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The 5 Rules of Real Estate Investing

Monday, November 07, 2022

There are many real estate investors who have become successful by breaking the rules. However, there are also a lot of real estate investors who have failed by doing the same. If you want to be successful in real estate investing, it is important to know and understand the 5 rules that every real estate investor needs to follow. In this blog post, we will discuss each of these rules in detail and provide you with some tips on how to abide by them!

follow these 5 rules if you want success

you make your money in the buy

You make money when you buy real estate, not when you sell it,  and this is absolutely crucial when it comes to investing in real estate. You either need to be buying into equity or buying it to cash flow, or maybe just a combination of the two. Don't do what everyone else does, which is buy something at market value for market rents without allowing yourself any room for improving these things and therefore also improving your investment.  If you buy the property at a low enough price, it gives you a huge safety net and a lot of wiggle room in case anything goes wrong.

What if you overspend on renovations, maybe you miscalculated something, or maybe there's a market ends up going down. If you're buying into a significant amount of equity or cash flow. It almost eliminates the majority of your risk going into that investment. And this doesn't mean that these deals are easy to come by.  If it was that easy to find undervalue property, everyone would be doing it.  If you want the best ways to find undervalued property, head to this link for more.  Finding great deals take time, a lot of searching, patience and perseverance to actually find something undervalued. Even for me as a real estate agent who's checking the market everyday. 

Or you can buy into something where you can strategically remodel it to improve rents and therefore improve your investment at the same time, also known as the BRRRR method. But ideally there should be some type of upside when you go and buy the property and either buying into immediate equity or buying into immediate cash flow or being able to do renovations to improve those and boost up your investment.

Don't get emotionally involved in the property before you own it

This one has taken me sometime to learn over the years.  Emotions run wild, and real estate is super exciting, but you need to put your emotions to the side when investing in real estate.   I see way too many people emotionally involved before buying, they initially go out and start looking for the perfect investment but then fall in love with a home because it's super charming. It's got a lot of character. Maybe it reminded them of the home that they grew up in despite it being just an absolutely money sucking terrible investment. But hey, maybe the property just has a really good vibe to it right? Or maybe it's just just a really cute neighbourhood. Point being this is an investment. It's a business. It is not a romantic comedy. You just can't ever get emotionally attached to a property that you're going to be investing in for the purposes of being an investment.

Now this is a tough one for some people to do if they're naturally just sentimental and emotional about their decisions, I know I am like that, and it was tough to overcome, but you have to do it. Now it's one thing to trust your intuition and to trust your gut about something but it's another thing entirely to ignore all the red flags, all the really bad profit and loss statements, all just the money sucking negativeness of a property. If you feel good about the property and because you're attached to it, ideally you have to be completely detached and unemotional about what you're buying. Some of the best investors that I've ever met and seen don't care at all about the property until they own, and a lot of times, even when they own it.  It's a business, just black and white on pieces of paper.  They don't care about the colour of the walls, or how it makes them feel, it's pure business. Now I'm not saying you have to be that emotionless when you're investing in property. I am somewhere in between. I don't get emotionally attached to properties, but I do really care and I do trust my intuition and my gut a lot of the time so you don't need to go that extreme. But you can still trust your instincts at the same time and do what's right but with the intention that this is an investment. And it doesn't matter if this home is the one or the cutest home ever, or just the best ever and this is it. You can't lose it because I've heard it all before. It's an investment. At the end of the day, what really matters the most, does it earn you a return on your investment.

Always do your own homework

It's great relying on professionals in the real estate business to bring you deal after deal to your beckon call, it's a great way to think, it's just not very accurate.  Most salespeople and so called experts don't know the first thing about real estate investing.  Relying on outside salespeople or advisors to direct you where to go can AND will end up with you owning a bad investment.  Always ask what their motivation is, if they are just trying to sell you something, or do they truly believe in it themselves.  If so, would they buy the same property if they had the money? 

When it comes to vetting the investments, you need to research the market, the property, and the area before making any decisions. You should also have a clear understanding of your goals and objectives before investing in real estate. This means that you need to stick to your plan and not make impulsive decisions. You also need to be willing to hold onto a property for the long term in order to realize the maximum return on your investment. This means that you shouldn't try to rush into a real estate deal just because you're excited about it. You need to make sure that you do your research and homework and that you're comfortable with the investment before you commit to it.

Act when the right moment crosses your path, the worst thing you can do is to have analysis paralysis. Not acting from over analyzing is also a form of not being disciplined, have a key set of metrics that will make your decision making easier.Before you do anything, it is really important to do your homework. This means learning about the property, the area, and the market.  It's also a good idea to research all of this information so you can make smart decisions!

never over-leverage yourself

This means that you should never borrow more money than you can afford to repay. Leverage can be a great tool when used correctly, in fact, it's the number 1 reason to get into real estate.  You get to control a massive asset with little to no money...but it can also lead to financial ruin if not managed properly. Using leverage in real estate investing can be a great way to make money, but you need to be careful. You should never borrow more money than you can afford to repay. This is called over-leveraging, and it can lead to big problems if you're not careful!  A big part of over-leveraging is buying too many of the same assets in the same market. 

Diversifying will allow you to mitigate the downside of your investments.  Investing in different types of real estate and different geographic areas. This will help to protect you if one investment goes bad. You should spread your money out by investing in different types of real estate and different places. That way, if something happens to one investment, you won't lose everything, and will help you out if you are over-leveraged and need to unlock equity quickly. 

Have an exit strategy

If you failed to plan, then you have planned to fail.  Simply put, you need to have a plan in place BEFORE you start investing.  And the #1 part of the plan is how are you going to exit your investments?  You don't need an exit plan for all the potential bad things that can happen, but also the good!  What if the market skyrockets upwards in pricing, do you have an exit plan?   Maybe your plan isn't to exit ever, if so, what will you do with the portfolio once you die?  Will you pass it on, donate it?  You will need a plan regardless of what you want to accomplish. 

This means that you need to have a plan for how you will sell the property or how you will refinance the loan if things go wrong also. You need to make hay when the sun is out. It's difficult planning for difficult times when things are going smoothly, but it is almost inevitable, and you need to have a plan of escape, if things go sideways. This might mean selling it or refinancing the loan. You need to have a plan in case something happens, so you don't get stuck in a bad situation.

If you follow these five rules, you'll be well on your way to success as a real estate investor. Just remember to always do your research, diversify your portfolio, and stay patient. With a little bit of effort, you can achieve great things in the world of real estate investing!

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