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The 5 Investment Rules of Real Estate Millionaires

Whether we’re in an up (current) or down (2007 crash) market, many successful real estate investors have managed to stay on top. But how do they do it?

So to answer that very question we’ve tracked down the few tried and true secrets that the most wildly successful real estate millionaires (and billionaires) have used time and time again to achieve maximum upside with minimum risk and consistent returns throughout the years.


Rule 1: Use Other People’s Money

Investing in real estate, as with investing in anything, requires up front capital. This can be a challenge for someone who doesn’t have thousands of dollars in disposable income readily available. But according to self-made real estate pro and best-selling author, Kemi Egan, if you leverage other investors’ money you can raise enough capital to get started and grow your investments exponentially over time.

Egan is living proof that this tactic works – she went from being homeless to making millions in real estate in just a few short years by networking her way into investment circles and raising over $1 million in initial investment to get started initially. You can read more about how she raised her investment capital here.

In addition to working with partners to raise money for real estate down payments, Brian Kline of Realty Biz News, suggests the following options to “use other people’s money” to build up initial capital:

Seller Financing: This involves transferring the property title and a mortgage directly to the buyer and having the buyer pay all initial closing costs.

Subject to Existing Financing: This is where the buyer agrees to pay the amount of the seller’s mortgage payment plus an additional amount that the seller keeps as profit.

Private Money: Real estate investors aren’t the only ones with money that can be leveraged. Anyone with a large retirement account or excess wealth available to invest can be tapped as a potential real estate investment partner.

Hard Money: Hard money lenders typically provide short-term (6-12 month) loans at high interest rates. This can be a good (last resort) option for properties that can be flipped within six months.

Once you’ve earned enough income and established enough equity in a property, you can then leverage this as working capital to grow your real estate investment portfolio.


Rule 2: Find Partners Who Know Things You Don’t

Investing in real estate often involves making decisions about areas well outside the realm of typical real estate knowledge. If you’re evaluating an agricultural property but don’t know much about how a farm operates, or you’re evaluating a property for a remodel but you don’t know much about construction costs, it can be difficult to make an informed decision about whether or not to invest.

But as Warren Buffett, arguably the most successful investor of the 20th century and one of the wealthiest people in the world, points out: you can leverage partnerships to fill gaps in your experience. He used this tactic to evaluate and purchase a 400-acre farm in 1986, by working with his son – who had extensive farming knowledge – to assess operating expenses and revenue potential, and by partnering with a successful property management group to run the farm on his behalf.

This strategy has served Buffett very well, resulting in annual returns of more than 35% of the original equity investment and multiple special distributions over 150% of the original investment in the property. To this day, Buffett has never actually seen the property in person – furthering emphasizing the value that a trusted partner can bring to the table when it comes to real estate investing.

When dealing with high dollar investments, it’s also crucial to have partners that you can trust. To vet a real estate investment partner, successful real estate investor and founder of National Real Estate Investor Month, Jason Hanson, recommends what he calls “The 5 Deal Test”.

The test involves attending local real estate investment meetings and asking around about the last five real estate deals that the potential partner was involved in, and then asking the candidate about the same five deals to see how well the individual’s reputation matches up with what he or she tells you.

And it’s not enough to find a good partner – you also have to know how to keep them happy. Multi-millionaire real estate investor and best selling real estate author, Julie Brood, shares the following tips on how to maintain strong relationships with your investment partners:

  • Make sure you share common objectives.
  • Discuss and agree upon every possible end scenario up front.
  • Be fair and honest.
  • Under promise and over deliver.
  • Communicate regularly and well.

Rule 3: Diversify Your Investment Portfolio

One of the most common pieces of real estate advice is to know your market. But sometimes staying within your comfort zone carries risk, as can be the case if you invest too much into one market.

The key, advises investor and host of the television show ‘Real Estate Millions’, Marco Santarelli, is to diversify your real estate markets. All real estate markets are local markets, and it’s easy to become so comfortable in a familiar market that you overlook the risks associated with investing all of your resources into one area.

It’s not easy to predict when some local event or trend like a major factory layoff that increases the unemployment rate or a natural disaster that damages the surrounding neighborhood will occur. The way to combat this, according to Santarelli, is to invest in no more than 3-5 properties per market. Once you’ve hit that threshold, he advises to move on to a new market that you’ve researched well. That way, if something happens in one market, you have investments in other markets that likely won’t be affected and should offset any potential losses.

For commercial real estate investment diversification, advises National Director of Real Estate Asset Management for Wells Fargo, Bill Nimmo, it’s also important to diversify across asset or product types and tenants. This will mitigate the risks associated with a widespread decline in a certain industry or with a certain company.

This strategy again makes the case for developing strong partnerships, since it’s not always easy to fly around the country to prospect markets and it’s almost impossible to manage a property from afar without a good property management group in place.


Rule 4: Invest in Undervalued Assets

For this piece of advice, we look again to Warren Buffett. The self-made billionaire ($72.3 billion net worth in 2015) is well-known for his frugal investing habits. In fact, he has lived in the same house in Omaha, Nebraska that he bought for $31,500 in 1958 for his entire adult life.

Buffett advises to look for undervalued property to invest in. The Omaha farm he bought in 1986 and the commercial real estate property near NYU that he bought in 1993 were both undervalued since he purchased them each immediately following the economic crashes of the agricultural and NY real estate markets at the times of the purchases.

But Buffett was confident that people in Nebraska would always need corn and that students would still continue to  attend NYU. These bets panned out well for Buffet when the markets recovered and his low-cost properties prospered.

So how can you tell if the property you’re considering is worth more than the asking price? According to this article by Your Investment Property magazine, there are a few tricks that will help you determine if a property is undervalued:

Know the market. Research the history and current prices of real estate in the area and pay close attention to trends in the market to evaluate where your prospective property stands in the grand scheme of its particular market.

Look for a motivated seller. Sellers who have already purchased another property elsewhere, are dealing with financial issues, are going through divorce, etc. are much more likely to be focused on getting out from underneath a property than making a lot of money on the sale.

Buy the worst house (or building) on the block. Look for properties that need a bit of fixing up (just make sure you understand the costs beforehand). The value of the other properties in the neighborhood will automatically boost your property’s value significantly as soon as it has some fresh updates.

Buy near upcoming infrastructure. New community developments often mean increases in property values. Look for properties near where new public transit lines, shopping centers, hospitals, etc. are being built to capitalize on the increased value these developments will bring to the neighborhood.

Look for failed auctions. Sometimes property auctions are advertised at over-priced value estimates and they never receive any offers for months. This creates a great opportunity to negotiate a much lower purchase price.


Rule 5: Buy for Income, Not to Sell

The most common (and perhaps the most important) piece of advice that the most successful real estate investors all seem to agree on is to treat real estate investing like a business by focusing on recurring income and profit instead of what the future sale price might be.

Many people think that real estate investing is all about finding property that you can sell at a higher price to make a lot of money quickly. But as real estate mogul and host of the hit television show Income Property, Scott McGillivray, says, “Real estate investing is get rich slow, not get rich quick.” McGillivray suggests looking at multiple ways that a property investment can make you money, and he says that the most important investment factor for him is the ability to make positive cash flow from an investment.

According to the CEO of Empire Property Portfolios and host of the television show ‘Your Property Empire’, Chris Gray, you should buy, not sell your property. By holding onto property as long as possible, you build up appreciation and equity that can be borrowed against in the future to grow your investment portfolio.

This strategy is also recommended by Warren Buffett, of course. Buffett says that he focuses solely on income when assessing a property investment’s value and is skeptical of anyone who claims that they can speculate a property for its future value.

Treating real estate like a business and keeping track of recurring income and expenses can be complicated. But with a good real estate bookkeeping service provider and a solid property management group on their side, investors can let others worry about the more tedious details while they continue focusing on what they do best – finding the most profitable new deals.

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