Real Estate Investors Need to be Financially Literate Too

By on June 20, 2018

As the complexity of commercial and investment real estate products and services increases, so does the knowledge base required for the real estate investor. Real Estate investments are substantially more complex than that described by the basic economic transaction model. We will explore the financial literacy necessary to transact business in this highly complex world.

Become a student of the industry to be successful in real estate, read everything you can to open your eyes to the many options available: If you want to be a successful real estate investor, subscribe to newsletters and read blogs.

Pick a specific area of real estate and focus on one type of investment at a time until you are confident in your abilities. There are numerous ways to make money in real estate, from short sales and flips to long-term commercial investing, you can make money any number of ways. However, you won’t make money in any of them if you don’t focus.

Pick an area and be the best in it. Don’t spread yourself too thin always trying to find the next best thing. Real estate investing can be hard work. By picking an area and focusing, you will increase your odds of being successful. You can always try new things once you have started generating decent profits.

Find a mentor. The fastest way to take your investing to the next level is by finding a mentor in the industry that you can learn from. Consider speaking with the real estate agent you bought your home with or the owners of a commercial real estate business to help you cut the learning curve dramatically.

Find someone who is willing to teach and share their investing experience to guide you along the way. A mentor can be instrumental in helping you take your investing career to a new level. They also have the experience you need to help you avoid major mistakes.

Additionally, if you aren’t ready to go out on your own just yet, invest with experienced investors in the area you would like to be a part of — it’s a great way to learn hands-on while earning a return on your investment along the way. Investing with others will allow you to experience the entire investment process without trying to do it all yourself before you are ready.

Do your homework before investing. Set some goals, get a basic understanding of the concepts and math involved in assessing investment choices, pick a focus, lean on your mentor to make informed decisions.

Understanding Real Estate Math

You don’t need to be a college calculus student to understand real estate math. In fact, most of the math you’ll need is grade-school level. This section is going to quickly touch on some of the basic concepts and math formulas you’ll need in your real estate investing career.

Income:

Income is simply the amount of money that comes in from a property, such as those who make money through commissions from buying and selling property, or real estate management companies who get to keep a percentage of rents in exchange for running the day-to-day operations of a property.

For example, an apartment owner may get to keep 5% of sales from vending and laundry facilities or from the extra parking application, pet or late fees. This math is perhaps the easiest of all: simply add up the amount of rent and any additional fees that comes in.

Expenses:

Expenses are simply the things that cost you money on an investment. For example, the garbage bill for a home is $50 per month, the loan from the bank was $500 per month, and maintenance was $100 per month. The total of these three expenses is $650.00.

Your total expenses for this example were $650 for this particular month. Keep in mind that there are many other expenses that you’ll face as a real estate investor, including taxes, insurance, management, holding costs, capital expenses and various others.

Cashflow:

Cashflow is simply the amount of money left over at the end of the month after all expenses are paid. Typically you will see this type of income when buying apartment buildings for commercial real estate and operating it so you collect a stream of cash from rent, which is the money a tenant pays you to use your property for a specific amount of time.

Cash flow income can be generated from well-run storage units, car washes, apartment buildings, office buildings, rental houses, and more. To determine the cashflow, simply subtract the total expenses from the total income.

Return on Investment

Your return on investment (ROI) is a fancy way of describing what interest rate you are making on your money, per year. For example, if you invested $250 and you made a total of $500 over the course of one year, you would have made a 100% return on the initial investment. Similarly, if you invested $5000 and made an additionally $2500 over the course of a year (for a total of $7500) you would have made a 50% return on your investment.

The actual calculation for Return on Investment looks like this:

ROI = (V1 – V0) / (V0), (where V1 is the ending balance and V0 is the starting balance)

Real Estate Appreciation:

This is when the property becomes more valuable due to a change in the real estate market, the land around your property becoming scarcer or busier such as a major shopping center going in next door, or upgrades you put into your real estate investment to make it more attractive to potential buyers or renters. Real estate appreciation is a tricky game and is riskier than investing for cash flow income.

Real Estate Insurance:

Homeowners and commercial real estate investors need insurance to protect them from financial disaster should problems arise with the structure, natural disasters or accidents affecting the residence (such as injuries or thefts) which may trigger lawsuits and the spending of extra money not previously accounted into annual budgets.

Virtually every real estate transaction involves numbers; therefore, it follows that everyone in the real estate business should be proficient with numbers and common terms.

FInancial Literacy Creates Profit

Building a solid financial education is one of the best ways to limit costly mistakes in real estate investing. It will also help you make better decisions and in turn, more money. Education doesn’t have to cost a lot of money, but I can guarantee you this: whatever you spend building your financial literacy before investing will pay big dividends once you start investing.

You can’t expect to become an expert in real estate investment unless you have the knowledge for success. Financial literacy is just the starting point, even the novice real estate investor can be successful — with a little guidance you and an experienced real estate agent or broker can make targeted and specific choices to be successful.

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