“Location, location, location” or “make sure the numbers work” are important tips and basic real estate investing principles to remember. However, there are some other basic tips to real estate investing.
1. Listen to the market. The cabinet guy looked to me for a decision. I realized that I knew nothing at all about which cabinets people like, so I asked him which ones others were choosing, and he pointed to one that three quarters of his last forty customers had chosen. That’s the one I want, I told him. Why argue with the market you are trying to sell to?
2. Do your own research. The real estate agent might show you only the comparable sales that make the property look more valuable. Do your own research. Some counties have made it easy now, with sales prices online. You can also search any number of sites with MLS listings, just to get an idea about the asking prices of other nearby properties.
3. Partner carefully. When you do a deal with partners, be the money or the management, but not both. Group decisions tend not to work well in real estate, and will cause you much stress. Once you decide on and agree to a plan, step back if you are investing the capital, and let your partner do his thing. Of course, step up and take control if you are managing the project.
4. Negotiate openly. Just ask a seller outright, “What do you want to get out of this?” It is rare that someone is offended by this simple question, and it saves you from wasting valuable time talking about things that don’t interest him or her. Once you get a clear answer, you can decide if you can give them what they want, and still get what you need.
5. Invest safely. Investing isn’t gambling. There is always risk, but the difference is that the odds are in your favor. If not, you are gambling. This why you shouldn’t invest based on continued price increases. There is no guarantee that prices will continue up at any particular rate. Do deals that work even if prices go nowhere, and if values go up, you’re that much better off.
6. Run the numbers. It is about the numbers, and if it is income property, it’s about one number in particular: cash flow. Whatever the local formulas are, whether gross rent multipliers or capitalization rates or whatever, just be sure that after every last expense you’ll have cash flow from the very first month.
Rules, formulas and real estate tips are really just guidelines. Even the rule above about cash flow can be broken if you know that rents can be raised soon, for example. You have to use common sense and learn from experience, and you can’t replace good analysis with rules, formulas and real estate tips.