Most people don't jump into full-time real estate investing right away, but rather, they slowly build their portfolio and experience over time. Whether you start investing in real estate through real estate investment trusts (REITs), single-family rentals, vacation properties, or commercial property, it takes time to build a substantial real estate portfolio. While it may seem enticing to go all in right away, there's an art and balance to knowing when is the right to make your investing business a full-time endeavor. If you're considering a full-time career as a real estate investor, learn how to gauge when it's the right time to transition to full-time investing.
The tipping point
Since everyone has different financial goals and reasons for investing in real estate, it's really a personal decision to know when it's the right time to go full time. Generally, there will be a tipping point -- a point in which your real estate business income meets or exceeds your current income from your job. That number will be different for everyone. If you're an attorney who earns $150,000 or more, it's going to take a lot longer for you to establish enough passive or active income from real estate to replace your current salary. But if you're a teacher who earns $42,000 a year, you can achieve that same income through real estate in a much faster manner.
Generally investors shouldn't go full time until their income earned from the real estate investments is greater than their normal salary for a year or more, with extra weight being placed on income earned from passive investments rather than active ones.
What type of income are you earning in real estate?
Consider the type of income you're earning in real estate. It's easy to get excited when you score a home run that nets you your average annual salary (yes, it can happen and happens more than you may think), but those types of deals are rare and can't be relied on, on a consistent basis.
A lot of active investors who make money by flipping properties, wholesaling, or investing in nonperforming notes can earn a really great income when business is good. But it's not reliable. The market can turn, prices can decrease, competition can increase, and closings can (and likely will be) delayed, all of which can diminish your profits.
If the majority of your income is earned passively, that is, from rental properties or income from a performing mortgage note, you're in a much safer and reliable position than if your income is reliant on scoring and closing the next deal profitably. A good rule of thumb as you're building your portfolio is to use any active income earned from real estate to buy a passive investment. Passive income will almost always trump active income!
The longer you wait, the better you'll fair
Even when the tipping point is reached, it doesn't mean you should instantly quit your job. You should take other factors into consideration, like the amount of reserves you have personally and in your business. Play out a few scenarios and make you sure you would be able to financially float a market downturn, a failed flip, or another worldwide pandemic that restricts your business or your tenants' ability to pay. You should have a nice safety net for each individual investment property, your business (maintaining day-to-day operations), and personal savings before going full time. That number of reserves will again be different for everyone but should be at least a minimum of three months of expenses.
Also consider your current salary and the time you commit to your job. If you're in a lower- income earning position that requires a lot of your time, it may make sense to leave your job once you've reached the tipping point because you'll have more time to fuel your business and income. While others may earn more or work less, having the extra income is a nice way to continue to fuel their real estate business. I know plenty of investors who could be full time but choose not to because they enjoy what they do and like having the additional source of income that goes with it.
Being patient with the time it takes to grow a real estate portfolio while maintaining your main source of income will typically allow your real estate business to grow faster. Rather than living off of your real estate income right away, you can continue to invest any earnings into new investments or pay down mortgages on existing investments to help improve your cash flow over time. While not always the case, the longer the wait, the more your real estate business will thank you. Putting yourself in the best possible financial situation before going full time is setting yourself up for success.