Wednesday, June 19, 2024

4 Simple Steps for Less Money Stress in Real Estate Investing

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There is a rosy glow about real estate investing—a land of opportunity, eye-popping numbers, and the lure of a tangible asset that can be painted a calming shade of blue. And a lot of these upsides are brilliantly true! But there is one soft underbelly that gets lost in the optimism—and that’s the added stress of being a landlord.

Leaky pipes that need fixing, the mortgage that needs to be paid between renters. It’s a lot of numbers and cash flow logistics to be jumbling around in your head—and it can be stressful!

Well, that’s kind of our thing: keeping finances neatly organized. Stay for the geekery. We know a thing or two about how to gain total control of your money, and how to be totally in control of your cash flow for real estate investing. 

There are four simple rules, and they’re called the YNAB method. That’s You Need a Budget if you’ve got time to stop and smell the roses. Our secret sauce is this proven four-step method that puts you firmly in the driver’s seat for managing your cash flow no matter what tool you use.

At their heart, this method isn’t really about money management. It’s about creating a system to organize your finances, so you can spend less time stressed about money and more time living the life you want. 

What you’ll learn:

  • How to use the four-rule method for less money stress
  • How to know when you’re financially ready to buy your first property
  • Things to budget for as a landlord
  • How to remove surprises from your expenses
  • How to organize, track, and gain total control of your cash flow

Without further ado, let’s meet the YNAB Method:

  1. Rule #1: Give every dollar a job
  2. Rule #2: Embrace your true expenses
  3. Rule #3: Roll with the punches
  4. Rule #4: Age your money

Rule #1: Give every dollar a job

Think of each dollar in your possession like a devoted employee. Each dollar you have right now needs a specific job. Maybe some dollars are meant to pay for mortgages, while others are set aside for utilities. Maybe some dollars are saving up for your next (or first!) rental. You want the unemployment rate for your dollars to be 0%, so each one is given a job. You get to choose. You’re the boss.

Rule #2: Give every dollar a job until all your money is assigned to a category.

Rule #2: Embrace your true expenses

No more getting walloped by a roof repair, surprised by a water bill, or left out in the cold for the inevitable renter turnover. With rule #2, you plan for non-monthly expenses within your budget. You save for things like maintenance and repair each month, turning your monthly expenses into neat-and-tidy monthly costs.

Save for non-monthly expenses like repairs and renter turnover in your budget.

Rule #3: Roll with the punches

Rigid budgets break. They break on paper, they break your heart, they break your budgeting willpower. So with Rule three, we future-proof the ol’ budget.

You might spend more than planned on a repair—and that’s totally ok. Just move money from another category that’s less important (like the emergency fund you set aside for such a time as this!). 

When you overspend in a category, just pull from another category that has money available.

Rule #4: Age your money

Think of it like this: with Rule Four, money comes in and stays in your account for a little while. You use last month’s rental income to pay this month’s mortgages. You’re using “old” money instead of “new” money. As time goes on and you follow rules one through three, rule four is really just a byproduct—your pile of money and assets will grow larger. 

Side effects of following rule #4: balances growing plump, and extra cash left over to continue growing your real estate collection.

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Follow rule #4 to build your pile of cash so you can jump when the next opportunity strikes.

Let’s see the four rules put into practice with two scenarios: the new investor, and the seasoned investor. We’ll show you examples within YNAB, but you can implement the method in a spreadsheet or any other zero-based budgeting system.

Budgeting for the new real estate investor

You’re itching to buy your first rental property but it’s hard to know when to pull the trigger. Instead of trying to time the rollercoaster market, you call the shots by knowing when YOU are financially ready. After you’ve used the four rules in your own life, you can map out the specific costs it will take to enter the market and start saving. Plus, you’ll know exactly when you’ve hit the target to start shopping for property that fits neatly within your budget.

Focus on using the four rules in your own personal budget, and include a category to save for your first rental property. Once it reaches your target balance, you’re ready!

Set aside money for your own personal expenses, and then set a target for the down payment needed on your first rental property. Don’t forget to set it high enough to cover closing costs and repairs needed.

Budgeting for the seasoned investor

You’ve got your portfolio amassed, now you just want to optimize your organization system. Your budget could include all the expenses of each property, split out by address. 

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Track both your cash flow and your list of mortgage debt to market value in one place.

Don’t forget to save for those larger, less frequent expenses in your budget as well. Consider including a Master Funds category group to cover expenses between leases, an emergency fund, and a fund for capital improvements. 

You can easily save for your next property as well in this Master Funds category group. 

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Save for larger, less-frequent expenses within your budget.

Keep an account register of your rent payments and outgoing expenses for easy reference.

See a running list of money coming in and out, and easily reference when rent money is due.

As you follow the four rules, watch your net worth climb every higher as your asset-to-debt ratio increases.

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A real net worth chart shown in YNAB reports.

As you track your spending and categorize your dollars, you’ll also be able to easily see an at-a-glance income statement by month and over time.

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Track your net income each month (shown here in YNAB reports) at a glance,

No matter what app or spreadsheet you use, follow the method to lower your stress, grow your wealth, and enjoy your ever-larger pockets. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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