I invented the following rules of successful real-estate investing over my many years of successes and failures. These are the same rules I follow today and share with our clients at Norada Real Estate Investments.
1. Educate Yourself
Data is the new currency. Without it you are doomed to follow other people’s advice without knowing if it’s bad. Data will also help take you from being a “good” Investor to becoming a great investor, and that knowledge will help give a passive stream of income for you or your folks.
2. Set Investment Goals
A goal is not like a wish; you may want to be rich, but that doesn’t mean you’ve ever taken steps to make your wish become true.
Setting clear and precise investment goals becomes your road map and bullet point plan to becoming independent financially. You are statistically far likelier to achieve financial independence by writing down precise and detailed goals than not doing anything at all.
Your targets can include the number of properties you want to get annually, the once a year cash-flow they generate, the sort of property, and the situation of each. You might also want to set parameters on the rates of return required.
3. Never Speculate
Always invest with a long-term point of view under consideration. Never speculate on fast short-term gains in appreciation, even in a heated market experiencing double-digit gains. You never can say when a market will peak and it’s usually 6 to 9 months later when you find out. Don’t chase after appreciation. Only invest in prudent value plays where the numbers make sense from the start.
4. Invest for Cashflow
With few rare exceptions, always buy investment property with a positive cash-flow. The higher, the better. Your cash-on-cash return is related directly to the before-tax cash-flow from your property.
Cash-flow is the “glue” That keeps your investment together. Your equity will grow over time (through appreciation and loan amortization), while the cash-flow covers the operating costs and debt service on your property.
5. Be Market Agnostic
The US is a really sizeable country made from masses of local real-estate markets. Each market goes up and downwards independently of one another due to many local factors. As such, you should recognize that there are times when it makes sense to invest in a selected market, and occasions when it doesn’t. Only invest in markets when it makes sense to do that not as you live there or you bought property there before. There’s a factor of timing and you don’t desire to beat the trend.
6. Take a Top-Down Approach
Always begin by selecting the best markets that align with your investment goals. Most investors start by investigating properties with little to no regard of its location. This is a major mistake if you don’t consider the investment in light of the market and neighborhood it’s in.
The best way is to first select your town or town based on the condition of its housing market and local economy (unemployment, job expansion, population expansion, for example.). From there you would narrow things down to the best areas (amenities, colleges, crime, renter demand, etc.). Finally, you would search for the best deals within those districts.
7. Diversify Across Markets
Focus upon one market at a time, accumulating from 3 to 5 earnings properties per market. Once you’ve added those 3 to 5 properties to your portfolio, you would diversify into another provident market that’s geographically different than the previous one. Sometimes that implies targeting another state.
One of the base reasons for diversification in the same asset sector (real-estate), is to have your assets spread right across different industrial centres. Each real estate market is “local” And each housing market moves independently from one another. Diversifying across multiple states helps reduce your “risk” Should one market decline for any valid reason (increased unemployment, increased taxes, for example.).
8. Use Expert Property Management
Never manage your own properties unless you run your own management company. Property management is a rude job that needs a solid knowledge of tenant-landlord laws, good promoting skills, and powerful social skills to deal with tenant beefs and excuses. Your time costs and may be spent on your family, your career, and searching for more property.
9. Keep Control
Be a direct financier in real estate. Never own real estate through funds, partnerships, or other paper-based investments where you own shares or other stocks of an entity you don’t control. You need to be in charge of your real estate investments. Don’t leave it up to corporations. Or fund managers.
10. Leverage Your Investing Funds
Real-estate is the sole investment where you can borrow other people’s money (OPM) to purchase and control income-producing property. This permits you to leverage your investment funds into more property than purchasing using “all cash” Leverage magnifies your overall rate-of-return and accelerates your profit creation.
So long as you have positive cash flow and your renters are paying down your home loan for you, it might be silly not to borrow as much as possible to buy more revenue property.
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Marco Santarelli is an investor, author and founder of Norada Real Estate Investments — a nationwide real estate investment firm providing turnkey investment real estate in emerging markets around the U. S.. “10 Rules of Successful Real Estate Investing” was originally published on the Real Estate Investing Blog. (Also see Norada Real Estate on BBB.)