Investing in real estate is a great way for people to begin earning a passive income. It also allows you to rapidly build household wealth. When leveraged correctly, a single strategic real estate investment could help you make several more significant investments later on down the road!

Real estate investment, however, also represents a major financial decision. Many assume they’re financially stable enough to begin investing in real estate. Then, they find out too late that they don’t actually have the assets necessary to overcome the many unforeseen obstacles and expenses frequently associated with real estate. It’s a tricky situation.

Before you commit to purchasing a new piece of property, carefully analyze your finances. Weigh any potential circumstances you may encounter both during and in the months immediately following the transaction. And remember, while it’s possible to begin earning money from a real estate investment right away, many issues could dig into that cash flow before it even hits your bank account.

How to tell if you’re financially stable

Determining your own fiscal stability can be a challenging task. You may think you have a relatively comfortable lifestyle and are financially capable of making a large investment. But in fact, without a preemptive, careful, objective analysis of your own finances, making an investment could actually spell disaster for your pocketbook.

There are some aspects of your financial life you may not think will impact your ability to invest in real estate—like your ability to pay unforeseen emergency expenses. Here are a few signs you can use to determine your fiscal readiness, and to help you determine whether you’re able to invest with confidence and stability.

You’re protected against emergencies

Emergencies always tend to strike when you least expect them, and when they’re least welcome. If you’re planning on making an investment soon, you should be sure that you have emergency funds to cover at least six months’ worth of living expenses.

Investing in proper disaster coverage for your existing assets, like your own home, will also help you to lower the impact of any emergencies that may strike.

You lack unsecured debt

Unsecured debt, like credit card debt, is a liability to your financial health and security. If you have any unsecured debts, you’ll need to pay them off completely before you begin investing in real estate.

While debt tied to a hard asset (like a car or property) can help you grow your net-worth, unsecured debt is only costing you money in interest payments and fees, and does nothing to grow your wealth. Pay off any credit cards or personal loans before looking at real estate investment opportunities.

You stick to your budgets

You should have budgets outlined for each month, quarter and year. Planning your budgets can be challenging, but they’re essential to maintaining the fiscal health necessary to make a major investment.

If you’re new to budgeting, you should spend at least a year following and tracking your budget before investing in real estate. Your budget should outline hard expenses for each month, as well as discretionary spending on items necessary some months, but not others.

You’re saving at least 15 percent

Experts recommend you set aside a minimum of 15 percent of your annual income toward your retirement account. It’s important to notice, however, that this is the minimum recommendation. In fact, you should be saving at least twice this amount toward the end of your career! If you aren’t putting away large swaths of your annual income toward your retirement account, you’re not fiscally secure enough to begin investing in real estate.

You’re adding passive income each year

Many people begin to invest in real estate to generate passive income. In fact, you should already have some sources of passive income before you begin investing in real estate. Some ways to generate passive income include stock and bond dividends, real estate investment trusts (REITs) and more. It’s important to have some form of passive income before making a real estate investment decision. This way, you’ve got some other source of cash flow if a deal lands you under water.

Does your situation track?

If your finances are in line with these criteria, you may be ready to begin exploring real estate investment opportunities! If you’re still carrying around credit card debt or are having trouble sticking to your budget, you should probably start your journey toward investment by tackling those issues first.

Going into your first real estate investment properly prepared will help you ensure you are able to reap the benefits of passive income generation. That way, you can grow your net-worth effectively and responsibly over time!