My Top Successful Real Estate Investing Rules
My top successful real estate investing rules
Investing in real estate is a rewarding endeavour – financially and intellectual, but it can also be full of pitfalls if you don’t approach this type of investing in the right way. Whether you’re a first time investor or a seasoned one, my top successful real estate investing rules will help you get organized, choose the right investment, manage your investment and achieve your investment goals.
1. Do your due diligence; research pays off
It may seem to be a no brainer, but many people spend more time researching a TV, appliance or tire purchase than they do a real estate purchase. When you’re buying real estate as an investment you need to do some research and think about the type of investment you’re able to make and what you wish to get out of it (e.g. long-term hold and then sell, steady monthly income, flip opportunity, etc.). Basic research includes:
- Reviewing the market where you’d like to invest (sales, listing activity, prices),
- Understanding the long-term economic expectations of that area (for example, look at forecasts, GDP and projected population growth),
- Understanding the rental market in the area (determining if there is an appropriate and available population of potential tenants, typical rents), and
- Availability of the type of property in which you’d like to invest.
2. Prioritize your actions and be aware of your timelines
It’s very easy to leap before you look, especially if you see what appears to be the ideal property, but remember you’re making a real estate investment, and that is usually a large financial and personal commitment.
This means it’s important to prioritize your actions to achieve your desired investment goals. Having clear priorities will help you develop the order in which you need to do things to achieve your investment goals. Thereafter you’ll be able to create a timeline for the investment; be sure it includes time to:
- Do your research,
- Assemble the team of professionals you’ll need to support you in making and maintaining your investment, and
- Organize your financing, including pre-approvals.
3. Create Checklists that work for you
In addition to prioritizing your actions and creating a timeline for your investment, l find it useful to create checklists for the various steps along the way. Checklists will help to ensure that you are efficient and effective as you review a potential property for investment. They can help you identify what professional help you might need (see 5. Assemble your team below). They’ll also help you ask all the right questions you’ve developed based on your research and due diligence. You can make as many checklists as you like, but at a minimum I recommend creating one for each of these areas:
- Market research,
- Property inspection,
- Deal numbers,
- Renovation items and costs,
- Financing and the closing process.
You’ll also find checklists useful after you’ve purchased your investment property. They can help you keep track of items such as ongoing planned property maintenance; support transitions between tenants (especially if you’re managing your tenants directly); and recurring items like outgoing and incoming tenant suite inspections, tracking of improvements to the property, and so on.
4. Know your strengths and weaknesses
Each of us has strengths and weaknesses, so it’s important to understand yours. Identifying your strengths with respect to investing in real estate enables you to focus on the things you enjoy about this type of investing.
Some of us enjoy the thrill of the hunt for the perfect property, others like putting the deal together, some investors like seeing the possibilities of renovating, while others like managing the property. However, it’s difficult to have all of the professional knowledge needed for the many aspects of real estate investment including the management of your investment property. Understanding your weaknesses is also important as this enables you to identify areas where you could use professional help. If you ever watch renovation, flipping, buying and/or house hunting shows on TV, you’ll know that the project always goes more smoothly and efficiently when specialists are brought in to complement the homeowners/investors skills and get the entire job done.
5. Assemble your team
Based upon my years of real estate investing, having a strong team of professional experts that will support you in your investing is critical. Typically, your team should be very experienced with real estate investing and may include an experienced real estate agent (knowledgeable about their markets, and type of property you’re considering), mortgage broker, lawyer, renovation specialist/contractor, accountant, financial planner, and, possibly the most important team member, your property manager. Your property manager is absolutely instrumental in keeping your investment producing. You could say that the property manager is your representative in tenant relations and in keeping the property profitable on an ongoing basis.
In addition to finding these various people, you need to get to know them and have them understand your wishes for your investments, so that you can ensure that you are all on the same page. It is always better to work with people that understand you and your objectives, and are supportive in helping you achieve them.
Once you have a strong team in place it’s important to communicate with them regularly. Seek out their advice and don’t assume they’ll be in touch with you. Have good communication with the different members of your team will help when you run into a road block or situation with which you’re not familiar. It also helps them see you as an involved and informed investor.
6. Know your limit and invest within it – maximize your power of leverage wisely, safely
Don’t overextend financially; real estate investing is one area where it can be less stressful if you are more conservative. Sure you can make a great deal of money by playing the game hard, but you can also get into severe financial trouble by being too aggressive. It can only take one bad deal to affect everything you have worked on if you are over-leveraged.
This idea of being conservative goes beyond the property’s purchase price, it also refers to the expected annual return on investment you expect from your property. The wise investor allows for changes in market conditions and the fact that things can, and likely will, change. For example, if you’re considering a property in an area with a resource-based economy it may have the potential to generate a very high income during a “boom” phase but this can swing to a “bust or down” phase and the potential income can collapse or be significantly reduce until resource’s market swings upward again.
The current drop in the price of oil is a good recent example of the volatile nature of a major resource and the potential effect it can have on resource-based town. Depending on the situation, the town could lose a number of contract workers due to companies shutting down some of their operations until the price of oil increases to a profitable level and this can affect the pool of available tenants. Generally these swings are temporary but they can be significant.
Investing in this type of market may still be a good investment for you, but only if you were holding it for the longer term and provided you’re in a position to weather the ups and downs of this type of property.
It also may be tempting to “max out” your home equity line of credit (HELOC) to get one or more great properties, but you need to be able to comfortably manage the repayments and to have access to a portion of the HELOC in the event it’s needed for repairs, renovations or other reasons.
At the moment, interest rates are extremely low and now is a good time to take advantage of such low borrowing rates, but we all know that they can’t stay this low forever and when the rates increase it is important that one is prepared for those mortgage payment increases. One of the exercises I do in such cases I is look at what happens of the rates increase by 2 to 5 percentage points. A good question to ask your self is “can the property and I handle the increase in monthly payments”.
Particularly in at a time such as now when there is a high probability that interest rates are going to increase, another wise thing to do is to avoid interest rate shock by increasing your monthly payments as you’re able to pay off more of your mortgage. Taking such action before interest rates go up means that more of your payment will go towards lowering your outstanding principal. That way when it comes time to renew, and the rates are higher, you will have a lower amount of outstanding principal and thereby reduced your payments from what they might have been.
Ultimately, it’s extremely important that you set acquisition and/or renovation budgets so that you have a clear understanding of what you can afford and how to achieve your end result. Too many people don’t set realistic budgets and this can cause them distress when they get stuck in an acquisition or renovation that is beyond their means.
As part of setting a budget I always build in a contingency. I find a 20% contingency, overall, works well. Understanding and setting your limits and staying within them is fundamental if you wish to be a long-term investor in real estate.
7. Don’t get personally attached to the deal
Real estate investing can be very exciting – putting the deal together, watching the pieces fall into place and so on. However this is an investment property, not a dream home, the numbers need to work as an investment in both the short and long term and should be within your risk tolerances. This is where your checklists can be handy to help you rationally assess the opportunity and determine if it will work for you and is in keeping with your real estate investment strategy.
8. Find your niche
There are many different opportunities within the field of real estate investment. It’s wise to find your niche – the type of property and investment that suits your needs, your risk tolerance and your capacity as an investor. It’s useful to consider what your investing niche is which is based upon your risk tolerance, skills and desires. Some examples of things to consider for determining your niche are if you:
- Have high, medium, or low risk tolerance,
- Have a specialization in one region or several regions, i.e. Edmonton or Alberta or Western Canada etc.
- Have the time and skills to be an active investor/property manager or are a more passive investor,
- Like flips or short-term properties or are more interested in a buy and hold situation,
- Prefer to be a lender or a JV partner
- Enjoy doing renovations and fixer-uppers, or
- Are interested in a rent-to-own opportunity.
9. Don’t pay in full until the work is done
If you live in the Metro Vancouver, Calgary, or Toronto areas, you’ll be very familiar the pre-sale market – but no matter how good a deal may seem, if possible, never pay the entire purchase price prior to the property actually being finished. You may have to include certain hold back clauses to ensure that even if you have to pay in full upon closing some of the funds are held back from the seller by the lawyers until your property is complete and is deficiency free. Once you pay the complete price for a property, you have minimal leverage if work isn’t completed as scheduled and promised.
This mind set is also true if you’re purchasing a property that is undergoing repairs/renovations, if you’re purchasing a property and then contracting to have renovations done, or if you’re making renovations to an existing property. The key is to maintain some leverage to ensure the work is completed professionally and to your satisfaction.
10. Read all documents completely before signing
Don’t assume that you know what’s in an agreement or contract – read the entire document and ensure you understand it. If you have questions seek advice from the appropriate members of your team. Take the time to understand documents before you sign them and avoid unpleasant and costly misunderstandings.
11. Remember the Golden Rule: Treat others the way you want to be treated
Lastly, successful real estate investing, like so many things in life, is about relationships. The best rule is one of the oldest it is the Golden Rule. Treat others as you want to be treated. Treating others well is the foundation for good relationships with the members of your real estate investing team, your tenants, fellow investors, suppliers, sellers, contractors, developers, builders and others. Respect people’s opinions and look for the win/win opportunity.
Real estate investing is not rocket science, but if you do your homework and follow these 11 top rules, I believe you’ll achieve a successful and productive real estate investment portfolio that suit your investing style and enable you to achieve your goals.