Ask yourself, what is the main reason you want to jump into real estate? Is it because you enjoy finding and making deals? Gutting and rehabbing a beat up property? Or is it because you enjoy getting yelled at by tenants because the pipes leak every time they flush the toilet? Although all of these things may be a reason why investors enjoy real estate, the fact of the matter is none of them are the main reason.
What is the main objective you ask?
Whether you are conscious of it or not, the answer is always Financial Freedom.
5 Levels of Financial Hierarchy
Before we dive deeper into the basics of real estate investing, we have to clean shop a bit and take a look in the mirror. Are you financially ready to take the leap into real estate investing?
Let’s make it easy by breaking down your financial journey into 5 steps. This will serve as a simple blueprint to analyze if you are ready for the world of Real Estate. I like to call it the 5 Levels of Financial Hierarchy.
1. Survival
Imagine you are a professional boxer. When you are in survival mode, you are no longer the aggressor in the fight. You are back pedaling while the other fighter continues to put pressure on you. You keep pedaling back further and further until eventually your back is against the ropes. You might have just been hit with a big shot. For those that have never experienced it, a million thoughts are running through your mind. Should I go down with the next shot? I just need to last 40 more seconds until the round is over. Most people when put in this position either give up, or find it within themselves to focus and make it to the end of the round.
So what does this look like from a financial perspective?
You have a job that pays you every two weeks and the end of the month comes and now it’s time to pay your bills. Your bills are all paid and you look at your bank account and you barely have anything left to save or even worse you may be in the red. This is what I call Financial Survival Mode.
Also don’t think that even if you have a higher income you are automatically exempt from living your life in this stage. Human nature has confirmed over time that as our disposable income increases so does our expenditure on non-essential goods.
How do you escape?
In order to get out of financial survival, you need to get a grip on your personal finances. You need to sit down and track in detail how much you are making and how much you are spending. If your goal is to truly create wealth through real estate, then you have to face this directly. If you have already cut down as many expenses as possible and still find it difficult to save, then your options are either to find a higher paying job, 2nd job, or find a side gig on the weekends to gain additional income.
While you are cleaning up your finances, this is the perfect time to start learning about the various methods of real estate investing and familiarizing yourself with the real estate terms and the industry in general. This way, once you are ready, you can proceed without having to halt your progress.
2. Stability & Strategy
Financial Stability is the level you reach once you know without worry that you’ll be able to pay your bills, debts, and even enjoy a nice dinner on the weekend. Once the pressure of survival is out the window, you will be able to think more clearly about your finances and tie up any loose ends causing you to spend more than you need. You can begin to set aside a portion of your income as a savings for your future investment goals.
How do you advance to the next level?
Hopefully by this time you have spent enough time learning just enough about real estate to begin creating a strategy. You should be setting savings goals for down payments, analyzing specific markets you would like to invest in, and identifying what type of assets you want to purchase. Once you have done your due diligence and have achieved the savings and investment goals you set for yourself, it is time to move to the next step.
3. Execution
“Vision without action is a daydream. Action with without vision is a nightmare.”
Japanese Proverb
You did the work to cut your expenses, increase your income, create a savings, and learn about real estate. Now it’s time to put all your hard work into action. You are now ready to make your first investment into real estate.
How do you keep climbing up?
Once you’ve made your first investment, you will feel a large burden be lifted off your shoulder. You are now in an elite company of individuals who have a stream of passive income. The action here is to keep learning and leveling up your investments to earn more and more streams of passive income. This can take shape in flipping a duplex you purchased into a four-plex through a 1031 exchange or taking your gains out of a REIT and using it for a down payment on a property. The possibilities are endless, but the main objective is to continue to set goals and achieve them.
4. Growth
An important part of growth is to never stop learning. As you begin to accumulate more wealth, more opportunities will become available to you. Constantly educating yourself about new investment opportunities is necessary to continue climbing the financial mountain.
How do you reach the last stage?
To reach the final step, it’s going to require some basic math. First you need to calculate approximately how much money you will need to cover your monthly expenses. Then calculate how much money you are raking in from your passive investments (real estate, dividends from stocks, investments in startups, etc.) Once your passive income is greater than your monthly expenses, you are ready to move on to the next step. This is contingent on the fact that over the years you have been saving a portion of your income in a savings or retirement account that you can use at your disposal.
5. Financial Freedom and Fulfillment
The real American Dream. You did all the work you needed to wake up in the morning and do whatever your heart desires. You may still be working a job, but you are only doing it because you want to, not because you have to.
The important thing to keep in mind is there is no timeline to financial success. You may reach financial freedom at age 25 or at age 55 or in most people’s cases you may never achieve it. It all begins with being honest with yourself, paying close attention to your personal finances, and creating short and long term goals that you are constantly striving towards.
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