I invented the following rules of successful property investing over my years of successes and disasters. 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 cursed to follow other people?s guidance without knowing if it?s bad. Information will also help take you from being a ?good? Investor to turning into a great financier, and that data will help give a passive stream of earnings for you or your family.
2. Set Investment Goals
A goal is not like a wish; you may wish to be rich, but that doesn?t mean you?ve ever taken steps to make your wish come true.
Setting clear and express investment goals becomes your roadmap and bullet point plan to becoming independent in a money sense. You are statistically far likelier to achieve financial independence by writing down express and detailed goals than not doing anything at all.
Your goals can include the number of properties you want to acquire annually, the yearly cash-flow they generate, the type of property, and the site of each. You might also want to set parameters on the rates of return required.
3. Never Speculate
Always invest with a long-term viewpoint under consideration. Never speculate on fast short term gains in appreciation, even in a heated market experiencing double-digit gains. You never know when a market will top and it?s often 6 to 9 months after the fact when you find out. Don?t chase after appreciation. Only invest in prudent value plays where the numbers sound right from the beginning.
4. Invest for Cash-flow
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 a period of time (through appreciation and loan amortization), while the cash-flow covers the operating expenses and debt service on your property.
5. Be Market Agnostic
The United States is a really large country made from masses of local real-estate markets. Each market moves up and down independently of one another due to many local factors. As such, you must recognize that there are times when it is sensible to take a position in a particular market, and times when it does not. Only invest in markets when it is smart to do it not as you live there or you purchased property there before. There?s a factor of timing and you don?t want to go against the trend.
6. Take a Top-Down Approach
Always begin by picking 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 given the market and neighborhood it?s in.
The best approach is to first choose your town or city based primarily on the healthiness of its housing market and local economy (unemployment, job expansion, population growth, for example.). From there you would narrow things down to the best districts (conveniences, colleges, crime, renter demand, etc.). Ultimately, you would go looking for the most acceptable deals inside those districts.
7. Diversify Across Markets
Focus on 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 is geographically different than the previous one. Usually that implies targeting another state.
One of the base reasons for diversification within the same asset class (property), is to have your assets spread right across different industrial centres. Every real estate market is ?local? And each housing market moves independently from each other. Expanding across multiple states helps in cutting your ?risk? Should one market decline for any reason whatsoever (increased unemployment, increased taxes, for example.).
8. Use Professional Property Management
Never manage your own properties unless you run your own managing company. Property management is a thankless job that requires a solid appreciation of tenant-landlord laws, good selling talents, and strong social skills to deal with renter beefs and excuses. Your time costs and should be spent on your folks, your career, and searching for more property.
9. Maintain Control
Be a direct investor in real estate. Never own property through funds, partnerships, or other paper-based investments where you own shares or other instruments of an entity you don?t control. You mostly need to be in control of your real estate investments. Don?t leave it up to companies. Or fund executives.
10. Leverage Your Investment Capital
Real-estate is the sole investment where you can borrow other people?s money (OPM) to purchase and control income-producing property. This allows you to leverage your investing funds into more property than buying using ?all cash? Leverage magnifies your general rate-of-return and accelerates your wealth creation.
As long as you have positive cashflow and your renters are paying down your mortgage for you, it might be dumb not to borrow as much as practicable to buy more earnings property.
Marco Santarelli is an investor, author and founder of Norada Real Estate Investments -- a nationwide real estate investment firm providing turnkey investment property in emerging markets around the U. S.. "10 Rules of Successful Real Estate Investing" was originally published on our Real Estate Investing Blog.
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