Real estate investing can be a great investment option that can yield lucrative short-term and long-term goals. However, there are a set of particular principles that one may abide by when venturing into the real estate realm. Understanding these fundamental principles can mean the difference between succeeding and failing in this venture.
Some think of these foundational investment principles as “tips” or “tricks,” though they are really essential particulates that any successful real estate investor needs to comprehend. Real estate investment has changed over time, but the underlying principles remain helpful to anyone entering the real estate game regardless of their longevity or season in the real estate business. As with any industry, there are always new, more effective ways of doing things that are worth keeping up to date on and learning. However, 6 core principles are essential to understanding real estate investing. They are:
- Building relationships
- Understanding essential numbers
- Mitigating risks
- Being prepared/staying ready
- Setting goals
- Self-education and application of concepts
Real Estate Investing Principles
1. Building Relationships
When it comes to real estate, there is no resource more valuable or prized than people. The more people one knows, the greater the chances that they will buy (or sell) real estate properties. For that reason, it is important to always generate, harvest, and maintain new and long term relationships. When meeting a lot of people, keeping track of everyone’s names might be challenging, especially if your memory is not great. When networking and meeting new people try to find out people’s names and get to know them. If they are looking for a property, they may call you first.
2. Understand The Numbers
Make sure that you have a clear comprehension of relevant numbers and data. For instance, when you are looking into prospective rental property investment, think about the expenses, the income, and the cap rate (capitalization rate) of that property. Think about what certain changes could do to help you raise the property value, which in turn will permit you to generate a higher income from the property. Never settle for just a “good feeling” about a property. It is this kind of non-data driven behavior that tends to get investors in trouble.
3. Mitigate Risk
Use methods and take the necessary actions to reduce risk. Any property deal can fall through, so make sure you have the financing, inspection, and contingency clauses included in the offer so that you can get your deposit back. Before you purchase a property, always have a “Plan B” and consider an exit strategy. Make your purchases through your corporation or LLC, and never rely on “feelings” or “hunches” in making your decisions. Instead, focus on cap rates to figure the real estate values.
4. Be Prepared And Stay Ready
As a fully prepared real estate investor you need to always stay prepared. Always have a pen, paper, and some business cards on your person. You might run into a property for sale or hear about one at any time. All too often just mentioning that you work as a real estate investor, can get the attention of prospective sellers or buyers, as well as other investors, who might come out of the woodwork. They may be able to present you with opportunities, options, valuable information, or even a good deal. Since you never know when such an opportunity will manifest, in this line of work it is imperative to not just be prepared, but to stay ready.
5. Set Goals
Don’t just have a wish list; create some action-driven goals instead. Give yourself some milestones to work towards, setting some measurable accomplishment goals. For instance, make it a goal to look at a specific amount of properties weekly. Challenge yourself to write a certain number of offers monthly as well. Setting small goals (like a particular number of weekly phone calls, checking online listings a certain amount of times, etc.) will let your goals not only be achievable but also surpassable, letting you feel especially productive. Keep in mind that action generates momentum, and as you create good habits, they will lead you to more successes in real estate investment.
6. Always Learn And Apply New Knowledge
Never stop learning. No one knows everything and there is always more knowledge to consume. Garnering additional knowledge from books, magazines, or audiobooks is great, but only as long as you actively put that newly acquired knowledge into action. The enjoyment of reading can sometimes take away from the practical application of actually using the new skills and tips while investing. Collecting new, useful information is wonderful, but it’s wasteful if it’s not applied.
Real estate investing can be fulfilling and lucrative work, but there is a level of risk involved in this venture. To avoid financial losses and to prevent many failed investments, it is imperative to keep in mind the previously outlined principles and apply them during your investment practice.