The Ten Commandments of Real Estate Investing.

Here are my own, personal Ten Commandments of Real Estate Investing. I have been a real estate investor (on a small scale) for many years now. This is a collection of rules for real estate investing. These are the rules I have always followed myself, and have worked out very well for me over the years.

1. Know what you are doing.
Before you make any kind of real estate deals, make sure you really, truly know what you are doing! Read many books. Search the Internet. Don’t take advice from anyone who hasn’t done it themselves. Talk to others who have succeeded or failed investing in real estate. DO NOT buy some course on real estate investing or go to some weekend seminar. Those people are there to make money by selling you courses, books and CD's; not to help you to succeed in real estate.

2. Consider the worst case scenario.
Make sure you figure everything worst case, not best case. Most people look at how much money they’ll make when things go as planned, but fail to figure out ahead of time what to do when things don’t go as planned. After you get yourself all excited thinking about how well things could work out for you, take quite a bit of time coming up with as many things as you can think of that could go wrong, then plan ahead of time what you would do in each of those cases. Never allow yourself to think that no bad things will ever happen. Assume that they will happen and prepare ahead of time. If you come up with any potential problems which you would be unable to handle if they happened, then don't do the deal!

Decrease your profit calculations by 30% and increase your expense calculations by 30%. If the numbers no longer work on paper after that 30% adjustment, then don’t do the deal...trust me!

Here are some examples of things that commonly go wrong in real estate:

Vacancies. Sooner or later there are going to be vacancies in rentals no matter what anyone says. It may be someone who gets evicted, or it might be major repairs that require the building to be empty, but it will happen.
Repairs, maintenance and expenses you are not expecting.
Some expenses increasing over time--sometimes, significantly!
The market, or the neighborhood, declines and your property is not worth as much as you originally figured.
A tenant, vendor, contractor, etc. sues you in court. Even if you win, fighting in court often gets expensive.
Unexpected vandalism occurs.

These are just a few examples, there are many other unexpected situations that will arise.

3. Make sure your personal income could cover everything.
Make sure you could financially carry the building out-of-pocket if it generated no income at all, or did not sell for several years. In other words, if it’s costing $2,000 per month to run the building, then make sure your situation would allow you to make that $2,000 payment out of your own income with no help whatsoever from the building. Believe me, there is a very good chance you will be called upon to do this very thing sooner or later.

4. Set some profit aside.
If operating a commercial or residential rental, set aside money for taxes, then put at least 25% of your profit right into a savings account and don’t touch it except for real estate emergencies. 40% is even better. If you spend all of your profit as it comes in, you have nothing for emergencies or to take advantage of the next deal that comes along. Also, put any security deposits directly into the bank and don't touch them--things can get real tough real fast if you are required to return a security deposit and don't have the money to do so.

5. Put everything in writing.
Always, ALWAYS put EVERYTHING in writing. That includes rental agreements with tenants, contracts with contractors, partners, suppliers, etc. I don’t care if the person is your brother, best friend or your grandma--always put everything in writing!

6. Have money set aside for personal or family emergencies.
Do not rely on equity loans or credit cards to carry you in the event of a problem. Trying to borrow your way out of financial problems will bury you real quick. You need to have significant savings set aside for emergencies; otherwise, you are in no position to invest in real estate. Make sure you have at least three month’s worth of personal income saved up as an emergency fund. If you lose your job, get sick, get injured, whatever; you don’t want to lose the building as a result. Make sure your debt is under control and you have adequate emergency savings BEFORE investing in real estate.

7. Take good care of your customers.
Treat your tenants or buyers as customers. The better you treat them, the better they’ll treat you. Happy buyers close on the deal faster and easier, and happy tenants pay their rent on time and take better care of the place. It is not a ’you against them' situation, they are your customers so treat them as such.

8. Start small.
Start out small and easy. Don’t run out and buy a multi-unit apartment building or huge commercial spread as your first project. Instead, buy a duplex, single family home, or very small retail space if that’s what you decide to try. Do not go on to the next deal until the one, or ones, you already have are working smoothly over time. Don't make the mistake of thinking that the next deal will work out so great that you can cover your losses from the last one.

9. Get the 'move-in' money up front.
If buying a rental, then live by the statement "No move-in money, no move in." Never, ever deviate from that policy no matter what sad stories you are told. Also, if payment is late, act IMMEDIATELY with whatever first notice your state requires. It gets the tenant’s attention, respect and generally motivates them to pay on time from then on. If they never do pay, you can evict faster since some of the legal requirements are already out of the way. The sooner it is re-rented, the sooner you are profitable again.

10. Don't buy where you wouldn't want to be.
The most important one of all, and the one that has saved my butt many, many times: don’t buy a building anywhere that you personally would not want to live or work. In other words, if you wouldn't want to be there, then don't invest in it. I have seen many other investors break this rule to get cheaper properties and then end up losing the property or having it plummet in value during the time they own it. You are far better off spending more money for a nice place in a good area, then trying to save money by buying something in a bad area just because it's cheaper. If you are going to fix something up, you still want it to be in a desirable location after all the work has been done.

If you follow all of these rules, you have significantly improved your chance to succeed.

If you break even one of these rules, you have significantly increased your risk.

If you break two or more of these rules, then good luck!

I have been an investor for many years. Following the above rules of real estate investing has allowed me to make money even while other investors around me were struggling or going under. I don’t mean to scare you with all this doom and gloom, but these ARE the biggest gotchas to avoid. If done right, real estate can make a lot of money over time. If done wrong, it can destroy you financially.

This article copyright © 2008 by Keith C. Rawlinson (Eclecticsite.com). All rights reserved.
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