It’s no secret that starting a real estate business can be expensive. After all, even small properties cost significantly more upfront than product materials in other industries. This is why only individuals with large amounts of capital can truly make a mark here. It’s also why a decent business plan, and the implementation of strategies like the 5% rule, are so crucial to success.
Working on the belief that real estate managers and landlords must keep 5% of their profits aside for building maintenance, improvement, and future investment each month, the 5% rule aims to build a more stable financial foundation for otherwise unruly real estate costs. Here, we consider a few crucial ways to feel its benefits.
# 1 – Do your sums before you invest
While the 5% rule largely concerns money handling after investment, it can also help to determine investment in the first place. That 5% cap can especially push already high buy-to-let mortgage rates over the edge with potential to not only ruin profits but also leave investors in the red. For example, if you’re earning $2,000 rental income, minus 5% which is $100, plus $1,900 in mortgage payments, profits will never be possible. By comparison, a $2,500 monthly rental, or a $1,000 monthly mortgage, is far more feasible alongside that 5% in the long run.
# 2 – Update your books regularly
Ideally, the high outlay of real estate requires fast growth that goes from basic rental starter homes right up to the employ of professionals like Rockford Construction for the development of your very own real estate enterprise. However, failing to increase your 5% alongside this growth could leads to costs that bury your efforts. To avoid that and to keep profits in the right direction, it’s important to return to your books at least once a month during high growth periods, and adjust your 5% buffer accordingly. Then, even when you have an entire street of houses to your name, you’ll easily be able to cover expenses without putting profits at risk.
# 3 – Always keep your 5% separate
It can be difficult to get serious about banking when starting in any business, but the modest costs of other fields are far more forgiving if you take business expenses out of your personal account and vice versa. With real estate, however, this is never viable, especially when you’re setting aside 5% of a growing enterprise every month. After all, by the time your real estate is worth $20,000 of monthly income (which shouldn’t take long), you’ll be piling $1,000 into your excess account each month. Make sure that you keep that quickly escalating money safe and easily accessible by opening a separate savings account for this purpose and staying strict about not tapping into that money until real maintenance needs arise.
The 5% rule is a game-changer for real estate startups that might otherwise need to operate on empty for far longer than is comfortable. Make sure it works out for you by keeping these pointers in mind.