There is no doubt that we are in one of the worst economic times that America has seen in many years. Massive layoffs, interest rate adjustments, and over building have lead to a major crisis for many in the real estate market. These factors have led to a record numbers of foreclosures. With a glut of foreclosed properties entering the market, prices of all properties continue to drop as fewer qualified buyers are in the market to purchase these properties.
Although, this market may seem like the worst time to be a real estate investor, it is actually the best time – if you know how to maneuver in this game. I bought my first property in 1996. It was a major ordeal full of unbelievable trials because I didn’t have a clue how the process worked. I relied on others who didn’t have my best interest at heart to close the deal. In retrospect, a lot of people made a lot of money from my ignorance. In the years that followed, I have amassed a tremendous amount of knowledge investing in real estate during boom times as well as during the decline. The best lessons I have learned have not only come from my personal experiences, but from observing others in the game – some who were greatly successful and others who disastrously failed. From this experience, I have come up with a set of twelve guiding principles that any investor, green or seasoned, can follow in order to succeed.
Although, this market may seem like the worst time to be a real estate investor, it is actually the best time – if you know how to maneuver in this game. I bought my first property in 1996. It was a major ordeal full of unbelievable trials because I didn’t have a clue how the process worked. I relied on others who didn’t have my best interest at heart to close the deal. In retrospect, a lot of people made a lot of money from my ignorance. In the years that followed, I have amassed a tremendous amount of knowledge investing in real estate during boom times as well as during the decline. The best lessons I have learned have not only come from my personal experiences, but from observing others in the game – some who were greatly successful and others who disastrously failed. From this experience, I have come up with a set of twelve guiding principles that any investor, green or seasoned, can follow in order to succeed.
Rule #1: The numbers don’t lie
There are only five types of math you need to know to be a good investor. They are addition, subtraction, multiplication, division and probability. If you analyze every deal using simple math – not emotion, not speculation – you will only pick the deals that can make you a profit. Don’t ever forget that real estate investing is a business in which your ultimate goal is to make a profit; whether that profit comes in the form of a cash return on a sale or from monthly cash flow from rentals, the objective is to make money. A bad deal is a bad deal. It doesn’t matter how you try to justify it or explain it away, if the numbers don’t add up to a significant profit, don’t enter into the deal.
Unfortunately, there are some very unscrupulous people in the real estate industry. Do your homework and check out anybody you intend to do business with. Interview them, Google them, ask for references, check with watch dog agencies and see if there is something that raises a red flag. If you find anything wrong, tangible or simply a bad feeling, move on. A predator does not discriminate. If they took advantage of someone else, no matter what they try to tell you or how safe and profitable the deal looks, they WILL eventually take advantage of YOU!
Rule #3: Don’t try and predict the market trends
The only guarantee about the market is that it will shift. There are no real indicators that can determine how long the excesses will last, nor is there any way to know what will change the attitudes of the government, lenders and buyers that fuel the change. So, whether there is a “bubble” or a down turn in the market, you should remain disciplined in how you analyze and acquire your investments. During a “bubble,” don’t assume the market will continue to climb and purchase an overpriced property speculating that it will increase in value.
Rule#4: Learn to recognize opportunity
There is ample opportunity to profit in any market. You have to learn how to recognize those opportunities that no one else can see. While others are blinded by the market trends – chasing any dangling carrot put in front of them - you must remain clear and focused on real value. The best opportunities exist investing in areas that have properties with intrinsic value that have been adversely affected by circumstances causing people to forget about its long term economic value.
Rule #5: Understand the difference between price and value
This can be explained simply; price is what you pay. Value is what you get. Often times, new investors confuse the two. Based upon a fear or lack of available resources they often chase after the deals with the lowest price only to find that what they bought does not have strong economic value. In essence, it would have been better to pass on the low price and increase resources to purchase something that will produce greater profitability through a resale or rental income. A smart investor realizes that a property does not have to be bought for a rock bottom price to be a good investment. It only has to be selling for less than what you determine the value of the property is.
Rule #6: Always look for intrinsic value
There is no formula to figure out intrinsic value. You have to understand the neighborhood in which you intend to invest. In New York City, there are certain types of buildings, such as brownstones and limestones that have intrinsic value that transcend the market fluctuations. This is because of their architectural beauty and quality. You cannot reasonably afford to build a property with that level of quality and craftsmanship in the proximity of other equally magnificent properties today. Since the cost to build one will continuously ascend out of reach, to acquire one of these properties gives you long term economic value. The same consideration goes for waterfront properties which are finite and properties overlooking Central Park in Manhattan or Prospect Park in Brooklyn.
Rule #7: If everybody’s buying – SELL!
Most people get interested in investing real estate when it’s popular. The best time to get interested in real estate investing is when no one else is. The bottom line is when it comes to investing you can’t buy what is popular and do well. When there is a buying frenzy, prices are driven up by the overwhelming demand; this is not the time to buy. It is the time to sell and reap the benefits of the markets irrationality. Also, when the buying seems to grind to a halt, prices drop and inventory increases. This is the time to seek out bargains and buy as much as possible.
Rule #8: Minimize risk
There is no way to completely avoid risk because every factor cannot be 100% accounted for, but you can significantly reduce your risk to close to zero. This is done by performing tedious due diligence on every deal. Develop a niche neighborhood to invest in, don’t get caught up in the trends, scrutinize every opportunity to find the best use of the property, add up all of your costs and subtract that from potential income to determine the profit margin; and make sure you have your team and resources in place to capitalize on opportunities. Most of all don’t get emotionally attached to any deal; learn to walk away if the risk is too great.
Rule# 9: Avoid overleveraging
Do not borrow more money than you can afford to pay back if the market shifts or an unforeseen event causes you to liquidate the property. One hundred and one hundred and six percent financing has caused the financial ruin of many new and seasoned investors that greedily gobbled up every property they could get their hands on over the past five or six years. The market shifted, sparking decreases in value and now the properties are worth less than what they paid for with borrowed money. There is no opportunity to sell the properties without still owing the lender money.
Rule# 10: Be patient
You only need to make moves when opportunities arise. There will be times when multiple opportunities will come your way, and their will be times when nothing good comes you r way for a long time. That is the nature of the game. Fight the temptation to force a deal to happen simply because you are impatient. Impatience causes you to ignore sound investing principles. This leads to greater risk and potential losses. Don’t panic or become remorseful over a missed opportunity either since it is inevitable that a new opportunity will come your way again.
Rule # 11: Only invest in what you understand
Ignorance coupled with borrowed money is a recipe for disaster. Do not try to do deals that are outside of your scope of understanding. Keep it simple and develop your knowledge and skill set in a very specific neighborhood, property type, investment strategy and ability to determine value. Learn from your mistakes and continue to expand your knowledgebase.
Rule # 12: Know your ultimate goal for the investment
Before you get into any deal, you need to know what your ultimate goal is for the property. Is your intention to buy the property, improve it to increase its value in order to sell it quickly for a profit; or is your intention to fill it with amenities attractive to your target market to maximize monthly cash flow from rentals. Before you can determine if a deal is good or not, you must know what your intention for the property is.
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