5 Rules you NEED to Ensure You Don’t Lose Money In Real EstateNov 10, 2023
If you have read Rich Dad Poor Dad, you probably have caught the bug and want to jump into buying assets like Real Estate right away.
BUT if you are like me you can get super excited about the concept of it and when it’s time to actually get started, all the questions and doubts start to creep up.
What type of deal should I do? What market? Is this a good deal? Am I going to lose all my money?
…If this is you. Take a deep breath and know that we all go through that same thing.
I am writing this to ensure that you have a playbook to follow that and if followed, can allow you to invest with confidence that you are doing all the right things to make money on your deals.
Principle #1: Knowledge is Power
Imagine stepping into a boxing ring. But this is the first time you have ever boxed or even thrown a punch….and your opponent is Mike Tyson in his prime. Yeah not liking your chances.
That is what it’s like if you just start investing because you read a book. You have to train and get educated before you step into the ring. A doctor spends decades before they even become doctors!
Why don't people learn before making a big investment like Real Estate?!? Answer is I don’t know!
If you don't know the steps to educate yourself, I have made a short 7 Steps to Financial Freedom Free Course here.
The biggest thing to look for though is knowing your numbers. It is key to making informed decisions. Understand the local real estate market, property values, rental rates, and potential appreciation. Familiarize yourself with different financing options, such as traditional mortgages, private loans, and hard money lenders. By educating yourself, you'll be better equipped to assess the profitability and make informed decisions.
Building a network of professionals can also provide valuable insights and support. Surround yourself with a team of experts, including real estate agents, contractors, property managers, and lenders. These professionals can help you navigate the complexities of real estate investing and provide invaluable advice and guidance throughout the process.
Furthermore, establishing checks and balances within your team is crucial. Ensure that each member has a clear role and responsibility, and regularly review their performance to ensure they're meeting your expectations. Trust and verify the information and recommendations provided by your team members and cross reference them with other team members for accuracy.
Principle #2: Buy Right
Buy at a discount!
What is the most basic way you can make money? Buy low, sell high.
Real Estate is no different. If you think that you can just go and start and hope someone will sell you their house for cheaper than it's worth. Think again…hope is not a strategy.
You will have to buy a property at a discount, and that takes 1 of 3 things. Time, Capital, or knowledge.
Let me elaborate.
Time- if you have this but not the other two. You can spend time researching how to find sellers in distress. That can be financial hardship, death, divorce. You can then hand write cards, door knock, or text said people.
Capital- If you have this, you can pay wholesalers or agents there commissions to do this for you. You can pay businesses to give you a list of good targets and pay other organizations to send them letters.
Knowledge- You can negotiate good deals using creative financing options to create win-win situations that a normal investor wouldn't know was even an option.
Principle #3: Defined Multiple Exit Strategies
If you only have one exit strategy then you don't have enough. What if your exit strategy is to Short Term Rent it but then your city passes a law that says you can't do Short Term Rentals anymore. What happens?
If you are like 99% of investors, you are screwed and have to fire sell because you can't make income and don't want to have to pay the mortgage. I.e. It's November 2023 as of time of writing this and there are a lot of Ex-STRs on the market selling lower than they bought it.
If you are like 1% of investors, you analyzed what it would look like if you Mid Term rented or Long Term rented to and determined that you would be ok with that scenario as well. Those investors will be able to keep their property for the long term and ultimately make good money on their investment.
Principle #4: Cash Flow
This one seems pretty straightforward. The property should cash flow.
If your strategy is to buy in a certain area, not even look at the numbers of IF it will cash flow, and HOPE that there will be appreciation then I hate to break it to you but Hope is not a strategy and you will get burned.
So making sure it cash flows means actually analyzing the deals in hopefully some sort of Analyzer model. Looking at worst case scenarios adding in a reserve for maintenance and capital expenditures. If the numbers still work, you may be on to something there.
***Beware, just cause the numbers play out on paper does not mean the numbers will work. Case in point, worst areas always look prettier on paper then they end up actually being.
Principle #5: Don't Over Leverage
While leverage can be a powerful tool in real estate investing, it's important not to overextend yourself. This is where a lot of people lost homes in 2008. They did loans that did not check if they even had income to support the loan (nowadays they have put in enough regulations to help that not happen again. I may bite my words in a few years but we will see). The values went down so dramatically that their loan was more than the house was worst (this is called underwater), that they just threw the keys back at the bank in a foreclosure instead of bringing cash to the table to just sell.
However, what you don't hear about was that 2008-2012 was the biggest transfer of wealth in our generation. The people who were able to hold on and even get more properties during that time did extremely well.
It's all about STAYING IN THE GAME and not getting knocked out. It's cool to go fast but you know what is cooler. Doing it forever.
***Keep sufficient cash reserves to cover unexpected expenses, vacancies, or repairs. This buffer will provide peace of mind and ensure you can weather any financial storms that may arise like an international virus that restricts travel.
Bonus: Take Action
The worst thing you can do is to have spent all that time reading this blog that I am pouring my heart into and just not do anything. Go back to your life and forget about everything we just talked about. That is what 99% of people will do.
But remember the next time you are scrolling through Instagram or Tik Tok, that the only difference between you and the person you are watching is they chose to take action and be value creators not consumers.
If you need more direction and motivation my team will happily whip you into shape and you can book a call with them here.
All in all, if you are looking to get into investing please use these principles in your investing and I promise you that if followed correctly you will be sitting at your dream home looking back at when you read this and smiling :)