This last Saturday I went to our Downers Grove real estate office to play a game. This isn’t just any old game, it’s the Cashflow game. This game is designed to teach people about money and how our decisions in life can affect us financially more than we think. Here are a few of the things I learned, and how I realized that my education in real estate investing is so valuable!!
Do you understand DTI?
Your debt to income ratio is one of the things that governs how much money the bank will lend to you. What you probably don’t know is that the bank will lend you far more money than you really should borrow. The bank looks at your fixed expenses and compares that to your income, but other things in your life such as how much you eat out, how many shoes you buy, and expensive vacations, aren’t taken into account. Because of this, many people get into debt that is over their head and thus stretch their living DTI way beyond where it should be. Banks want to see your DTI under 40% for them to feel comfortable lending money to you. The formula is debt/gross income. So if you have $1200 a month of debt payments, and your income is $3000 a month, your DTI is 40%.
The formula for your living DTI is debt + other expenses / gross income – taxes So if you have $1200 debt and $1000 other expenses, the same $3000 gross income and $400 in taxes, your living DTI is actually about 85%. In this situation, adding more debt wouldn’t be a good idea! These principles are taught in the class Understanding Mortgages.
Can you buy properties with bad credit?
Yes! Just have to know how. Raising Money and Partnerships is one of the classes through my real estate education curriculum that teaches all about using other people’s money. If you have the knowledge of how to find real estate deals, and turn those deals into cash flow, or profit, do you think there are people out there who would like to partner with you? Absolutely! Partnering with these people eliminates that need for you to have your own money or credit.
Are your assets protected?
Just because you found a good deal and it’s cash flowing nicely, doesn’t mean you’re good to go. What happens if you get sued for any reason? You don’t want your assets on the line because of something you did or didn’t do. Mark Kohler, the tax and legal instructor, does an AMAZING job at instructing us exactly how to set up entities to provide maximum protection. And this doesn’t equate to going out and getting a Nevada entity just because Nevada has good laws. If you’re not doing business in that state, don’t get an entity from that state!
Have you properly formed your partnerships? Is it in writing?
Along the same lines as what we just talked about, making sure that your partnerships are properly setup is crucial. If you don’t have everything in writing, and something happens later down the road, it’s just his word against yours. Having contracts properly setup go a long way towards setting expectations and killing misunderstandings before they even happen. Mark Kohler talks about this in his tax and legal classes.
Invest in things that you can control, ie, not the stock market.
It might be sexy to go invest in a stock and see it shoot to the moon. But then the next week or month or year you get to watch it plummet back to earth. Why invest in something that you have no control over? Investing In Real Estate has it’s risks, that’s for sure, but is a lot more within your power. You can find leads, analyze the deal, and make offers that fall within your parameters of a good deal. You limit your risk and maximize your profits in this way, and you don’t have to guess.
Real estate opportunities come in all shapes and sizes.
In the world of real estate, all kinds of deals will present themselves to you. If you don’t have the knowledge to know how to take advantage of them, you’ll see a lot of deals go by. The Creative Acquisitions class by Chris Albin is fantastic in that it teaches you how to look at deals in different ways. Think of yourself as Batman. Batman has a tool for every situation. As a real estate investors you should have a tool for every deal that comes your way. Being able to be creative and solve these issues will give you an advantage and help you to be more likely to purchase properties.