The first option is to take out a home equity line of credit (HELOC) or, if you have owned your home long enough, to do a refinance option and do a cash-out refinance.
BRRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. This type of real estate investment means you buy a property, fix it up to increase its value, find renters, refinance to pull out the equity, and then find another investment property and start the cycle over again.
This type of real estate investment strategy is great if you are willing to work to make this strategy effective. With this strategy, you also want to make sure to explore your options in traditional loans (FHA, USDA, VA) to make a wiser investment.
House hacking is a method of using your primary residence to generate income. This can be done by renting out an extra room in your house if available. Still, the most common method of house hacking is purchasing a duplex or quadplex (multi-unit property) and living in one of the units and renting out the other remaining units.
The income from the other units will cover the mortgage payments and may allow you to live rent-free.
To properly deploy this multi-unit property real estate investment strategy, explore government financing, such as FHA loans or a VA loan. These loans provide lower interest rates and even options for covering the down payment.
Now that we have gone through your financial situation and discussed all the ways to invest in real estate with “no money,” now I feel obligated to warn you against the most common real estate investing mistakes.
Mistakes of Beginning Real Estate Investors
When you first get into real estate investing, there are so many different variables/scenarios where something could go wrong, all of which impact the overall return on investment. So without delay, let’s look at some of the common mistakes rookie investors make with a real estate investment.
Not Having a Plan and Not Doing Enough Research
This is the number one mistake made by most new real estate investors. Before you invest your hard-earned money and your time, do as much research and planning as possible. Here are some of the big areas that need proper due diligence.
Not Paying Attention to Financing
New investors face mortgage options aplenty, many with the purpose of helping potential homeowners secure aplace to live. Those financing options aren’t always beneficial to investors seeking passive income.
If your intent is to acquire a primary residence, an FHA loan or a VA loan might be best with lower closing costs, opportunities for down payment assistance, and generally a lower interest rate.
Government loans may or may not be the solution to a multifamily purchase, depending on size and intent. So, do your research to find the best financing option for your situation & goals.
Don’t get stuck on the sale price of investment property. The mortgage payment isn’t the only expense.
Plan for yard maintenance, occasionally replacing appliances, and occasional repairs, plus there are also insurance costs and property taxes to be taken into account.
Before purchasing any rental property, use your rental rate plus a list of all possible expenses and calculate your eventual return on investment to determine if a particular property would be a wise investment or not.
For flipping homes (renovate and sell at a profit in a short time-frame), consider the cost of value-add expenses and the time it will take to make these improvements to the house. Pay close attention to the short-term financing costs, fees for insurance and utilities, and possibly any loan prepayment penalties.
Not Having an Exit Strategy
Exiting your investment (selling the property) is one of the last events that takes place during a real estate investment cycle, but the exit should be one of the FIRSTS things you consider before investing.
Are you looking to fix up the property and sell it quickly, are you using it for a rental home, or are you looking at buying and maintaining the property? Establish your intention before you invest in real estate so you can research your options and plan for the right exit strategy for your goals.
Keep in mind the market is constantly changing; therefore, have a few exit strategies for different markets.
Read and Understand the Contract
The investment property contract is a binding agreement, so make sure you know exactly what you are signing.
Depending on the asset size and class, your investment purchase carries variables that can make or break your experience as a real estate investor. Have an attorney draft or review the contract with your best interests in mind.
Overpaying for the Property
This is one of the biggest mistakes first-time real estate investors make, and most often it is because they have fallen in love with a certain property.
If you start out overpaying for a property, your intention of generating profit as you invest in real estate goes out the window. Do your research and find similar properties in the local real estate market to make sure you are not overpaying. The less you pay upfront, the more you can make in the long run.
It is okay to have a bid rejected, and if you don’t get the property, that is okay because there are plenty of other properties out there to choose form and one that will not affect your overall investment opportunity.
Not Paying Attention to the Tenants’ Needs
What type of tenants are you looking to have in your investment property? The answer to this question will determine the type of property you want to purchase and the area in which to purchase it.
If you are looking to rent out to families, then you know they will be looking for good schools and a place with a low crime rate. If you hope to rent to singles or college students, you might look for a place with easy access to a transit system or local hangouts. If you intend to buy an AirBnb you can also use as a vacation home, make sure it is close to the attractions the tenants would want to visit.
Not Asking for Help
Even seasoned real estate investors have several people to help them accomplish their goals, so don’t feel you need to do everything on your own. Sure, going it alone might seem to save costs initially, but an experienced supportive community will save you more in the long run.
Find a great real estate agent, attorney, contractor or handyman, inspector, and probably an insurance representative to ensure everything you do is covered. These experts will help you make sure your real estate investment is truly an investment and not a money pit.
Alright, we’ve walked through establishing a solid financial foundation before your invest in real estate, explored how you might get started investing with “no money,” and even shared the most common real estate investing mistakes to avoid. With these tips for investing in real estate under your belt, you’re on the right track.
If you have any questions about earning passive income from commercial real estate, join the Goodegg Investor’s Club. Inside, we will provide you with all the tools necessary to build wealth for your family and create financial independence.