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10 Rules of Successful Real Estate Investing

10-Rules-Successful-Real-Estate-Investing

I came up with the following rules of successful real estate investing over my many years of successes and failures. These are the same rules I follow today and share with our clients at Norada Real Estate Investments.

1. Educate Yourself

Knowledge is the new currency. Without it you are doomed to follow other people’s advice without knowing if it’s good or bad. Knowledge will also help take you from being a “good” investor to becoming a great investor, and that knowledge will help provide a passive stream of income for you or your family.

2. Set Investment Goals

A goal is different from a wish; you may wish to be rich, but that doesn’t mean you’ve ever taken steps to make your wish come true.

Setting clear and specific investment goals becomes your road map and action plan to becoming financially independent. You are statistically far more likely to achieve financial independence by writing down specific and detailed goals than not doing anything at all.

Your goals can include the number of properties you need to acquire each year, the annual cash-flow they generate, the type of property, and the location of each. You may also want to set parameters on the rates of return required.

3. Never Speculate

Always invest with a long-term perspective in mind. Never speculate on quick short-term gains in appreciation, even in a heated market experiencing double-digit gains. You never know when a market will peak and it’s usually 6 to 9 months after the fact when you find out. Don’t chase after appreciation. Only invest in prudent value plays where the numbers make sense from the beginning.

4. Invest for Cash-Flow

With few rare exceptions, always buy investment property with a positive cash-flow. The higher, the better. Your cash-on-cash return is directly related to the before-tax cash-flow from your property.

Cash-flow is the “glue” that keeps your investment together. Your equity will grow over time (through appreciation and loan amortization), while the cash-flow covers the operating expenses and debt service on your property.

5. Be Market Agnostic

The United States is a very large country made up of hundreds of local real estate markets. Each market moves up and down independently of one another due to many local factors. As such, you should recognize that there are times when it makes sense to invest in a particular market, and times when it does not. Only invest in markets when it makes sense to do so, not because you live there or you bought property there before. There’s an element of timing and you don’t want to buck the trend.

6. Take a Top-Down Approach

Always start by selecting the best markets that align with your investment goals. Most investors start by analyzing properties with little to no regard of its location. This can be a big mistake if you don’t consider the investment in light of the market and neighborhood it’s in.

The best approach is to first choose your city or town based on the health of its housing market and local economy (unemployment, job growth, population growth, etc.). From there you would narrow things down to the best neighborhoods (amenities, schools, crime, renter demand, etc.). Finally, you would look for the best deals within those neighborhoods.

7. Diversify Across Markets

Focus on one market at a time, accumulating from 3 to 5 income properties per market. Once you’ve added those 3 to 5 properties to your portfolio, you would diversify into another prudent market that is geographically different than the previous one. Typically that means focusing on another state.

One of the underlying reasons for diversification within the same asset class (real estate), is to have your assets spread across different economic centers. Every real estate market is “local” and each housing market moves independently from one another. Diversifying across multiple states helps reduce your “risk” should one market decline for any reason (increased unemployment, increased taxes, etc.).

8. Use Professional Property Management

Never manage your own properties unless you run your own management company. Property management is a thankless job that requires a solid understanding of tenant-landlord laws, good marketing skills, and strong people skills to deal with tenant complaints and excuses. Your time is valuable and should be spent on your family, your career, and looking for more property.

9. Maintain Control

Be a direct investor in real estate. Never own real estate through funds, partnerships, or other paper-based investments where you own shares or other securities of an entity you don’t control. You always want to be in control of your real estate investments. Don’t leave it up to corporations or fund managers.

10. Leverage Your Investment Capital

Real estate is the only investment where you can borrow other people’s money (OPM) to purchase and control income-producing property. This allows you to leverage your investment capital into more property than purchasing using “all cash”. Leverage magnifies your overall rate-of-return and accelerates your wealth creation.

As long as you have positive cash-flow and your tenants are paying off your mortgage for you, it would be foolish not to borrow as much as possible to buy more income property.

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  1. Comment by Aldo Bertolotti
    August 15th at 6:17 am 

    Marco,

    Great advice, as usual!  And a good strategy check list for foreign investors.

    Thank you,

    Aldo

  2. Comment by Dan
    August 15th at 7:56 am 

    Nice article I agree with all points for the most part. I think you and many other experts gloss over the hiring of property managers. Third party managers are the scourge of the rental business. Never to be trusted and avoided at all costs. Use them to grow if need be I guess but move quickly to in house management. I will never trust a property manager again…or use one for that matter. They function with closed minds and little respect for the residents of the property they manage…shame on these thugs…now that I have nearly two hundred units I breath easy knowing these clowns are my competition.

  3. Comment by Jim
    August 15th at 5:04 pm 

    Dan,

    I am sorry you do not feel Property Managers should breath the air you breath. I disagree, there are great Managers out there. I agree that owners should have a hands on approach and monitor the manager they hire, however, if owners are not in management, they need to stay out. Management as you know is intense, many owners need the guidance and supervision from a Professional. Not all of us can buy and manage 200 of our own units. And the use of the word “clowns” is disrespectable.

    Marco, Nice article.

  4. Comment by Carmine DiFulvio
    August 24th at 6:05 am 

    One item that you did not list was the need to understand and use the 1031 exchange process. Investors who decide to sell their investment property to acquire better properties or want to leverage into more properties need to understand how Section 1031 of the IRS Code can benefit them. The 1031 exchange allows a taxpayer selling investment property to defer their tax liabilities as long as they follow certain rules and work with a Qualified Intermediary. As a Qualified Intermediary with one of the countries largest companies, I work with taxpayers every day on this part of the tax code. If you are selling investment real estate, talk with your tax professional to see if a 1031 exchange is a good choice for you. If so, speak with a Qualified Intermediary to get the process started.

  5. Comment by Stephen Trevathan
    September 26th at 7:45 pm 

    Hello, I just wanted to say thanks for sharing these great real estate investing insights. The market certainly seems ripe with investment opportunities right now, especially considering the latest mortgage rate news. I also wanted to thank Carmine for the information shared in her comment. Having a working understanding of the 1031 exchange process is one of those things that many investors could overlook when looking to invest in the market.

  6. Comment by Andy Pillinger
    October 12th at 12:40 pm 

    Hi, I currently have 4 rentals with 3 of the mortgaged, one is clear and next spring will come into some cash of around 400K. Can anyone here please give me their opinion on how that money should be spent to maximize its potential with regards to buying cash flow property? For instance what price point is best. Which suburbs? Should I buy outright or buy all with 30% down etc. Any advise would be very grateful. Many thank in advance.

    Regards,

    Andy

  7. Comment by Marco Santarelli
    October 13th at 11:03 pm 

    Hello Andy,

    If you want to continue building your real estate portfolio, you’ll probably want to invest in additional cash-flow properties in some of our higher cash-flow (income) markets such as Indianapolis, Kansas City, or maybe Memphis.

    Price points vary by market and are market specific. You’ll want to consider and compare the rent-to-value ratios of the markets to find the best market for you.

    I always suggest financing your investment properties to leverage your capital and get the highest cash-on-cash returns.

    We can help you select the best markets, neighborhoods, and properties based on your criteria when you’re ready.

    Continued success!

  8. Comment by Tony McCarthy
    December 9th at 9:21 am 

    Great advice. Times have been so tough lately that real estate investors need all the help they can get to maximize their returns and keep their capital as safe as possible.
    Well written.

  9. Comment by Megan Samuels
    February 17th at 3:14 pm 

    This is a great set of standards for real estate investors especially first time investors. Research and planning are imperative to the success of your investment property. This is typically a long term investment so take your time in finding the perfect investment property to match your needs and goals! It is also important to have an exit strategy in place BEFORE you make your investment.

  10. Comment by Megan Samuels
    February 17th at 3:14 pm 

    This is a great set of standards for real estate investors especially first time investors. Research and planning are imperative to the success of your investment property. This is typically a long term investment so take your time in finding the perfect investment property to match your needs and goals! It is also important to have an exit strategy in place BEFORE you make your investment.

  11. Comment by Kate Louise
    March 31st at 11:16 pm 

    I really enjoyed reading your blogs. You have shared nice tips. Real estate property investing isn’t for those who wants to be a millionaire overnight. It require hard work, market research and long term investment.

  12. Comment by Jessie Peris
    June 21st at 2:43 pm 

    Awesome blog! Great tips for newbie’s to start with a goal, proper planning prevents poor performance. Also, I really like the idea of leverage (OPM) when you have cash on cash flow properties; the opportunity is sky to get private lenders to fund your deals.

  13. Comment by Michael
    July 31st at 3:05 pm 

    I mostly agree with Dan, in that property managers can be a liability. I don’t know if I’d go as far as to consider them clowns and thugs (as it’s possible to find a good one). But especially for beginning real estate investors, it’s an extra step that can reduce efficiency a little.

  14. Comment by shaneforest
    September 9th at 4:28 am 

    Well, I completely agree with all your points.It is very much hard to discover an authentic private money lender for real estate transactions, Private money exchange understands the value of such requirements and initiated there support services to assure the funding need of real estate investors.

  15. Comment by Ruben
    September 16th at 6:13 pm 

    I have a different opinion than Dan’s. I agree that there are property managers that should be out of business. There are also property managers that are excellent. Just like you do your homework in finding a good cash flowing property, you should also do the same for the property manager. I would go as far as to say that finding a good property manager is done first THEN find a property they can manage for you. I have several properties and my property manager has done an excellent job in managing the property.

  16. Comment by Moe Reese
    December 27th at 9:07 am 

    These are some great tips on investing in real estate. I always say the money is made when you buy the property. So make sure to educate yourself on the property and know what the property will sell for once you fix it up.

  17. Comment by Rob Shepherd
    February 26th at 10:11 am 

    Great tips, it helps to know all the scenarios ahead of time in case you come across something you didn’t expect. It’s best to figure out what you would do in all situations and have a plan of action in case. Great points. Thanks

  18. Comment by Dublinkoch
    March 12th at 3:14 am 

    Thanks for sharing great article and I really needed this type of information because recently I joined Lee Arnold seminar in how to invest in real estate.

  19. Comment by Amit Jain
    March 28th at 2:27 am 

    Right until or unless you are not educated about real estate you can’t convince anyone. That’s why you educate yourself first.

  20. Comment by Gerald
    April 17th at 7:17 am 

    I would like to re-emphasize the importance of #1 on educating yourself. There are so many ways to invest in real estate so indeed do your due diligence and arm yourself with knowledge. Many investors end up studying and never pulling the trigger. The first deal is always the hardest but after that, you end up trying to figure out how the deal could’ve been better. You can learn so much from studying but once you get your feet wet, you will quickly learn the lessons you have read about. Remember, surround yourself with successful investors who are active. This business can be very rewarding, especially if you enjoy it.

  21. Comment by Rahul Garg
    June 3rd at 3:33 am 

    Hi Marco, thanks for sharing your experience. It will be helpful for a real estate agent. Knowledge is the new currency. Without it you are doomed to follow other people’s advice without knowing if it’s good or bad.

  22. Comment by Dumbo
    June 15th at 4:09 am 

    Maintaining control is very important factor. You never know what fund manager can do with it…

  23. Comment by Frank
    September 25th at 8:50 pm 

    Good tips, I found these rules very helpful. Real estate investing can be a challenge.

  24. Comment by John
    November 18th at 4:08 am 

    Hi Marco,

    Great post about Successful Real Estate Investing. It is a good strategy checklist for real estate investors.

  25. Comment by Mike Woods
    November 27th at 10:32 am 

    How do a find a great property management company (#8). I want to invest, but I definitely don’t want to manage.

  26. Comment by Marco Santarelli
    November 27th at 10:00 pm 

    Hi Mike — I don’t recommend self-managing one’s own properties in most cases. It’s important to vet the right management company. There are interview questionnaires online and in our blog. A good place to start is to listen to our Passive Real Estate Investing podcast episode on property management.

  27. Comment by Mike
    December 11th at 8:20 pm 

    Great Article. Thanks for your insight.

  28. Comment by Mason Nettles
    January 6th at 3:10 pm 

    Good write up on investing. Always good to see someone helping others in real estate.

  29. Comment by April Lavine
    January 29th at 6:07 am 

    Hey Marco,
    Quite a nice and in-depth advice has been given here. I just want to pitch in that I am in complete agreement with the notion that investing in real estate requires a lot of patience and hard work. It all starts from educating yourself to getting the grip over the market with patience.

  30. Comment by Robert
    February 5th at 7:38 pm 

    I love what you are doing with real estate and the blog you are publishing. Keep up the work

  31. Comment by Mark
    February 26th at 6:27 pm 

    All of these “rules” are great, especially #1. Knowledge is power. And you damn well better have a lot of knowledge before you go out and “borrow as much as possible to buy more income property”, or you could end up in a hot heap of trouble.

  32. Comment by Shantanu Sinha
    March 9th at 9:21 pm 

    Hello Marco Santarelli,

    Very strategic post you came up by. Great real estate investing points to be look upon while investing on a property deals. It’s definitely better to educate yourself first so that you could convince others well.

    Thank you for sharing this among us. Keep on the the work.

  33. Comment by David
    July 8th at 3:41 pm 

    Thanks for sharing, great post.

  34. Comment by John
    October 5th at 10:56 pm 

    Nice post! Great strategy and the points you mentioned here. These points must be followed by everyone before investing in nay property. Thanks for sharing this awesome post.

  35. Comment by PART Realty
    October 25th at 11:04 am 

    It’s important to be prepared when taking on real estate investing. This means everything from educating yourself to having the proper funds. Anyone looking to start investing in real estate could benefit from reading this article. Great post Marco!

  36. Comment by Donna
    January 29th at 6:21 am 

    Great article with some valid points. The rules will slightly change depending on ones personal circumstances and investment goals but education is one rule that always remains. It is an absolute must for sustained success in Real Estate or any other industry.

  37. Comment by Lisa Canosa
    February 7th at 10:08 am 

    Nothing to criticize but only appreciating your awesome post. As an investor I am motivated to reach my investing next level with the rules. Thanks.

  38. Comment by Roman Ludwing
    March 21st at 8:40 am 

    Great post. I would agree with you that number 1 should be educating yourself. Many new investors fail to do this.


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