1. Know what you are doing.
are my own, personal Ten Commandments of Real Estate Investing. I
have been a real estate investor (on a small scale) for many years now.
This is a collection of rules for real estate investing.
These are the rules I have always followed myself, and have
worked out very well for me over the years.
you make any kind of real estate deals, make sure you really, truly
know what you are doing! Read many books. Search the Internet.
Don’t take advice from anyone who hasn’t done it
themselves. Talk to others who have succeeded or failed investing in
real estate. DO NOT buy some course on real estate investing or go to
some weekend seminar. Those people are there to make money by selling
you courses, books and CD's; not to help you to succeed in real estate.
2. Consider the worst case
sure you figure everything worst case, not best case. Most people look at how much money they’ll make when things go as
but fail to figure out ahead of time what to do when things
go as planned. After you get yourself all excited thinking about how
well things could work out for you, take quite a bit of time coming up
with as many things as you can think of that could go wrong, then plan
ahead of time what you would do in each of those cases. Never
allow yourself to think that no bad things will ever happen.
Assume that they will
and prepare ahead of time. If you come up with any potential
problems which you would be unable to handle if they happened, then
don't do the deal!
Decrease your profit calculations by 30% and increase your
expense calculations by 30%. If the numbers no longer work on paper
after that 30% adjustment, then don’t do the deal...trust me!
Here are some examples
of things that commonly go wrong in real estate:
These are just a few examples, there are many other
unexpected situations that will arise.
- Vacancies. Sooner or later there are going to be vacancies in rentals no matter what
anyone says. It may be someone who gets evicted, or it might be major
repairs that require the building to be empty, but it will happen.
- Repairs, maintenance and expenses you are not
- Some expenses increasing over time--sometimes, significantly!
- The market, or the neighborhood, declines and your property is not worth as much as you originally figured.
- A tenant, vendor, contractor, etc. sues you in court. Even if you win, fighting in court often gets expensive.
- Unexpected vandalism occurs.
3. Make sure your personal income
could cover everything.
sure you could financially carry the building out-of-pocket if it
generated no income at all, or did not sell for several years. In other
words, if it’s costing $2,000 per month to run the building,
make sure your situation would allow you to make that $2,000 payment
out of your own income with no help whatsoever from the building.
Believe me, there is a very good chance you will be called upon to do
this very thing sooner or later.
4. Set some profit aside.
operating a commercial or residential rental, set aside money for
taxes, then put at least 25% of your profit right into a savings
account and don’t touch it except for real estate
40% is even better. If you spend all of your profit as it comes
have nothing for emergencies or to take advantage of the next deal that
comes along. Also, put any security deposits directly into the
bank and don't touch them--things can get real tough real fast if you
are required to return a security deposit and don't have the money to
5. Put everything in writing.
ALWAYS put EVERYTHING in writing. That includes rental agreements with
tenants, contracts with contractors, partners, suppliers, etc. I
don’t care if the person is your brother, best friend or your
grandma--always put everything in writing!
6. Have money set aside for
personal or family emergencies.
not rely on equity loans or credit cards to carry you in the event of a
problem. Trying to borrow your way out of financial problems will bury
you real quick. You need to have significant savings set
for emergencies; otherwise, you are in no position to invest in real
estate. Make sure you have at least three month’s
personal income saved up as an emergency fund. If you lose your job,
get sick, get injured, whatever; you don’t want to lose the
building as a result. Make sure your debt is under control and you have
adequate emergency savings BEFORE investing in real estate.
7. Take good care of your
your tenants or buyers as customers. The better you treat them, the
better they’ll treat you. Happy buyers close on the deal
and easier, and happy tenants pay their rent on time and take better
care of the place. It is not a ’you against them' situation,
are your customers so treat them as such.
8. Start small.
out small and easy. Don’t run out and buy a multi-unit
building or huge commercial spread as your first project. Instead, buy
a duplex, single family home, or very small retail space if
that’s what you decide to try. Do not go on to the next deal
until the one, or ones, you already have are working smoothly over
time. Don't make the mistake of thinking that the next deal will work
out so great that you can cover your losses from the last one.
9. Get the 'move-in' money up
buying a rental, then live by the statement "No move-in money, no move
in." Never, ever deviate from that policy no matter what sad stories
you are told. Also, if payment is late, act IMMEDIATELY with whatever
first notice your state requires. It gets the tenant’s
respect and generally motivates them to pay on time from then on. If
they never do pay, you can evict faster since some of the legal
requirements are already out of the way. The sooner it is re-rented,
the sooner you are profitable again.
10. Don't buy where you wouldn't
want to be.
most important one of all, and the one that has saved my butt many,
many times: don’t buy a building anywhere that you personally
would not want to live or work. In other words, if you wouldn't want to
be there, then don't invest in it. I have seen many other
investors break this rule to get cheaper properties and then end up
losing the property or having it plummet in value during the time they
own it. You are far better off spending more money for a nice place in
a good area, then trying to save money by buying something in a bad
area just because it's cheaper. If you are going to fix
up, you still want it to be in a desirable location after all the work has been done.
If you follow all of these rules,
you have significantly improved your chance to succeed.
you break even one of these rules, you have significantly increased
If you break two or more of these
rules, then good luck!
have been an investor for many years. Following the above rules of real
estate investing has allowed me to make money even while
investors around me were struggling or going under. I don’t
to scare you with all this doom and gloom, but these ARE the biggest
gotchas to avoid. If done right, real estate can make a lot of money
over time. If done wrong, it can destroy you financially.
This article copyright
© 2008 by Keith C. Rawlinson
(Eclecticsite.com). All rights reserved.
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copied for non-profit use including newsletters, bulletins, etc.
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