Success in Real Estate Investing: Six Essential Principles for a Strong Financial Foundation Before Investing


Real estate investing holds the promise of wealth, passive income, and tax benefits. It has provided me the funding to travel the world, give my children incredible lives, and support causes important to me. But real estate investing is not without its risks. Before diving into this lucrative venture, it’s crucial to lay down a solid financial groundwork. Below are my recommended six essential principles for building a robust financial foundation before venturing into real estate investment.

Step 1: Stabilize Your Income & Expenses

Many Americans have insufficient savings, with 16% of Americans missing at least one payment every month. Before considering investing in real estate, you must make sure your income is stable and expenses are under control. You should attack the problem from both sides. Identify every expense you can reduce or eliminate and explore every avenue to boost earnings. Be sure to stabilize your income and debts before venturing into real estate investing.

Step 2: Build an Emergency Fund

Unexpected expenses are inevitable. Life happens to all of us, and it is imperative to have an emergency fund to handle unforeseen financial setbacks. Start with the goal of building an emergency account with at least one month of living expenses, gradually increasing it to three to six months, depending on your income stability. The path to financial freedom through real estate (or any other means), begins with facing reality and being prepared for the inevitable surprises.

Step 3: Pay Off Unsecured Debts

Prioritize paying off your high-interest unsecured debts, primarily credit cards. According to Forbes, American credit card debt increased by over 18% in the past year, now totaling over $930 billion. It is simple math. If you are paying 24% interest on your credit card balance, your investments must hit 25% return just to break even. That is an absurdly unrealistic expectation. Your best first investment is to start paying off those credit cards. Start with the cards with the highest interest rates and work down from there.

Step 4: Max Out Matching Contributions

Take advantage of any employer-matched contributions in retirement accounts. This gives you an instant 100% return on your investment, courtesy of your employer. And you get the tax benefits of investing in a 401(k) or other workplace retirement account. This is a fast and easy investment. And, since you always want to diversify your financial portfolio, the 401 (k) is a great starting point.

Step 5: Set Long-Term Goals

It seems everywhere I go, people stop me and ask where I think they should invest their money. The problem is that I cannot answer the question without knowing their long-term goals… and they often don’t have any. Are you a 24-year-old looking for maximum long-term growth? A 54-year-old looking for steady reliable passive income streams? Are you someone with high anxiety and a low-risk tolerance? Or an investor with a strong stomach for risks in exchange for higher average long-term returns. Are your priorities more cash flow or wealth building?

Before investing, it is critical to clearly define your financial goals, tailored to your age, risk tolerance, and objectives. And determine your desired timeline for your financial independence, passive income targets, and allocation between real estate and other investment vehicles.

Step 6: Learn the Fundamentals

Educate yourself about the fundamentals of real estate investing before diving in. Seek guidance from mentors, coaches, or experienced investors to avoid costly mistakes. Invest in learning and leverage others’ expertise to navigate the complexities of real estate.

I began investing in real estate at a very young age, knowing almost nothing about land lording or flipping houses. I simply jumped in, and figured things out as I went. And I made a lot of costly mistakes. I flipped houses before knowing how to manage contractors. I bought rental properties before understanding the rules of cash flow. I failed to learn the nuances of the local landlord-tenant laws. I remodeled properties without knowing the zoning ordinances and required permits.

I made a lot of costly avoidable mistakes in those first years. One early mistake I made was building an expensive privacy fence around a newly acquired property, only to be forced to tear it down when learning it was prohibited by zoning laws (check out our investors blog for more advice).

Before you invest, find mentors, coaches, or senior partners with experience in your chosen investing niche. Learn from their mistakes and benefit from their network. You can offer them a cut of your first few deals or pay them a coaching fee. It is worth it, helping you avoid mistakes that could cost you tens of thousands of dollars in the future.