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11 Platinum Rules Of Property Investments
When you have the chance to meet a real life successful property investor who is living off his properties, you might notice that any positive or negative information you provide does not faze him at all. I’m not talking about the “gurus” who hold free seminars and try to sell you an apartment in Iskandar at the end of the seminar. I’m talking about real investors who have so much fun being successful in their investments, they are not even remotely interested to charge you $3,888 for a weekend workshop. There is a reason why veteran investors are unfazed by setbacks that arise. It is because they understand and acknowledge that there are rules in the real estate game. It’s just part of getting their hands wet with property investing. What rules?
1) The higher the risk, the higher the yield. Throughout our academic lives, we have always been reminded the high risks translates to high rewards. This is true universally and does not exclude real estate investments. Take government treasury bonds for example. These are low risks investments and you take up a lower returns on your money. For properties, accumulating high risk properties in your portfolio can cause your wife to fall off her chair, but it must be the potentially mega rewards that tempted you to invest in the first place. Generally, the best way to go about property investments is to go with moderate risks and moderate returns. The magical thing about real estate that thrills people is that often you can find bargains with low risks and high returns.
2) Breakeven first. As with any investment, your first priority should be to get back your principle. This is the amount of cash you forked out for the acquisition. For example, it is a well-known strategy for stock investors to to sell off a certain portion of their holdings on a counter to get back their principle. Their remaining holdings will then represent their nett profit. It is also important to consider buying insurance on your properties to protect the investment in case of fire or natural disasters.
3) Control your expenses and liabilities. Expenses and liabilities are 2 different things. You have to be able to tell them apart as an investor. Expenses are costs incurred to repair or maintain your property when there is a need to. These can include plumbing works, electrical repairs, etc. Liabilities are recurring costs that you have to repay. They include the mortgage, management fees, etc. It can be easier to manage expenses than liabilities.
4) Add value to your property. The simple concept of adding value can be put this way. The customer paying you should feel that what your are offering is way more valuable that what he is paying. This is how retailers do business. Retailers markup prices up to hundreds of percentages to the cost price and still sell their merchandise like hotcakes. And customers still walk away from fancy boutiques with a smile on their faces. Retailers add value by making things conveniently available, branding to increase social status, great aesthetic presentations, etc. There are different market segments of tenants more than willing to rent at $5 or $50 per square foot. But they will only splash out the cash if they think they are getting good value from their money.
5) A middleman must offer something other than just a referral. The real estate market is filled with middlemen. In fact, a lot of businesses generate their income solely based on middleman commissions. You might then be shocked that a lot of what these people do are nothing more than forwarding your phone number to another middleman! Property agents are the most obvious middlemen in real estate transactions. Other than bringing together buyers and sellers, landlords and tenants, they should be able to provide you market data and timely information so that you can base your investment decisions based on dependable data.
6) Property investments are long term. You might have heard about your best friend’s neighbour’s cousin who made a quick windfall from flipping a property or through sub-sales. But if you entered into buying your second property based on these strategies, you are speculating more than investing. You are placing a bet that prices will rise enough to cover all closing costs when you resell it. In this instance, you should wake up and smell the coffee. With the policies in place now it is very difficult to make money this way.
7) You will face litigation one way or another, sooner or later. You will be seeking help from a tribunal for rental loss or being sued by tenants over negligence. What is certain in this business is that you will get involved in litigation or threatened with litigation one way or another. Accept this mindset. It is part of the job description. What matters most is communication. A lot of times people sue each other just to make sure the other party gets the message. You can avoid this with good communication with tenants.
8) It only takes one really good deal to retire. As you get more involved in the world of property investments, you will be more exposed to killer deals that might enter and exit the market within hours or minutes. With experience, you should also be able to quickly recognize a good deal when you see one. When you do get your hands on one that knocks the ball out of the park, consider liquidating all your inferior holdings to fully focus on the winner you have on your hands.
9) Everything can come crashing down within a matter of days. The story of Donald Trump is inspiring in how he conquered adversity and also a timely reminder that you could be facing bankruptcy before you even know it. Interest rate hikes, property crashes, negative job growth, or even an event overseas can trigger everything to come tumbling down. In these times, cash is king. Always keep track of what is happening in the market and keep alternative plans ready at all times so that you can move swiftly when the time indeed arrives.
10) The real world is not ideal. The rental rates available in the market can seem overwhelmingly attractive. But whether you can find a tenant willing to pay those rates is another matter altogether. Market data may also show property values rising 20% in the last year, but you find that your property value only rose 5%. As the value of a property is related to it’s rental, being unable to find tenants or having tenants paying way below market rates does not help you in anyway. You could have also forecast budgets based on market data. These discrepancies will affect your business plans. So remember to plan for the real world instead of the ideal one.
11) Inflation is your friend. As time passes, inflation is sure to have an effect on any bustling economy. The good thing about properties is that they always tend to rise faster than inflation. As prices of things go up, so does rental and property prices. But your mortgage will not appreciate over time. You will still only be liable for the amount you borrowed. And as the value of money erodes over time, your mortgage will also be easier to pay off.