Step 5 is one of most important risk management tools available to investor in real estate. Each property has typically an inherent rate at which it can be rented, even if that is not your intent. By looking at rental rates, relative to amount of principle, interest, taxes, and insurance (PITI) that you will have to pay, then you can understand amount of cashflow that may be required to support property. If your objective is to produce cashflow, then you need to be cashflow positive very quickly. If your objective is capital gains and cashflow is negative, then you now understand what you may have to support on a monthly basis if things don’t work out.

Deferred maintenance then becomes our Step 6. For an existing property, how much maintenance has previous owner neglected that you will need to catch up? Be careful here since this can be one of major places to get nasty surprises.

And now I saved best for last: Step 7 is to determine your own personal risk tolerance. Some new investors look at a deal and only see positive. This is a huge mistake. EVERY REAL INVESTOR I KNOW HAS LOST MONEY IN A DEAL but they gladly will do more. Why? They understand their risk’s going in, they understand how to limit their downside, and gains are much larger than risks they are taking. If you were standing beside them and saw what they saw, you would gladly take risk as well and rapidly ignore any small losses that you experience.

Hopefully this has given you a good start at learning how to analyze a potential opportunity. Obviously each of these steps requires additional work or training but they are what separate new investor from seasoned, battle tested veterans.

Speaking stocks and bonds...and retirement accounts, anything considered an investment for future, you need to know what value is. This could be as simple as looking at most recent statement of that account or if it's your twenty year collection of Elvis dolls, having a competent, trustworthy appraisal done. You should make copies of all documentation and keep originals in a safe place. This way you will have copies of account numbers and a history record should it be needed. Be sure to include life insurance accounts in this search. Term life insurance does not accrue cash value, but it is good to know what you would have available to you if your loved one dies. Find out when term of insurance expires and what renewal options may exist. Whole life insurance accumulates a cash value over time as well.

Next, find out exactly what your total monthly household income is. All payments should be considered, and a copy made of most recent statements should be added to your file.

Last but most importantly, is to find out where your money is going. Every last dime of it. Not only from monthly bills, but everyday expenses. It's not a lot of fun, but keep a little notebook handy for a month and track expenses. You need your partner to do same as well or at least give you receipts so you can track things. If you meet a lot of resistance, you may have to resort to asking questions, making estimates or, as a last resort, snooping around to find out. This may be least desirable approach, but every cent that gets spent in your household is an investment in your future. You have right to know.

Once you have completed information gathering process, you will begin to have an idea of your true financial health. The next step in this series will be to conduct an honest, straightforward appraisal of your financial health.

Summary One of first steps on your journey to financial security is to know what your present state of affairs is. Otherwise, how can you map out a success strategy if you don't know where your starting point is? One important part of this evaluation process is to consider all income and expenditures an investment in your future, good or bad, so you can invest wisely.