Over the course of my many years of successes and disappointments, I’ve come up with the following guidelines for real estate investing success. These are the same guidelines that Norada Real Estate Investments clients and I follow today.
1. Empower Yourself
The new currency is knowledge. Without it, you will be forced to take others’ counsel without understanding if it is sound or not.
Information will also help you advance from being a “good” investor to a great investor, and it will enable you or your family create a passive source of income.
2. Specify financial objectives
A goal is distinct from a want; even if you wish to be wealthy, it doesn’t indicate that you have ever taken action to bring your wish to pass.
Your road map and action plan for achieving financial independence are created by setting clear and defined investment goals. Statistically, laying down explicit, thorough goals is considerably more likely to lead to financial freedom than doing nothing at all.
Your objectives may include the quantity of properties you need to buy each year, the amount of cash flow they produce annually, the kind of each property, and their locations. You could also want to specify the necessary rates of return.
3. Avoid speculating.
Always think long-term while making investments. Even in a frothing market seeing double-digit increases, never bet on fast, short-term appreciation gains. You never know when a market will peak, and you typically learn about it six to nine months after the fact. Avoid chasing after praise. Invest only in sensible value plays where the numbers add up right away.
4. Put money into cash flow
With very few exceptions, only invest in real estate that generates a profit. Better if it’s higher. The before-tax cash flow from your property is closely correlated with your cash-on-cash return.
The “glue” that holds your investment together is cash flow. Through property growth and loan amortization, your equity will increase over time, and the cash flow from your property will pay your operational costs and debt obligations.
5. Be market-neutral
There are hundreds of local real estate markets spread across the vast nation of the United States. Due to numerous local circumstances, each market fluctuates up and down independently of the others. As a result, you should be aware that investing in a specific market can make sense at different periods and cannot. Never invest in markets just because you reside there or have previously purchased real estate there; only do so when it makes sense. There is a time component, and you don’t want to go against the grain.
6. Use a top-down strategy
Always begin by deciding which real estate markets best fit your investment objectives. Most investors begin by examining properties without much thought to the property’s location. If you don’t take into account the investment in light of the market and community it’s in, this could be a costly error.
The ideal strategy is to first decide which city or town you want to live in depending on how well its housing market and local economy are doing (unemployment, job growth, population growth, etc.). You would then focus on the most desirable neighborhoods (amenities, schools, crime, renter demand, etc.). Finally, you would search those neighborhoods for the greatest offers.
7. Increase your market diversity
Concentrate on one market at a time and amass three to five rental units there. After adding that three to five properties to your portfolio, you would diversify into another responsible market that was located somewhere else in the world. Usually, that entails concentrating on a different state.
To have your assets distributed throughout several economic hubs is one of the fundamental justifications for diversification within the same asset class (real estate). Every housing market is “local,” and they all change independently of one another. Having a diverse portfolio spanning several states lowers your “risk” in the event that one market declines for any reason (increased unemployment, increased taxes, etc.).
8. Employ qualified property management
Unless you own your own property management company, never manage your own properties. Property management is a thankless job that calls for strong people skills to deal with tenant complaints and justifications, as well as a firm grasp of tenant-landlord legislation. Your time is valuable and ought to be used for your family, your work, and the search for additional real estate.
9. Maintain Control
Invest directly in real estate. Never purchase real estate through funds, partnerships, or other paper-based investments where you are a shareholder of stock or another type of security in a company that you do not own. You want to be in charge of your real estate investments at all times. Don’t rely on businesses or fund managers to decide.
10. Use Your Investing Funds as Leverage
The only investment where you may use borrowed money from other investors to buy and manage income-producing real estate is real estate. As contrast to buying “all cash,” this enables you to leverage your investment funds into more properties. Leverage increases your overall rate of return and speeds up the process of creating wealth.
It would be crazy not to borrow as much money as possible to purchase additional rental properties as long as you have positive cash flow and your renters are taking care of your mortgage payment for you.
