3 Real Estate Investment Rules You Dare Not Break
Almost anyone can make money in an appreciating market. The real skill is making money in a flat or down market. Here are three rules you need to know about making money with real estate in both good times and bad. Knowing these rules and abiding by them will allow you to sleep well at night while those around you lie awake with anxiety and fear.
Rule No. 1 – Invest, Don’t Speculate
Perhaps the costliest mistake novice investors make is thinking that they are investing when what they are actually doing is speculating. Speculating is like driving a car with a blindfold on and expecting to arrive safely. Investing is knowing how to get to your destination before you get into the car, fueling up the night before, having a charged cell phone and first aid kit for emergencies. So, how can you tell if you are investing or speculating with real estate?
Any time you are guessing or counting on unknown variables, you are speculating. Investing is based on concrete facts like mortgage pay down. The mortgage balance can be calculated to the penny five years from today. Rent and expenses can be established ahead of time. Price appreciation cannot. Price appreciation is an unknown variable. Yet, many people buy real estate with the sole intention of price appreciation as seen by the speculators who got caught with pre-construction condo flips. They were hoping that prices would continue upwards allowing them to cash out higher. They based their buying decision on an unknown variable.
To avoid these speculative variables from the start, ask yourself how you are making money with the investment. If the investment is based solely on making money through variables such as price appreciation or simply guessing on any cost or expense without verification, then you are speculating, not investing.
Rule No. 2 – Buy Real Estate Investments that Support Themselves
Any investment that you purchase must be able to support itself on an ongoing basis and not be dependant upon your financial support, even if your accountant says it’s a good tax write off. For example, if you borrow money for the investment, then the investment must generate enough income to cover the loan payment.
Consider what would happen if your situation changed and you were no longer able to support your investment. How would you continue to support it? Not only could you lose your investment, you could risk jeopardizing your own home as well as your entire financial future.
Rule #2 is very simple. If there isn’t enough income from the investment to support itself then don’t buy it. You don’t want needy investments.
Rule No. 3 – Buy on Facts, Not Emotions
Keep your emotions in check. This is perhaps the trickiest of the three rules. Even seasoned investors get caught here. So how do you know if you are basing your investment decision on facts and not on emotion?
Emotions are something that is felt which often makes it difficult to walk away. Facts don’t possess any emotion. They are neutral and allow you to objectively analyze any deal making it easy to decide whether an investment is worth your time, effort and money.
Falling in love with a property that you just have to have at any cost, fear of being left behind or dying broke or feeling that the deal in front of you might be the last deal on earth, are all emotions.
Starting with facts such as mortgage pay down, market rents and associated costs on each property before you view a property doesn’t allow emotion to interfere. The investment decision is made before you look at the property. When you physically view the property you are prepared ahead of time and simply confirming your facts based on the actual physical condition and location of the property. If the numbers still make sense and the property is in good condition, now you are basing your investment decision on facts, not emotion.
Before you sign on the dotted line, ensure that you are investing not speculating, that your investment will support itself and that your investment decision is based on facts, not emotion. If so, then commit to the deal and sleep like a baby.
From Bankrupt to Millionaire, Best Selling AuthorPaul M Hecht shows everyday Canadians how to become Real Estate Millionaires regardless of their current situation.
Thanks for the reminder Paul! It is sometimes necessary to have a good look at the foundations of the enterprise.
Thanks for the reminder Paul! It is sometimes necessary to have a good look at the foundations of the enterprise.
+1