1. Become Educated (Educate Yourself On Key Investment Principles)
“Self-education is, I firmly believe, the only kind of education there is,” said author and scientist Isaac Asimov. Knowledge – the possession of information – is quite possibly the most powerful tool on the planet. And nowhere is this more true than in the world of real estate investing. It is not about college degrees or special certificates – ultimately, becoming a successful investor requires due diligence on a personal level so that you may become your own best advisor, without relying on anyone else (including professional consultants) to explain core investment concepts to you. Responsible investing is a choice – a choice that every investor can make!
2. Seek Guidance (Retain A Professional Investment Counselor)
Professional advisors are invaluable when it comes time to make a final decision. While self-education is a necessary cornerstone for responsible investment, understanding the ins and outs of any given real estate market is nearly impossible without historical experience, daily research, and human networking in the desired market. For example, while a responsible investor may have done his homework and everything might look good on paper, what if the property owner he is buying from is known to be less than reputable in a certain city? Tailored knowledge like this is where professional investment counselors come in, who are able to provide you with unique insight that only comes from those who are involved in a specific market every day of their life.
Now – how do you know which advisor to trust? Choose an advisor who is prepared to stay with you for the long term, and who puts their money where their mouth is. Let’s say you walk into a company like Merrill-Lynch and sit down across from a sharp, 28-year old kid who is fresh out of an impressive business school. He seems to have all the right credentials – but can you really trust somebody who has never invested in what – or in where – you are investing? Absolutely not!
Find an advisor who is paid to produce results – NOT somebody who is paid just to move their lips! Your advisor should be a coordinator – NOT someone who is trying to make decisions FOR you or WITHOUT you, and definitely not someone who leaves you all on your own.
3. Stay In Control (Maintain Direct Control Of Your Investment)
Any investment situation in which you are relinquishing decision-making power to other parties is a potential disaster waiting to happen. I strongly recommend avoiding any LLCs, partnerships, tenant-in-common deals, real estate investment trusts, or other similar arrangements when making investments. Additionally, never leave your financial future in the hands of incompetent, unethical, or greedy brokerage houses, fund managers, or corporations. Always be a direct investor.
Look, we’re ALL familiar with the “Enrons”, the “World Comms”, and all of these types of companies out there who wound up crippling thousands of investors. Even if your third party “manager” is not a “crook” and is actually rather competent, at the end of the day they are still taking a hefty handling fee off the top of your profits for decisions you should be directly involved with anyway!
4. Remain Prudent (Keep Your Long-Term Goals In Mind)
Keep your investment goals in mind at all times (i.e. retirement, financial freedom, creating wealth), while always abiding by your own unique risk tolerance limits. In simpler terms: stay true to your investment plan! Of course, this requires actually having a plan, which should be based on a combination of your self-education, your financial resources, the advice offered by an investment counselor, and your specific wealth goals. Some investors are conservative, while others are more aggressive. Some want cash flow, some want capital appreciation, and some are most concerned with tax benefits. Always keep your unique situation in mind to remain a prudent investor.
5. Do Not Gamble (Avoid Flipping, Speculating, And Other Risks)
The opposite of a prudent investor is a gambler – someone who chases after get-rich-quick schemes, fleeting market trends, or other risky forms of speculation. Only invest in properties that make good financial sense – starting from the day you buy them. While flipping houses and other quick-cash “guessing games” have been popularized by TV and the media, true long-term wealth is generated by making a smart property purchase and letting its value appreciate over time.
6. Always Diversify (Balance Your Investments In Various Markets)
Reduce risk and maximize returns by investing in several areas as every market is different. You’ll hear it from most prudent financial advisors: “diversify, diversify, diversify!” chanted like some sort of prophetic mantra. A great piece of advice, to be sure! The problem is that most advisors are merely “diversifying” between a group of fairly lame assets like stocks, bonds, and mutual funds. These types of assets are not proven and rarely work for anyone – in contrast with real estate, which has steadily created wealth for millions of people.
Former U.S. Speaker of the House Tip O’Neil was famous for saying “all politics is local.” Well, all real estate is local too. Media companies love to paint real estate with a broad, national brush when reporting on news stories or the latest market trends. While this may attract an audience, it is completely inaccurate! Real estate is a local investment. Investment diversity does not mean taking a wild swing at a handful of stocks (or otherwise). It does mean locating and purchasing income-producing investment properties in various geographic areas around the country.
7. Be Area Agnostic™ (Do Not Limit Yourself To Certain Areas)
Do not allow yourself to maintain pre-conceived notions about a certain market just because you happen to like “the weather” or whatever else an area might seem to have going for it. From an investor’s standpoint, it is absolutely illogical to fall in love with an area unless it makes good financial sense. Additionally, to avoid a conflict of interest, only invest with an adviser who is not partial to any one market or investment property. Consider a variety of opportunities. Take the emotion out of it and make a good business decision; that is what it means to be Area Agnostic™.
8. Use Borrowed Money (Leverage Debt Properly To Work For You)
Use as much borrowed money and as little of your own money as possible. Borrowed (mortgage) money can be repaid by the tenants who will move in to your income property! By letting other people’s money work for you, you can reduce your personal risk and become wealthier much faster. (There are also legal protection benefits, since real estate assets with standing debt are much less likely to be pursued if any legal claims arise against a property owner.)
Nuclear weapons have a shocking ability to destroy, yet are also credited for rapidly increasing the “value” of a nation’s sovereignty; this duality is similar with the nature of financial debt. The careless treatment of debt has destroyed a countless number of lives, but leveraging debt responsibly is the necessary and ultimate key to success when it comes to real estate purchases.
9. Identify Universal Needs (Avoid Virtual Commodities Or Trends)
Unlike commodities or market speculation, real estate is a “real” need among all people, which is why it is a wise investment choice. No one needs stocks, bonds or gold, but EVERYONE needs a place to live. With local populations and social affluence both growing all around the world, the consumption of raw materials will continue to cause upward price pressure on residential real estate.
But within the world of real estate itself, residential properties stand out for a reason. Following the internet boom and massive trends toward outsourcing labor and business services, commercial real estate is less and less stable. This shift in modern commerce leaves us with less demand for industrial properties, office space, and shopping centers. But the one thing we know for sure is that each and every human being wants a place to live, and a pillow upon which to rest their head at night. That is universal need and is exactly why housing is such a solid bet.
10. Purchase Tax-Favored Assets (Never Get Bored With Taxes)
Real estate is the most tax-favored asset in America. Most people tend to get bored with the subject of taxes, but this is a major mistake for property investors! Do not get bored with taxes. Taxes should be exciting to you (wait until you see how much money you can save by owning income properties!). Tax structures favored by real estate investors – such as the “1031 Exchange” – can accelerate your wealth-creation to an whole new level. Non-cash tax write-offs and deductions are real money going back into your pocket – and once again, real estate offers the best of both.
Episode: CW 216: Jason Hartman’s 10 Commandments of Real Estate Investing
Guest: Jason Hartman
iTunes: Stream Episode