How To Get In The Game And Never Lose Money
The purpose of this article is to help beginner investors get off the sidelines and into the game. If you have been a member of the BP community for one year or more, but haven't had the [whatever] to pull the trigger, this article is for you.
Warren Buffett is the world’s most successful investor by many measures. He says he has two rules: #1 is ‘never lose money’ and #2 is ‘never forget rule #1’.
But how do you apply these rules to your first investment?
Understand the rule. Really understand it.
To most people, the rule to ‘never lose money’ sounds impossible. How can you guarantee that you’ll never actually lose money?
Well, that’s the thing: you can’t.
The rule is what I call an operational rule. The rule is not about your results, it’s about how your operations are set up. In other words, the way you run your business has to be optimized to this rule. The things you do should reflect a desire to never lose money. Whether you lose money or not, is another question – but chances are, if you do things that reduce the likelihood of losing money, you will not lose money.
Still never losing money doesn't guarantee high returns....but it's about controlling what you can control, because often people lose money over things they can control.
Apply the rule by playing it safe.
Stock investors have been swindled into watching indexes. Fortunately real estate investors generally have their priorities straight. It's all about pursuing positive absolute returns. Absolute returns are just that – an ROI that is positive.
It may not impress; it may not be high; it will probably change from year to year (sometimes by a lot), but the key is to keep it positive. Some investors try to achieve the highest returns and take on too much in their first deal. They do some or all of the following:
- Buy distressed properties in need of work;
- Perform a lot of rehab or remodeling (even if the house doesn't need it); and/or
- Use leverage – especially hard money loans.
My clients' collective experience shows me that the above are usually present when a person is earning 30-40% cash-on-cash. I know people doing this. But you don’t have to be one of them on your first deal....or ever.
You can buy a non-distressed property requiring little rehab. You can buy it in a part of town where people want to rent. You can buy a house that median income households can afford to live in even though it might not promise a lot of appreciation. Many Real Estate Agents buy/sell/rent these houses all the time and can help you execute this flawlessly.
You can ensure on the front-end that the rent over 11 months or less will cover expenses including taxes, mortgage payment (interest & principal), insurance and a modest estimate of repairs, cleaning, etc.
You can use a property manager to find and screen tenants. If you do these things, you will have a fairly good chance of earning a positive cash flow.
"You don't have to be great to get started. But you have to get started to be great." - Les Brown
The sooner you experience the "magic" of earning positive cash flow from a passive investment, the better. All investors have a deadline -- it has many names including 'retirement' and 'death'. It's important to get started while you have time on your side.
Bonus: After you have had the property cash flowing for some time, you might refinance it if you didn’t use a loan. Over time, the repairs needed will slowly teach you the different elements of a house; when you fix those components, you’ll accumulate knowledge, resources, and contacts. Within a few years, you’ll be better qualified to implement higher risk strategies. But be advised that after you cash flow in a lower risk way, you may not want to chase the highest returns...but that's not a bad thing, is it?
The bottom line is that to get started investing in real estate, you don't need to wait and wait until you feel comfortable doing what makes the most money.
You can just start making money.