New Rules for Investing in Real Estate

"Strategies of Successful Real Estate Investing"

The rules for real estate investing have changed. I have written this to provide real estate investors with a successful frame-work for the new rules for real estate investing. Please use these as guidelines and guideposts. We look forward to your comments, input and ideas.

RULE #1

"The old rules of real estate are gone!"

The old rules of real estate are all gone. The real estate revolution has seen to that. The old rules, that real estate will always appreciate are gone. The old rule that you can afford negative cash flow is gone. The old rule that leverage is good is gone.

RULE #2

"The Real Estate market is in the state of revolution."

Times have changed and real estate has changed. The real estate market is littered with financial institutions, lenders and investors who have incurred significant loses, setbacks and failures. This doesn't mean that real estate investing has to be over. It really just means that the rules have changed.

RULE #3

"Leverage and Negative Cash Flow are Bad"

In the old rules of real estate, investors accepted negative cash because real estate would and did appreciate. Negative cash flow requires investors to use reserves and liquidate other cash flow equivalent investments to carry the mortgage payments. Is it wise to invest $100,000 per year in an asset that is not appreciating? We all know the answer to that question. Also, the use of leverage can at times result in negative cash flow. Leverage was one of the benefits of real estate in the past. The new rules of real estate are focused on lower leverage. The focus is on each property having leverage that does not result in negative cash flow.

RULE #4

"Pretty is not always Profitable. Profitable is Profitable"

Investors: Pretty is not always profitable! Investors used to invest in pretty properties because the impression was that a more attractive property would appreciate faster in an increasing market. Under the new rules of real estate it is the financial numbers that lead you to profit. Real Estate is a business of numbers, capital rates, valuations, appraisals and gross net multipliers. Analyze all real estate opportunities by the numbers. Please learn the numbers. Learn the calculations, the ratios, the procedures. Buying the prettiest of all the properties doesn't mean that you are going to make the most money. Just run the numbers and you might find yourself buying the dump next door instead. Running the numbers means finding out the actual income and expenses with proper reserves. Remember that profitable real estate is always done by the numbers and not by appearance!

RULE #5

"Watch the Pennies and you will make Dollars."

Under the new rules, Real Estate is a business of collecting the pennies. A building worth $1,000,000 generates no more than $80,000 per year. The operating expenses and income are created dynamically in Real Estate ownership. Verify all income and operating expenses. Watch the pennies and make more dollars! Always remember to invest with the long term in mind. Get your mind refocused on real estate as a long term investment. Focus on real estate as a great investment that produces income, tax deductions and future appreciation.

RULE #6

"The Second Biggest Expense is Taxes"

In buying Real Estate the second biggest expense after your mortgage is taxes. Focus your thinking on the tax ramifications of your actions. Focus on how to reduce your taxes and tax consequences.

RULE #7

"Real Estate Should Always be a Part of Your Portfolio"

Real Estate offers investors tremendous opportunity. It offers the Real Estate investor tremendous diversity. You can invest in single family residences, apartment buildings, group investments, etc. Real estate has been a continued source of wealth for astute investors.

RULE #8

"Don't Throw Good Money After Bad"

The art of real estate is a balance of income, operating expenses and potential profit and valuation. Remember it is time to focus on the basics of real estate investing. And don't forget that you can use new technology to assist you in due diligence review and analysis. Remember the balance and that investing in real estate is an art form. The old axiom of real estate was location, location, location. The new axiom is price, price, price. Please focus on the price. Consider this: Mr. and Mrs. Richards purchased an apartment house with a $500,000 down payment. The estimated value of the house was $2,000,000. The present value is now $1,000,000 and the property is making $20,000 a month in negative cash flow. How much more money should the Richards invest before it is too much? At some point any more monetary investment has to be too much. Does the property generate sufficient income to generate net income before taxes? You always need to ask yourself if there will be negative cash flow.

RULE #9

"Get an Exit Strategy"

When buying or investing in real estate consider what you expect the end result to be. What is your exit strategy? Do you want to buy and flip, refinance, hold for income, donate or sell? Invest with the exit in mind.

RULE #10

"Knowledge is Power"

In the new real estate era, knowledge is power. Learn real estate, read economics, study the numbers, understand real estate ratios. Listen and educate yourself.