10 Commandments or Rules for Successful Real Estate Investing.
These are “commandments” or investing rules that, if you commit yourself to them, will yield rich results in your investing program.
These Ten Key Concepts and Practices are a road map, or Blueprint for successful real estate investing and Wealth Building.
Some concepts you are familiar with– Others may surprise you.
These ten investing rules deserve greater discussion but for now, here’s the “short version”–
1. Invest for the long term. Those who “buy and hold” will be the winners every time. The most obvious benefits of holding (more than a year at minimum) concern prevailing income tax policy.
Taxes on profits due upon sale after one year will be at lower capital gains rates, nearly half ordinary income tax rates. If there is rental income (which is a good thing), that income will be partly “tax sheltered” in the first years of the investment.
And appreciation over time serves a “hedge against inflation” insofar as values keep pace with or exceed the prevailing rate of inflation. None of these advantages are available to those who sell in the short term.
2. Use “leverage”. Real estate is unique as an investment vehicle that uses leverage to enhance yields and profits. Most folks call leverage “other people’s money” or OPM.
Call it what you will, it is leverage that makes it all work. Basically, leverage is our ability to use a relatively small amount of money to gain control of a much more valuable asset by borrowing the rest (that’s the OPM).
Compared with those who simply save, or invest in securities (without borrowing), those who use OPM realize substantially higher returns (or, as it’s called, “ROI”).
3. Use “creative financing” when starting out. Generally secured from the seller, so-called Creative Financing often is a work-around for dodgy credit or limited financial resources.
While often touted as a tool for newcomers to investing, with sound advice well documented purchase money financing provided by the seller can be a viable first step in getting an investing program underway.
4. Find below-market rental properties, make cosmetic improvements, and raise the rents. This is the classic investor’s approach to investing in multifamily properties. As the rent roll increases the market value of the property goes up.
5. Seek out "distressed" properties. More aggressive investors, my students in particular, learn to look for distressed properties on the market at a reduced price due to problems we learn to fix. This investing rule is a FAST TRACK METHOD for building real estate wealth.
The reason is simple: depressed value is restored to full market value as soon as we fix the property.
We don’t have to wait for improving market conditions or increasing rents for the property to regain lost value. It is not unusual for a property to increase in value by 40% or more immediately upon completion of improvements to the property.
6. Portfolio management. As more properties are acquired, savvy investors develop systems to manage their properties as a whole grouping, or “portfolio”. Managing the collected properties together lends itself to cost savings due to “economies of scale” and access to professional management services.
7. Marketing. To be truly successful, investor-landlords develop a Marketing Plan which includes building a referral network and pro-active treatment of tenants as Valued Customers (not as a necessary evil).
By collecting names of prospective tenants from present tenants and other sources, and staying in touch with such prospects by newsletter or email, savvy landlords are seldom without interested prospective tenants when vacancies occur.
8. Maintain your properties. Generally combined with portfolio management, successful landlords never neglect maintenance. Their property is an important and valuable asset. Treat it as such and all will benefit.
Regularly scheduled and seasonal maintenance of mechanical systems, and periodic upgrades to interior and exterior amenities, will reduce need for emergency repairs (which always seem to occur during extreme weather).
9. “Flipping” is not the way– In spite of the apparent attractions of real estate dealing–in particular “Flipping”–such business models are particularly “tax disadvantaged“. Why send a third of what profit you’ve made off to the IRS? Especially in view of the fact assets you hold and sell later on are taxed at half the rate? Doesn’t make sense to me…
Arriving At Financial Freedom
10. Don’t squander your advantage. Consider your portfolio as just that, your advantage. It’s your primary source of ongoing, growing wealth. Don’t “dip in” early on, or you will never achieve your goal of long term financial security and independence.
Those who consistently REINVEST property-related income enjoy a wealth multiplier effect not seen by those who early on start spending income from rents on personal needs.
Much as it is never wise to "live on your capital", in the early years it is likewise not a good idea to live on the earnings generated by that capital.
Turn those earnings back into your investment account: Start earning on those earnings!
- Philip Elmes