Financial Planning for Real Estate Investing 101
Financial planning is crucial to investing in real estate because it is the process of determining every part of the funds that are going into the investment. This can include the mortgage, expenses, and anticipated cash flow. When you are first starting out in real estate investment, financial planning can seem intimidating so here are the things that need to be factored into your financial planning when you are preparing to invest in real estate.
Many investors need a mortgage to secure funding for their investment properties, especially when they are first starting out. It is because of this that the majority of your financial planning should be about the mortgage and mortgage payment.
When you set up your financial plan for this investment, make sure that the amount of money you will be making each month is higher than your monthly mortgage payment. Doing so will ensure that you are getting an income from this instead of losing money.
Your profits are the amount of money you will be receiving monthly from your investment after your expenses have been paid. When creating your financial plan, you will want to make sure that all of your expenses for the property — mortgage, maintenance, any utilities you cover — is less than what you are getting from your rent. Of course, you want to be making money from this investment and not losing it, so planning things like this is an important part of your financial planning.
The full scope of your expenses for each month can vary, depending on the property itself and its location. When you make your financial plan, you will want to factor in all of the expenses your investment will have, even if these end up not happening. It is better to plan for something that never happens than to not factor it in and be left with a bill that eats into your profits.
Some of the things you will want to include in your financial plan are:
· Property Management
· Water, sewer, power, and garbage bills (unless these are paid by tenant)
If you are investing in rental properties, vacancy rates need to be factored into your financial planning. The vacancy rate is the expected part of the year when a property will be vacant. For example, if there is a vacancy rate of 10 percent, the property is vacant for about 1.2 months of the year. This needs to be included in your financial plan, so it can be factored into your expenses.
With a multi-family unit or a building with multiple offices, your vacancy rate will be significantly lower. It is expected that at least one or two units will always be occupied, even if the others are not.
In real estate, appreciation is the increase in the value of the property over time. This can be predicted based on certain factors; however, there are no guarantees.
Appreciation is not as important to your overall financial plan since it can only be estimated, and those estimates can change quickly. This is more the bonus to the investment, and it should not be a huge factor when you are investing.