12 Solid Rules for Real Estate Investing
Indianapolis, IN · Member since 2008 · 759 posts · 185 votes
12 Solid Rules of Real Estate Investing
1. Real estate is a long term investment
2. Cash flow, cash flow, cash flow
3. Do not let your emotions get in the way
4. Know your markets
5. Get good property managers
6. Find 3 good contractors/handymen
7. Work with Brokers that understand investors
8. When people sell, you buy
9. When people buy, you sell
10. Diversify your portfolio
11. Invest what you can afford
12. Memorize and live by rules 1-11
Make it Happen!
Great Post!
Agreed! #3 is probably the point that causes more people to get into trouble, IMO.
Very good insight. Will keep all in mind.
Guess....
this is one of those posts where I'm the contrarian....
Buying and holding real estate is a bad way to start....
Long terms holding is for when you have too much cash....
And you can afford to pay cash to buy real estate at severe discounts...
And enjoy free and clear cashflow...
Until then you are better off... buying and selling and being in the real estate "business" until that time...
Think of every long term landlord you know and their properties are decrepit and they are selling them at a discount..
20 years later...
The single best use of a property will be the discount you purchase it at....
And taking advantage of that discount by going from....
Cash to asset and back to cash....
If income is generated primarily through your efforts, such as rehabbing, flipping, wholesaling, etc, then to my mind, you're operating a property-based business rather than investing. Yes, you've put money into property, but it's incidental to the profit-making activity. The profit-making activity is finding discount property, rehabbing, marketing, etc - not investing capital. Likewise, Kroger make their money by retailing, we don't call them a "grocery investor". ; )
If you're prepared to work in a property-based business, it can certainly be profitable and I'm not saying anything negative about that, but I don't consider it falls into the category of "investing".
I would not go as far as to say that flipping, rehabbing, etc is not investing, but Tracey makes some very valid points and I agree.
Buy and hold is the single most reason of wealth creation and when done correctly. can provide not only the net worth aspect, but a passive income stream for life whereas flipping and the like require an onging effort to retain an income stream.
I think it is the very best way to start, although I also agree one should do a few "flips" (which can be a wholesale deal, sell a contract, rehab project, etc.) to gain some capital for buy and hold acquisitions and reserve accounts.
Well... Then...
you are missing the bigger picture...
(I did as well for a long time, till we built up over 70 rentals and realized the fallacy)
Your "greatest investment" will be building a business...
That is the investment which allows you to create cash to invest faster than you ever thought before....
If you start out buying and holding.... 5 - 7 years from now... you wonder about all the missed opportunities...
As you sort through the inadequacies of starting with a buy and hold model... when you do not have the cash reserves to weather the storm...
For a newbie... this is about as close to a slow death as I can imagine..
Buying and holding should be implemented when you have plenty of cash reserves and is a hedge for your money.... profit preserving strategy..
Not a profit wealth building strategy...
You should be working toward Free and Clear properties......
And most that buy and hold are very leveraged borrowing to build...
Which makes that a business model that is fraught with problems...
These points I have to admit I agree with.
I agree that buy and hold is a much slower wealth creation, and should be used as wealth preservation.
But, Nick...
Be careful about listening to me
about that wealth building stuff...
As I wear shorts and tshirts (occasionally jeans, when I wanna dress up) and have long hair...
Guys like me and my friends could "no way" no anything about this sorta thing...
:)
We don't dress the part...
At any rate, I never referenced that you did not know anything about this stuff, and I don't think Nick did either, I just have a different opinion on the topic, fair enough!
There is no question many a newbies do it wrong and can't get their heads above water while attempting a buy and hold biz, that is just not always the case.
I completely agree with Will. Why use my own money if I can use someone elses? If cash is king, then leverage is the queen. Thats catchy.
Example:
Buy five houses that cash flow the same as one but you now have tax advantages of five houses plus appreciation on five houses. Pay them off in 15 years years and now you five times the cash flow.
Justin....
Just been here done that...
Leverage is a 2 edged sword...
Leverage in your business as much as
you can...
but, personally you should be deleveraging to create personal
freedom....
For most starting out those 2 things are one and the same...
So, when the business is leveraged.. they are also, personally leveraged...
And when the blade flips....
You get cut...
If you're lucky.. it's just a flesh wound....
If your not... It could put you out of the real estate business for a long time to come...
Use some leverage, but only to what you have comming in!
I personally like to purchase at those "free and clear" tax sales. I do find that building wealth "free and clear" is the only way to weather the storm (economically) these days.
While everyone else was screaming about their lines of credit being reudced, I went into my bank with my "free and clear" deed and obtained a line of credit.
Using that line of credit of 36K I now have increased the equity of the house from 58K to 125K-36K which is 89K.
But doing this 5 different times all at once would bring my total payments to those lines of credit to a level higher that I could make if I do not have someone paying me for the house (rent) and to sell one I would have to pay off that 36K which is like asking the buyer to put almost 30% down.
The point, I guess, that I am trying to make is some leverage is ok but too much (leverage as a business model) will bite you in the end one day.
I think free and clear is much better. But then that takes one to "How do you buy those flips?" Since cash is king you can often get a greater discount paying full cash right now!!
And the lower you leverage that property the lower you can accept as downpayment when selling using owner financing, which I think is the way to go as now not only do you (acting as bank) get all the equity by selling at your price, but you also get to have the interest that would usually go to the banks.
This alone will greatly build your wealth.
Good point, David. I agree - leverage is very powerful and can go either way.
Since I have started REI my number one rule buying houses has been and still is...only deal with motivated sellers.
I have a friend who operates a dual purpose real estate business. He buys raw land, subdivides it into lots and exchanges these cash gains into wholesale priced small multi family properties and office properties for cashflow. A similar model could exist for a high volume wholesale business that re-invests their cash profits into income producing properties that is aquired at bargain prices as well.
The immediate boost in cashflow on an investment property comes form a combo of buying low, using leverage, and getting favorable financing terms and locking in strong leases on your units. I think it is possible to have a business that generates cash from quick turning properties and reinvesting that cash into wholesale priced income property to hold long term while using leverage to do so. That's how I'm building my business anyway.
Anothe rbenefit to being a wholesaler is that you basically HAVE to become a great marketer and a great negotiator. Your entire business depends on it, because if you are not great at those things you won't be able to bring bargain deals to the table for your buyer's. So, of course the benefit of that is that you already know how to hunt down killer deals, then if you have resources in place to hold half of your wholesale inventory at low prices, you're going to do pretty well AND have cash reserves in the long run.
As David pointed out, what he is talking about *IS* investing. It's taking capital, putting it in an asset (the business), and generating income from it.
And if you run the business correctly, you're not putting in a lot of effort to continually generate returns. You build the business into an automated passive-income-generation mechanism that can grow, evolve, and continue to provide returns long into the future.
The investment is the BUSINESS, and the real estate is the underlying commodity being utilized to generate income.
I retract my statements about being in the business not being the same as investing - because I suspect from his language that David would agree anyway!
David, I understand - obviously - why leveraging is risky if you can't make payments. But it seems to me that if your rental income doesn't cover payments, it wasn't a good investment at all, unleveraged or leveraged, so I'm not quite sure what the nature of your problem with leveraging was.
Did you have a single large tenant who vacated, creating a huge cashflow drop? Was the property not cashflowing, and you needed to refinance to continue holding, and couldn't because of stagnant/dropping values? Did you get to a point where leveraging had you strait-jacketed, because the lenders had too much control over your activity?
I ask in all seriousness, because you're the first experienced investor that I've met who's so opposed to leverage. I know a lot of people who don't invest, or have small investments, that are opposed to leveraging. I also know several sizable investors who advocate conservative leveraging, perhaps only to 50% LTV.
But I can't recall having met somebody before who's had such significant holdings, who advocates holding property entirely unleveraged, and I would sincerely appreciate insight into how you came to that position.
Two different place...
Your business should leverage... I buy and sell houses using leverage all the time....
typically not even as good as 50%... but, closer to 75 - 80%...
I create equity...
Once equity is created (or bought in the the case of rentals)
That is the single greatest return you will get from that property....
So, it's time to go back to cash...
That's your business....
Find real estate.. get in very cheap... using leverage... create equities... get them back to cash....
Then you switch... and get the cash over to your personal side... stuff on your personal tax return...
No leverage their...
Just buying assets at .50 cents on the dollar or better... stay deleveraged..
Why would you leveage personally... that defeats the purpose of what you are trying to accomplish..
Ie... alot of books and people teach when starting out...
to pull cash out of their personal residence...
That's gambling yoru sole goal is to get personally free of debt or at a very debt to income... 30% or less or so...
So, you build a business that uses leverage to create or find equity and duplicates... and then get equity out...
Imagine you were back in times... and you found out you could mine for gold...
You go out and find gold... and then put it on the shelf hoping one day it would be worth more... well of course it will....
but, the moment you found it... is the moment of highest return...
Convert it to cash...
Now... go find more... you did it once...
Pretty soon you have a system for finding gold...
And converting it to cash...
That cash is then used to pay for the big house on the hill... and other assets that bought at a discount would double the value of the gold you had instantly...
And throw off cash flow to live as well...
So, you built a business that works to find assets that you convert to cash to buy assets personally that keep you deleveraged and produce cashflow that keep you from working...
RIDICULOUS! Starting with rental properties is as good a way to start as any other. Furthermore, I have never met ANYONE who had too much cash. If you wait until you have too much money to do ANYTHING, you'll never do it.
More nonsense! You could just as easily start out buying and holding and end up a millionaire in 5 years with enough cash flow to support a very nice lifestyle.
What fallacy is that? That you paid too much for your rentals and weren't successful? Is that what you're trying to tell us? Fortunately, that is not the only way to run a rental property business. For instance, you could buy RIGHT and not only obtain significant equity, but also significant cash flow.
Guys like me and my friends could "no way" no anything about this sorta thing...
Now, that we can both agree on!
As my friend Jeff says: Those that can - do. Those that can't - guru!
Mike
I don't agree with Mike all the time and am not as blunt as he is, but I must say, he hit that nail on the head!
I miss a couple of weeks, and I miss A LOT!!! LOL
- Speculating & Flipping gets you RICH!
- Buying & Holding gets you WEALTHY!
That is how I see it!
- Harrison
Mike....
I don't work... Do You!
I'm at a place in my life where I can do things as I please..... (within reason of course)
I guess you could call it retired..
I sleep in, don't wake to an alarm clock, my businesses is handled for the most part by others..
I do have a few tenants... because when you own real estate you end with rentals.... And I've had way too many before... with all the headaches... 70 plus at one point...
I'm thankful I sold them off with owner financing over the years...
Buying rentals... that's what works for you... cool.. no problems...
But, my opinion...
It's simply a bad place for newbies with No Cash To start...
It's hard to live off the cashflow of leveraged rentals... without another income...
It's the same philosophy that the stock guys sell to the beginning stock investors....
But, the fact is...
More wealth is made running a business... and then reinvesting the proceeds...
It's just a faster train...
It's safe to say you don't agree with me and it's safe to say I don't agree with you....
So, let it go... and we'll agree to disagree....
You seem to think because I sell a product or two.... that discredits what I have to say...
Nope... I sell products because teaching is something I'm good at and I enjoy...
I've also, found that the folks end up paying for education either through others experiences... or through the street... the latter is more costly...
The last line is pretty much an attack!..
I'm gonna ignore it and avoid responding... as that's not what this boards about....