Real Estate Investors 10 Commandments
Over the years I have been involved in the transactions of hundreds of real estate purchases. I have personally made mistakes and have witnessed many others who also made mistakes. Many mistakes are repeated over and over by various investors. These mistakes are obviously something everyone wants to avoid. I have always felt the best way to avoid mistakes is to learn from them that I have already plowed on the road to self-discovery. To that note I would like to share the 10 commandments that I now live by when investing in properties.
1. Thou shalt begin with the end in mind
Having worked with real estate investors for 20+ years, I see the largest mistake investors make is right out of the gate. They do not have a clearly defined investment strategy. They decide to invest and set out to buy a property. They know they want cash flow and that is about the extent of their plan. I have found the most successful investors have a 5, 10 and even a 20 strategy plan of what they want to accomplish and how they plan to do so. How they will continue to raise cash for down payment money. Determine how they will create the reserves for security of the properties and when they will leverage to buy more. Beginning with the end in mind will allow you to safely and strategically accomplish those goals.
2. Thou shalt build a team
We all know that team is the acronym for T.E.A.M (together everyone accomplishes more). We are not suggesting you partner up with another investor. Instead we are suggesting you build a network of real estate professionals who know your overall investment portfolio objectives and help you to not only buy the best investments, but to keep the maximum profits from those investments while reducing your liabilities. Realtors, accountants, attorneys, tradesmen, and property managers, etc. are all important people to have on your team. They will all work diligently to help you build your portfolio.
3. Thou shall confirm sustainability of a property and the market before making the investment
Just as not all properties are created, equal neither are the market conditions. Smart investors always invest in markets that are safe, with local economic stability and growth. They then buy properties within the sweet spot of the market to insure further sustainability.
4. Thou shall invest in low risk investments
Many investors found themselves in trouble by speculating, assuming prices would go up and they could sell for a profit. Investments that cannot create cash flow from renting the property (should you have to resort to this as a backup plan) are considered high risk investments and should be avoided.
5. Thou shalt only invest in properties that have immediate cash flow
Savvy investors always make sure that the day a property is purchased there is income being generated. Buying a performing asset is the true meaning of investing. Buying a property and hoping to rent it out for X and hoping expenses will be X is more speculation and is subject to unforeseen challenges. From the day you take ownership of the property until the day you get it tenanted is negative cash flow with speculative outcome, this should be avoided at all costs.
6. Thou shalt protect your investments and liability exposure
Often I hear people say they will buy a property in their own name and the insurance will protect their liability interest. Have you ever made an insurance claim? They try everything possible to avoid making payments. Yes, you want and need insurance, but to protect the assets you already have it is imperative to have an LLC or a trust or some sort of other entity to shelter your assets. Talking with an attorney and an accountant as to what is best for you and your situation is important. As we have plenty of readers from outside the U.S. it is important to talk with a tax person that is efficient in foreign tax law as not all countries recognize the American LLC (which is a prominent entity utilized here in the U.S. )
7. Thou shall always have an exit strategy (or two) in place before making a purchase
Often the expression is, "you make your money going in". This is because as we know in real estate investing you want to know your exit strategy going into the deal. Perhaps a backup exit strategy as well. You then realize the financial gain when you exercise that strategy. Those who purchase for speculation only to hope for a higher sale price often are disappointed when things do not work out, unfortunately hope is not a strategy!
8. Thou shall diversify for safety
Buying multiple properties in one location may expose you more than you care to be exposed, should that particular market falter. You can safeguard your investment portfolio by investing in various emerging markets and watching the changing market cycles and repositioning when the market suggests it has reached the peak of its market cycles.
9. Thou shalt focus and stop chasing the shiny objects
I know this sounds juvenile, but every day I see great people miss opportunity after opportunity because they are so busy chasing the latest and greatest investment craze. Here is where I suggest you make sure you understand and take heed to number 1 and begin with the end in mind, or begin as you plan to proceed. Know what you want to invest in, due your proper diligence and get informed and invest. I have worked with the shiny object chasers for years who watched our market cycles rotate and watched many people make great cash flow and equity growth while they did no investing at all because they were too busy trying to make sure they were chasing the best investments. Stop that now!
10. Thou shalt duplicate the process
When you invest with purpose and diligence it is easy to make money in real estate investing. Once you make a few purchases you will get into your investing groove. You will see what works for you and what does not. You then simply repeat the process.
Create systems for yourself and duplicate over and over until you get your desired portfolio built.