Rules to Investing

Rule #1: Buy to hold forever. Buying for the short-term means that you have to be able to predict markets. The rich buy and never sell

Rule #2: No negative cash flow. It costs about 40% of market rents to run a building effectively. If you own an “alligator”, you must be depending on appreciation – so see rule #1

Rule #3: No adjustable or variable note mortgages. They go up and cause negative cash flow. See rule #2

Rule #4: No balloon payments. They cause you to have to re-finance in an unknown mortgage market, and you will be stuck with a variable loan. See rule #3

Rule #5: Buy in areas where you don’t have to collect rents with a gun. Who needs the pain?

Rule #6: Buy local. When you buy out of state, you are going to pay $45 to change a light bulb

Sixteen Mistakes Investors Can Avoid

  1. Not determining what your goal is. Talk to your real estate agent about cash flow, capital appreciation, tax benefits, ease of management, equity pay down, or pride of ownership (sometimes these items are mutually exclusive)
  2. Believing the seller’s or the seller’s agents numbers. Check everything: Rent, income, taxes, expenses, deposits, lease expirations, etc. Hype is an epidemic in investment real estate
  3. Not joining your local apartment association. The best local source of forms, pending laws, procedures, and education on investment property
  4. Forgetting you’re buying a business. Owning an investment property carries with it great responsibility and potential, along with the very difficult decisions – evicting tenants, who to rent to, whether or not to make that improvement, etc. Remember it’s not hands-off investment. It’s easy to forget this during times of appreciation
  5. Being emotional. An emotional purchase is not always your best investment. Pay attention to the numbers, not necessarily to your heart
  6. Buying negative cash flow. Unless you know there will be constant appreciation, don’t buy investment property that eats like an alligator – it’s no fun. It may cause you pain and force a sale before the benefits of appreciation can be seen
  7. Agreeing to balloon payments. Here is a stress inducer – long-term investment goals financed with short-term  instruments, a classic investment mistake. You should own real estate for long term; with long-term real estate investments, you find long-term financing
  8. Not doing a thorough inspection. Look at every system. Hire a professional inspector and ask the tenants questions about the property. Don’t get lazy on this one
  9. Not getting estoppel letters. Get letters rom tenants confirming the statistics of tenancy. Make sure their story agrees with seller’s interpretation. Ask hard questions. If the seller won’t give the answer, get them from the tenants
  10. Inspect, approve, and confirm all documents after the close. Get the building permits, zoning laws, rental applications and leases, by-laws, easements, title policy, mineral leases, inspection reports, purchase contract, insurances, rules and regulations, note, trust deed, mortgage, etc.
  11. Not getting a bill of sale. There are many different types of personal property (appliances, fixtures) involved in an investment sale. Make sure you know who owns the pieces of personal property, then prove you do after the close
  12. Have adequate insurance at close. Get a professional insurance agent to make sure you are covered. Tenants and their guests bring liabilities
  13. Treat your tenants as customers. Vacancies and turnovers are your largest expense. Change fair rents and attend to realistic tenant needs immediately
  14. Not selecting qualified tenants from the start. Check references from previous landlords, employers, bankers, and friends. Check credit, bank balances and judgments. Drive by where they currently live. A little work up front can save 95% of your problems later
  15. Not renting right. Too low rent costs money, but it can cut turnover and can decrease vacancies. High rent increases cash flow and the value of the building, but can increase the vacancy factor and turnover
  16. Spending positive cash flow. Remember successful investors have free and clear properties. Apply your cash flow to the payment and speed up that amortization schedule

These are the sixteen most common mistakes that investors often make but can easily avoid with a little foresight.