When we think about what it means to succeed in this business, we usually talk about the steps of how to invest, and maybe even when to invest. But there's also an underlying current—underlying money management principles—that demand mastery if you hope to excel as a real estate investor.
Budgeting is so important here. Because if you want to scale your portfolio, grow your assets and passive income, and see your net worth accelerate, you have to have a strong budgeting strategy.
Here are our top budgeting tips for real estate investors.
Budgeting without a goal in mind makes everything that much harder. Start by mapping out your investment goals. Sit down and speak with an advisor and see what goals and timelines make sense for you. This will help you hone in on what is realistic and doable without putting a strain on your finances.
For real estate investors, there is always a financial goal on the horizon. We have ambitions! Goals! Because of that, savings are important. Prioritizing those savings is more important. So first things first, as part of your budgeting, is to pay yourself first. When you receive income, move whatever amount is appropriate for you to savings first. It can be too tempting to spend on impulse otherwise.
It would be a mistake to keep your budget in your head. Get it down, preferably in a spreadsheet. There, you can see it all in one place, color-coded and categorized. Make a new tab for each month, track your progress, and see how things change over time. If you don't know where to start, free budgeting templates are just an internet search away.
Related Article: 6 Key Budgeting Tips for Real Estate Investors
In a world of cash advances, credit cards, and instant gratification, it's no small wonder we struggle with this. Part of an effective budget has to be spending only what you actually have. This will keep you in the black. That means not letting yourself get into dangerous fiscal territory because you know payday is close. Don't count your chickens before they hatch.
Treat your personal budget like a professional budget, complete with bi-monthly meetings. Whether you're sitting down alone or with your spouse or business partner, track where you are. Check in and see if you're still on track or if course corrections are necessary. Budgets need to be able to change when the unexpected happens, but if you don't know where things stand, you won't be able to adapt with agility.
These are money matters, so talk to an accountant. Just because it's not 'tax season' doesn't mean it's unwise to consult a professional. Ask about the best way to manage and track your finances. Get some advice and see what they say about budgeting, reaching your financial goals, and keeping records.
We work hard for what we have so it can be challenging to keep emotions out of our money. That said, we must. Don't let anxiety, worry, or even positive emotions make you stray from your budget. Fear, joy, and all manner of intense emotions can cause us to act irrationally: spending where we shouldn't, evaluating situations without clarity, or otherwise acting on impulse. Keep emotions out of it. Evaluate facts, not feelings.
While in most cases we advocate for optimism, in budgeting, err on being tentative. If you want a successful budget, plan for more expenses to come your way and for there to be less income than you expect. It's far better to be pleasantly surprised with more leftover than you expect than for there to be less in your account that you would like.
As an investor, limiting your liability is always a top priority. One of the things that you should do from the get-go is separate your finances between personal and business. You can do this by setting up an LLC and by opening a separate bank account solely for your investments. While this may seem like a hassle, it will prevent this money from mingling in your personal accounts and ensure that your budget stays neat and your risk is mitigated. Untangling personal from professional where taxes are concerned also gets messy, so just keep it separate.
It's not helpful for you to simply look at the “before” and “after” at the end of each month. You don't get a lot of information by just seeing how much total money was spent versus how much was coming in. In order to really make your budgeting work and to be able to course correct and adjust over time, you need to be diligent in keeping a record of where your money is going month-to-month.
Not only is this valuable as a budgeting reality check, but it will allow you to more easily keep up with pertinent information when you need to file taxes or track down information for an accountant.
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