From my experience scaling from a handful of single family rentals to controlling over $400 million in apartments, and from interviewing thousands of active, successful real estate professionals on my podcast, I identified a pattern.
I discovered that there are three laws that, when followed, result in a real estate investors ability to thrive in any market at any time in the market cycle.
These Three Immutable Laws of Real Estate Investing are:
Law #1 – Buy for Cash Flow
The opposite of buying for cash flow is buying to appreciation. And in particular, natural appreciation. Natural appreciation is completely out of your control because it fluctuates up and down based on the overall real estate market and economy. Whereas forced appreciation is the bread and butter of value-add investors. Forced appreciation involves making improvements to the asset that either decreases expenses or increases income, which in turn, increases the overall property value.
Law #2 – Secure Long-Term, Low Leveraged Debt
The leverage that comes from financing is one of the main benefits of investing in real estate. Let’s say you have $100,000 to invest. If you decide to invest all of that money into a stock, you would control $100,000 worth of that stock (you can leverage a stock by investing in options contracts, but there is significantly more risk). On the other hand, if you wanted to invest all of that money in real estate, you could spend $100,000 on a down payment at 80% loan-to-value and control $500,000 worth of real estate. That’s the power of leverage from financing.
Law #3 – Have Adequate Cash Reserves
When you cannot cover an unexpected expense, you’ll need to either do a capital call, which will reduce your investors’ returns, or sell the property at a loss or give the property back to the bank if these expenses pile up.
To mitigate these risks, I recommend having an ongoing operating budget of at least $250 per unit per year in reserves. Additionally, to cover unexpected expenses that occur in the first year, create an upfront operating account fund equal to 1% to 5% of the purchase price.
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To your Best Ever-ness,