Principles of Real Estate
As an investor or someone interested in getting started investing in real estate it is so important to remember the basic principles of investing in real estate. Violating these principles can cost you time and money and frustration.
Knowledge is Key
This is the first principle because; the more we know and understand about investing the better prepared we will be to take action. Don’t get me wrong you can skip this step and you will learn as you go, but if you have the knowledge you will avoid mistakes, and save time and money in the process, it will give you a better starting point. This is a part of the preparation we need for seeing opportunities and giving us the confidence to act. Continue to learn as you invest this is part of life long education. There are plenty of good book, written by experienced investors, use them as tools for learning as well as seminars.
Once we have knowledge this is the next most important principle. Beyond purchasing our own home, many of us think about inventing in real estate, flipping a house, becoming a landlord, buying land but most of will not take action. How many times have you seen real estate courses, seminars advertised on TV, radio, and think that might be interesting? You may have even attended one, you left pumped up and ready to act. As weeks passed your enthusiasm started to wane, you got busy with other things in our busy lives, you may start making excuses, or procrastinate, soon it becomes a fleeting though. Truth is that only about 1% that attend those course will act upon the information presented. Make a plan, write it down, make it obtainable, and make a timeline for accomplishing your goal and act.
Location, Location, Location
We have all heard this one and it is true. Talk with realtors to find good locations, or areas that may be turning around. Also consider adjacent areas if the ideal location is pricey. Look for the cheapest home in the nicest area. Also invest close to home; use a 30-mile radius from your home for investing in properties. Trust me the closer to home the better, imagine driving 30 miles unloading your tools and realizing you left something back at home. This will get old quick.
Buy and Hold will make you Rich
Invest in real estate for the right reasons, don’t go in thinking your going to make a lot of money quickly, you might, but it is more reasonably to expect to make money slowly over time. Real estate will make you money, without the wild swings of the stock market, but it will take time, and it will require some involvement on your behalf.
Always buy from a motivated Seller
We have all heard the adage buy low sell high. Whatever the economic environment don’t settle for buying at market price. This is where you save time. Real estate will appreciate if you wait long enough, but you can shave some time off of the process by negotiating a good price. This should be the most enjoyable part of investing, the hard part come after the seller accepts your offer. If your seller is not motivated move on, find someone who is in a situation where they want out. Keep in mind we are not looking to take advantage of someone, we want a good deal, but ideally we want this to be a win-win situation for both parties. If you understand the seller’s situation you may be in a better position to help them structure a creative offer.
Do your math and eliminate emotions
Estimate your costs going in. This will depend on the intent of your purchase, are you buying to flip, or rent? If you are buying to flip, then in general you will need to know the market value that this property can bring, totally fixed up, minus your target purchase price + the estimated fixes. The fixes will be the hardest to estimate, since there are always surprises when you perform the demolition. You will also need to estimate how long this will take to rehab, and cost of money to do the flip (do you have cash, hard money loan?).
If you buying for a rental you can use a generalization to see if it is worth pursuing further. If you think you can rent the property for 1% of the purchase price per month, keep it on your list (e.g. the target purchase price for a $1000 a month rent would be %100,000). Another estimate is to use a 10% capitalization rate to see if the annual rents are in line so again with the $100,000 target price you want to see $10,000 in annual income or about $830/mo. Both of these estimates will get you in the ball park. Then dig deeper so you know are costs (i.e. taxes, H.O.A fees, fixes, insurance, etc.).
You may think that the only thing to negotiate is the price of the house, but if you don’t ask you never know what other concessions you may gain. The person on the other end of the transaction has a problem; they need to sell their house. Maybe a divorce is involved, a job transfer, estate sale, etc. Remember you are helping someone solve a problem so, everything is on the table, just ask, and remember you are trying to create a win-win situation.
Other Peoples Money
One of the biggest advantages of buying and owning real estate is leverage, so why use your money? If you’re flipping house, you may use hard money loans. Once you establish yourself you may build a relationship with hard moneylender and use them again and again. There are first time loan programs from Freddie Mac and Fannie Mae with as little as 3% down and will finance your closing costs. Look into these programs. Join a real estate club, you will find other people in you situation and you will be able to ask questions, find out how they finance properties. Mortgage rates have rarely been lower, so take advantage of other people’s money.
Everything we invest in has cycles, the stock market, and real estate, gold. It is important we understand this. While cycles exist we should not try to time markets, trying to buy at the bottom and sell at the top, since we really don’t know when we are at the bottom or at the top, nor do the experts. It is a better approach to understand where we are in a cycle and look for opportunities being presented.
Think back at the real estate bubble and subsequent market crash; remember condo conversions and people standing in line to buy 1-bedroom condos for outrageous prices. Two year later those same properties were on sale for 1/5th the price but no there were no lines.
How about the stock market crash of 2000 or 2008, do you remember anyone bragging about the money they were making or recommending stocks? You knew something was out of line but maybe greed kept you from taking money off of the table or reducing risk.
The two things that drive markets are fear and greed. We are usually fearfully when we should be brave and courageous when we should be afraid.
For more on real estate cycles.