10 rules for being a successful real estate investor

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10 Golden Rules of Successful Real Estate Investors

Thach Nguyen, a seasoned real estate investor, shares his 10 golden rules for becoming a successful real estate investor. These rules cover key principles like buying at the right price, investing in the right property type and location, avoiding emotional purchases, and building long-term wealth through real estate ownership.

1. Always Buy at or Below Market Value

One of the most crucial golden rules of real estate investing is to buy properties at or below market value.

The Importance of Buying Right

You’ve probably heard the saying, "The deal is always in the buy." This means that the opportunity to make a profit is determined when you make the purchase, not when you sell. Buying right ensures you have a cushion to fall back on.

Turnkey vs. Fixer-Uppers

If you’re buying a turnkey property, aim to pay market value or less. Avoid overpaying, especially in a hot market, where people often bid way above asking price. These buyers usually end up losing money.

Calculating Margins for Different Deals

For fixer-uppers, also known as BRRR (Buy, Rehab, Rent, Refinance), your total purchase and rehab costs should be at least 20-25% below the after-repair value (ARV). For example, if you buy and rehab a property for $700k, the ARV should be at least $1 million.

  • BRRR deals: 25-30% margin

  • Flips: 15-20% margin

  • Wholesale deals: 10-13% margin

Always aim for these margins to ensure a profitable investment. Anything below 10% is not worth the risk.

2. Buy the Right Type of Property with a Good Layout

Choosing the right type of property is key to maximizing your investment.

Property Styles Matter

Different property styles offer different advantages. For instance, a one-story home with a basement can offer rental opportunities for the basement while you live upstairs. In contrast, a rambler might not offer as much flexibility.

Expanding Smaller Properties

If you purchase a smaller property, such as a two-bed, one-bath rambler, consider expanding it to add more bedrooms and bathrooms. This can significantly increase its value.

Good Layout is Crucial

A property with a good layout is easier to rent or sell. Avoid homes with awkward or inefficient layouts, as these can be difficult to improve and may not appeal to potential buyers or tenants.

Look for Additional Opportunities

Consider properties with extra land for potential ADU (Accessory Dwelling Unit) construction. This can add value and provide additional rental income.

3. Invest in the Right Location: B and C Markets

Location is everything in real estate. Knowing where to invest can make or break your success.

Understanding Market Types

Markets can be categorized into A, B, C, and D types. A markets are high-end areas, while D markets are plagued by crime and poor amenities. B and C markets fall in between.

Focus on B and C Markets for Rentals

For rental properties, aim for B and C markets. These areas offer a balance of affordability and demand, making them ideal for long-term investments.

Flipping and Wholesaling in Different Markets

While you can fix and flip or wholesale properties in any market, rentals should primarily be in B and C areas for better returns and lower risk.

Research is Key

Understand the market dynamics and demographics of the area you’re investing in. This knowledge will guide you in making informed decisions.

4. Avoid Buying on Emotion, Stick to the Numbers

Emotion can be a real estate investor’s worst enemy. Always base your decisions on numbers, not feelings.

The Pitfalls of Emotional Buying

Many investors get caught up in the hype of owning multiple properties and make impulsive decisions. This often leads to financial losses.

Stick to Your Rules

When you let emotions drive your purchases, you’re likely to ignore essential investment rules. This can result in bad deals and significant losses.

Real-Life Consequences

I know an investor who recently lost $200,000 on a single-family flip because they bought on emotion rather than sticking to the numbers. This serves as a cautionary tale for all of us.

Peace of Mind

By focusing on the numbers rather than emotions, you ensure a more stable and profitable investment, giving you peace of mind.

5. Don't Be Afraid to Pull the Trigger and Buy

One of the biggest hurdles for new investors is the fear of making a purchase. But, once your research is thorough, it's time to take action.

Do Your Homework

Before pulling the trigger, make sure you've done your research. Know the area's market values, rental rates, and rehab costs. This will give you confidence in your decision.

Think Logically, Not Emotionally

Evaluate the numbers logically. If they make sense, take the leap. Remember, it's okay to lose a deal, but it's not okay to miss out because of fear.

Make Informed Offers

When you find the right deal, make an offer based on your research. If it falls through, at least you tried. But if it goes through, you’re on your way to successful investing.

6. Have Reserves for Unexpected Expenses and Emergencies

Owning rental properties comes with its own set of challenges, and having reserves can provide peace of mind.

Why Reserves Are Crucial

Reserves are essential for covering unexpected expenses like repairs, vacancies, or economic downturns. They act as a financial cushion.

How Much to Save

For each rental property, aim to have at least three months of mortgage payments saved up. This ensures you're prepared for any unforeseen issues.

Types of Reserves

  • Cash in a savings account

  • Home Equity Line of Credit (HELOC)

  • Money market accounts

These options allow you to access funds quickly, usually within a few days, which is crucial in emergencies.

7. Avoid Overleveraging, Maintain Equity

Overleveraging can quickly turn a profitable investment into a financial nightmare. Always maintain sufficient equity in your properties.

The Risks of Overleveraging

Overleveraging involves borrowing too much against your property's value, leaving you vulnerable in market downturns. It's a risky strategy that many young investors fall for.

Maintain a Healthy Loan-to-Value Ratio

The bank generally requires at least 25% equity when financing rental properties. Stick to this rule to protect your investment.

Refinancing Wisely

If you refinance, ensure you still have at least 25% equity in the property. This provides a buffer against market fluctuations.

Long-Term Strategy

Focus on paying off your properties over time. The true benefit of real estate investing comes from owning properties outright, maximizing your cash flow.

8. Buy 3-Bedroom Properties, Not Small Rentals

When choosing rental properties, opt for three-bedroom homes over smaller units for better returns and appreciation.

The Advantage of Three-Bedroom Homes

Three-bedroom homes command significantly higher rent than two-bedroom units. This makes them more profitable in the long run.

Market Demand

Three-bedroom homes appeal to a broader market, including families. This increases your pool of potential tenants and buyers.

Exceptions to the Rule

The only time to consider a two-bedroom property is if you can expand it. Look for opportunities to add bedrooms or bathrooms, either through renovations or converting existing spaces like basements or garages.

Long-Term Benefits

Investing in three-bedroom properties not only boosts your rental income but also enhances property appreciation over time. This makes them a smarter, more lucrative choice.

For more detailed insights and to start your real estate investing journey with mentorship, visit MikeSimmons.com.

9. Keep Some Properties as Rentals for Long-Term Wealth

One of the biggest mistakes I see investors make is flipping every property they buy. While flipping can generate quick cash, it’s crucial to keep some properties as rentals to build long-term wealth.

Balancing Flips and Rentals

If your business model revolves around flipping houses, aim to keep a portion as rentals. For example, if you flip 10 homes a year, try to retain three to five of those as rental properties.

Tax Benefits and Passive Income

Flipping properties results in significant tax liabilities, with up to 50% of your profits going to Uncle Sam. Keeping properties as rentals offers tax write-offs, passive income, and compound appreciation.

Building Wealth Through Assets

Owning rental properties means you’re accumulating assets that appreciate over time. This provides a financial cushion and a source of income that can support you in the future.

Avoiding a Lifestyle Trap

Flipping everything might give you a luxurious lifestyle now, but without assets, you miss out on long-term financial stability. Reinvest some profits into rental properties for a balanced portfolio.

10. Wealth Comes from Owning Real Estate, Not Just Flipping

True wealth in real estate comes from owning properties, not just flipping them. My mentor taught me this valuable lesson early in my career.

The Limitations of Flipping

Flipping houses, selling real estate, or working a 9-to-5 job can make you rich. However, these activities require continuous effort and result in high taxes, leaving you with little to show for your hard work.

Assets and Appreciation

Owning real estate provides long-term benefits. Assets appreciate over time, offering financial stability and something valuable to pass on to the next generation.

Trading Time for Money

Initially, you might trade your time for money by flipping houses. As you grow older, owning rental properties allows you to trade money for time, giving you the freedom to focus on what truly matters.

Planning for the Future

When you own real estate, you’re not just working for today’s income. You’re building a portfolio that offers passive income and financial security, allowing you to enjoy life without constant hustle. Additionally, it's important to persist in marketing efforts, even when the business is currently doing well, as the goal is to ensure a steady stream of leads and maintain long-term success.

NEWS YOU SHOULD KNOW

Why Warren Buffett Considers Real Estate a Lousy Investment

Introduction to Real Estate Investment

Real estate has long been considered a staple of a diversified investment portfolio. However, Warren Buffett and Charlie Munger, two of the most successful investors in history, have a different perspective. They argue that real estate is often accurately priced and offers little room for significant gains.

Accurate Pricing in Real Estate

One of the primary reasons Buffett and Munger avoid real estate is due to its accurate pricing. Unlike other commodities, real estate tends to be more accurately priced, especially critically developed properties. This makes it difficult to find mispriced assets that can yield high returns.

During periods of economic instability, such as the RTC period, there were opportunities for significant gains due to mispricing. However, these situations are rare and not the norm in real estate investment.

Challenges of Competitive Real Estate Market

The real estate market is highly competitive. Real estate investment trusts (REITs) and other investors have a good understanding of property values. This makes it challenging to find undervalued properties that can provide significant returns.

In addition, the competitive nature of the market means that most properties are priced according to conventional wisdom. This leaves little room for finding bargains.

Tax Implications for Corporations

Another critical factor is the tax implications for corporations investing in real estate. As a corporation taxable under Chapter C of the Internal Revenue Code, Berkshire Hathaway faces a layer of corporate taxes that individuals or partnerships do not. This makes real estate a less attractive investment for corporations.

For individuals and partnerships, there are more favorable tax structures that can maximize returns. However, for a corporation like Berkshire Hathaway, the tax disadvantages make real estate a less appealing investment.

Lack of Competitive Advantage

Buffett and Munger also acknowledge that they do not have a competitive advantage in real estate. Experienced real estate investors have specialized knowledge and skills that give them an edge in the market.

Without this competitive advantage, it is difficult for Berkshire Hathaway to achieve the same level of success in real estate as they do in other investments. This lack of expertise further reinforces their decision to avoid real estate investments.

Historical Real Estate Investments

Despite their general avoidance of real estate, Berkshire Hathaway has made some real estate investments in the past. However, these investments have not been significant in relation to their total capital.

For example, they considered purchasing the Irvine Corporation in 1977. While this was a serious consideration, it ultimately did not materialize.

Opportunities During Economic Downturns

While real estate generally does not offer significant opportunities for Berkshire Hathaway, there are exceptions during economic downturns. During the RTC period, there were opportunities for mispriced assets due to a lack of financing and market inefficiencies.

However, these opportunities are rare and require a specific set of market conditions. For the most part, real estate remains a less attractive investment for Berkshire Hathaway.

Conclusion

In summary, Warren Buffett and Charlie Munger avoid real estate investments due to accurate pricing, competitive market conditions, unfavorable tax implications, and lack of competitive advantage. While there are occasional opportunities during economic downturns, these are not the norm.

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Are you thinking about entering into a partnership? Read this first!

I have a partner in my real estate business. Our partnership has been highly successful for over 8 years and running. This is not the case with everyone however.

Time and time again I see entrepreneurs partnering in their business. Unfortunately, business partners, like spouses, have a high failure rate. And the fact of the matter is, business partnerships are very similar to a marriage.

Lots of assets, and capital at stake.

There are a number of factors that, I have found, contribute to a successful partnership. I have outlined those and exactly what I believe to be the formula for creating a successful partnership.

This is the subject of today's download. Technically this is less of a download than access to training that I have given. But I think it is incredibly valuable to watch if you have ever thought about partnering or think you may in the future.

It's not an exaggeration to say that this training can save you millions of dollars by helping you create successful partnerships and avoid terrible ones

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