Every year I personally purchase or assist in the purchase of hundreds of real estate investments. Over my 35 years of real estate investing there are things I have learned that work great and have pledged to do again and again. There are, of course, things I have found that do not work well, or are downright huge mistakes, that I have pledged to never do again.
As we draw to another close of the year, I find myself in many conversations on goal setting for 2015. With the combined knowledge of wins and losses, I have drafted what I consider to be the 10 commandments of real estate investing. Incorporating this into your 2015 investing goals may also help you create more wins with your real estate investing.
No. 1 — Thou shall not look at any real estate investments without a clearly defined, written investment plan.
I have personal experience on this one. Working with hundreds of investors, I continue to find those with written plans succeed while those without a written plan get stuck chasing the next shiny object and often fail to ever invest at all. Or, if they do invest, they are not happy with the outcome.
No. 2 — Thou shall not over-leverage your investments.
Like many investors in the early 2000s, I too found myself over-leveraged.
When you have too high a loan to value on the property it leaves little wiggle room for market swings.
I was forced to sell some great investments simply to keep cash flow solvent.
Fortunately, I was able to turn lemons into lemonade as I studied emerging markets, and can better control market swings by forecasting them. But I totally adhere to the six-month reserve rule for each property.
No. 3 — Thou shall only invest in sustainable real estate markets.
This one took a move across the country to discover. Indeed, there are markets that are better poised and positioned to provide longer, more sustainable returns than others. Finding and investing in emerging markets may be your biggest win.
No. 4 — Thou shall not invest unless cash flow is positive from day one.
I have in the past, however, seen too many people buy purely on speculation that values will rise while ignoring the cash flow all together. Cash flow is paramount to the safety of all investments.
No. 5 — Thou shall always have an exit strategy established before making a real estate investment.
This one comes from working with new investors. It is alarming how many use hope as a strategy for success. I always suggest you have a strong exit strategy before making a purchase, and having a second possible exit strategy is a good idea. Successful investors always know what their exit strategy looks like before the investment.
No. 6 — Thou shall establish a real estate power team.
Based on the premise that together everyone accomplishes more, I found what separates the seasoned investors from the new investors is they establish a full team of professionals.
They realize that during a buy-and-hold investment, there are a number of professionals they will work with (attorneys, accountants, property managers, etc.). Introducing all these professionals to each other, and having them briefed on your long-term goals, means they can help build your portfolio and look out for your best interests. As opposed to simply hiring them to do their individual tasks, they can indeed be a powerhouse helping to grow your portfolio and identifying new properties and new ideas and techniques to help you run a more profitable business venture.
No. 7 — Thou shall protect your real estate investments.
Another lesson learned is that owning property in your own name can be risky. Forming an LLC and trust to own the property protects that investment. My first investment many years ago was purchased in my own name. When a child of my tenants fell out of the tree he was playing in, I received a call. It was to inform me of a lawsuit. The tenant wanted to be reimbursed for doctor payments and pain and suffering. While my insurance company paid the doctor bills, I quickly realized how at risk I could have been if the tenant wanted to push the issue. Owning a property in an entity that has few assets can definitely help secure and protect your investment.
No. 8 — Thou shall diversify your real estate investments.
I have learned that you can most definitely minimize risk by buying investments in emerging markets and monitoring the cycles within the markets.
To further provide safety of your portfolio, diversify your investment to various areas so that should an unforeseen market shift occur, you have additional safety in your diversified investments.
No. 9 — Thou shall master your investing niche.
This one comes from watching too many people chase the next shiny object. With the information age comes an influx of data and opportunities. The challenge is too many people start an investment only to be distracted by another better deal. I am saddened to see so many never make an investment or perhaps make it too late and totally miss the great opportunity as they bounce from one investment niche to the next. This of course is why the investment goals and plan are so important.
No. 10 — Thou shall perfect your investing process and duplicate.
I see seasoned investors continue to invest using the same process over and over. It is just like creating a system. They create an investing machine. New investors who do not have a system often turn into one- or two-property investors and stall out.
Over many years and many investments, these 10 principles have become a very important part of my investing process. They now have become the 10 commandments that I invest by.
I share these with my investor clients. As the time for setting goals for 2015 is upon us, perhaps you may benefit from them as well.