10 Rules for Successful Real Estate Investment

Educate Yourself Knowledge is the new currency. Without it, you'll be doomed to follow others' advice without knowing if it's good or bad. Knowledge will also take you from being a "good" investor to a great one, helping you provide a passive income stream for yourself or your family. Set Investment Goals A goal is different from a wish; you might want to get rich, but that doesn’t mean you're taking steps to make your wish come true. Setting clear and specific investment goals becomes your roadmap and action plan to financial independence. It’s statistically much more likely that you’ll achieve financial independence by writing down specific and detailed goals rather than doing nothing. Your goals could include the number of properties you need to buy each year, the annual cash flow they generate, the type of property, and their locations. You may also want to adjust the parameters for required return rates. Never Speculate Always invest with a long-term outlook. Even in a hot market with double-digit gains, never speculate on quick short-term profits. You never know when a market will peak, and by the time you realize it, it’s usually 6 to 9 months too late. Avoid chasing appreciation. Only invest in value plays where the numbers make sense from the very beginning. Invest in Cash Flow With a few rare exceptions, always buy investment properties that have positive cash flow. The higher, the better. Your cash return is directly related to the pre-tax cash flow from your property. Cash flow is the "glue" that holds your investment together. Your equity will grow over time (through appreciation and debt amortization), while cash flow will cover the operating expenses and debt service of your property. Be Market-Agnostic The world is a vast market made up of thousands of global and local real estate markets. Each market moves independently up and down due to many local factors. Therefore, you should acknowledge that there are times when it makes sense to invest in a particular market and times when it doesn’t. Only invest in markets when it makes sense, not because you live there or have bought property there before. Timing matters, and you don’t want to break trends. Take a Top-Down Approach Always start by selecting the best real estate markets that align with your investment goals. Most investors start by analyzing properties without considering the location. This could be a major mistake. The best approach is to first choose your city or town based on the health of the housing market and the local economy (unemployment, employment growth, population growth, etc.). From there, look at the best neighborhoods (amenities, schools, crime, tenant demand, etc.). Finally, search for the best opportunities within those neighborhoods. Diversify Across Markets Focus on one market at a time by accumulating 3 to 5 income properties per market. Once you've added these 3 to 5 properties to your portfolio, diversify into another prudent market that’s geographically different from the previous one. Typically, this means focusing on another state. One of the underlying reasons for diversifying within the same asset class (real estate) is to ensure your assets are spread across different economic centers. Every real estate market is "local," and each housing market moves independently. Diversifying across multiple states helps reduce your "risk" if one market drops for any reason (increasing unemployment, rising taxes, etc.). Use Professional Property Management Never manage your properties unless you're running your own property management company. Property management is a thankless job that requires a solid understanding of tenant-landlord laws, good marketing skills, and strong people skills to deal with tenant complaints and excuses. Your time is valuable and should be spent focusing on your family, career, and seeking additional properties. Maintain Control Be a direct investor in real estate. Never own real estate through funds, partnerships, or other paper-based investments where you don’t control the entity. You want to maintain control over your real estate investments. Don’t leave this to companies or fund managers. Leverage Your Investment Capital Real estate can be an investment where you borrow other people's money to purchase and control income-generating properties. This allows you to convert your investment capital into more properties than you could if you were using "all cash." Leverage amplifies your overall return rate and accelerates wealth creation.