Fitting Real Estate into Your Financial Plans

For most people who are not wealthy, purchasing investment real estate has a major impact on their overall personal financial situation. So, before you go out to buy property, you should inventory your money life and be sure your fiscal house is in order. Find out here how you can do just that.

Ensure your best personal financial health
If you're trying to improve your physical fitness by exercising, you may find that eating lots of junk food and smoking are barriers to your goal. Likewise, investing in real estate or other growth investments such as stocks while you're carrying high-cost consumer debt (credit cards, auto loans, and so on) and spending more than you earn impedes your financial goals.

Before you set out to invest in real estate, pay off all your consumer debt. Not only will you be financially healthier for doing so, but you will also enhance your future mortgage applications.


Eliminate wasteful and unnecessary spending (analyze your monthly spending to identify target areas for reduction). This will enable you to save more and better afford making investments including real estate. Live below your means. As Charles Dickens said, "Annual income twenty pounds; annual expenditures nineteen pounds; result, happiness. Annual income twenty pounds; annual expenditure twenty pounds; result, misery."

Protect yourself with insurance
Regardless of your real estate investment desires and decisions, you absolutely must have comprehensive insurance for yourself and your major assets including:

Health insurance: Major medical coverage protects you from financial ruin if you have a big accident or illness that requires significant hospital and other medical care.
Disability insurance: For most working people, their biggest asset is their future income earning ability. Disability insurance replaces a portion of your employment earnings if you're unable to work for an extended period of time due to an incapacitating illness or injuries.
Life insurance: If loved ones are financially dependent upon you, term life insurance, which provides a lump sum death benefit, can help to replace your employment earnings if you pass away.
Homeowners insurance: Not only do you want homeowners insurance to protect you against the financial cost due to a fire or other home-damaging catastrophe, but such coverage also provides you with liability protection.
Auto insurance: This coverage is similar to homeowners coverage in that it insures a valuable asset and also provides liability insurance should you be involved in an accident.
Excess liability (umbrella) insurance: This relatively inexpensive coverage, available in million dollar increments, adds on to the modest liability protection offered on your home and autos, which is inadequate for more affluent people.
None of us enjoy spending our hard-earned money on insurance. However, having proper protection gives you peace of mind and financial security, so don't put off reviewing and securing needed policies.

Consider retirement account funding
If you're not taking advantage of your retirement accounts such as 401(k)s, 403(b)s, SEP-IRAs, and Keoghs, you may be missing out on some terrific tax benefits. Funding retirement accounts gives you an immediate tax deduction when you contribute to them. And some employer accounts offer "free" matching money — but you've got to contribute to earn the matching money.

In comparison, you derive no tax benefits while you accumulate your down payment for an investment real estate purchase (or other investment such as for a small business). Furthermore, the operating profit or income from your real estate investment is subject to ordinary income taxes as you earn it.

Think about asset allocation
With money that you invest for the longer-term, you should have an overall game plan in mind. Fancy-talking financial advisors like to use buzzwords such as asset allocation. This indicates what portion of your money you have invested in different types of investments, such as stocks and real estate for growth or lending vehicles such as bonds and CDs, which produce current income.

Here's a simple way to calculate asset allocation: Take your age and subtract it from 110. You get a number that you convert into a percentage. Invest that portion of your long-term money in ownership investments for appreciation. So, for example, a 40-year-old would take 110 minus 40 equals 70 percent in growth investments, such as stocks and real estate. If you wish to be more aggressive, you can take your age and subtract it from 120 so that a 40-year-old would have 80 percent in growth investments.

These are simply guidelines, not hard-and-fast rules or mandates. If you wish to be more aggressive and are comfortable taking on greater risk, you can invest higher portions in ownership investments.


When tallying your investments, determine and use your equity in your real estate holdings, which is the market value of property less outstanding mortgages. For example, suppose that prior to buying an investment property, your long-term investments consist of the following:

Stocks — $150,000

Bonds — $50,000

CDs — $50,000

Total — $250,000

So, you have 60 percent in ownership investments ($150,000) and 40 percent in lending investments ($50,000 + $50,000). Now, suppose you plan to purchase a $300,000 income property making a $75,000 down payment. Because you've decided to bump up your ownership investment portion to make your money grow more over the years, you plan to use your maturing CD balance and sell some of your bonds for the down payment. After your real estate purchase, here's how your investment portfolio looks:

Stocks — $150,000

Real estate — $75,000 ($300,000 property – $225,000 mortgage)

Bonds — $25,000

Total — $250,000

Thus, after the real estate purchase, you've got 90 percent in ownership investments ($150,000 + $75,000) and just 10 percent in lending investments ($25,000). Such a mix may be appropriate for someone under the age of 50 who desires an aggressive investment portfolio positioned for long-term growth potential.