I am personally a follower of The Three Immutable Laws of Real Estate Investing, which are the three things all investors must do when purchasing real estate in order to thrive in any market at any time in the market cycle. And I think a great companion list of laws are the ones laid out by turnkey rental property investor Marco Santarelli. In my conversation with Marco on my podcast, he outlined the 10 laws that he discovered based on personal experience and are common amongst all successful real estate investors. Apply these ten rules in tandem with the Three Immutable Laws to set yourself up for success and to create and scale a sustainable real estate business model.
1. Educate Yourself
Knowledge is the new currency. Without knowledge, you are going to make a ton of mistakes and fail. If you are already a good investor, gaining knowledge will make you a great investor. If you don’t educate yourself, you are going to be doomed to blindly follow other people’s advice. As Tony Robbins says, “Knowledge is potential power.” We must take action to make it powerful.
2. Set Quantifiable Investment Goals
You’ve probably heard this advice time and time again. But statistically, you are more likely to achieve financial independence if you write down specific goals, read them often, and try to follow them as best as you can. Marco prefers to quantifiably set his goals and to set goal dates so each can be achieved by a specific date. His main real estate goal, for example, is to control $100,000,000 in real estate before his 50th birthday. That’s a specific and measurable goal. Therefore, it is easy to determine whether or not he reaches it.
3. Never Speculate
According to Marco, there are a number of investors who still haven’t learned the hard lessons they should have from the crash of 2007-08. Here’s a reminder: It is very dangerous to speculate and chase after appreciation, which is also described in the first Immutable Law of Real Estate Investing. It may be the fastest way to build wealth on paper, but you need to have a longer-term perspective rather than settling for the short-term, riskier forms of growth. To be clear, it is okay to have a strategy to force appreciation via value-add methods like performing renovations, lowering expenses, etc. However, it is not okay to buy a property, sit back, and cross your fingers as you hope it increases in value. That’s just silly. It’s like putting a seed in the dirt and not watering it, just hoping it will grow. It won’t. As with plants, growing your real estate portfolio into a cash flow producing exercise takes a bit of nurturing. You’re going to be involved. Passive does not mean completely disengaged. You don’t get to be a chairside investor.
4. Invest for Cash Flow
Cash flow is king, and it is the glue that keeps the investment together. Cash flow covers all operating expenses and debt, which in the simplest of terms means that your tenants are buying properties for you over time. Having a positive cash flow allows you to acquire more properties faster, get greater returns from your investments, and ultimately build your net worth over time. Talk about a no-brainer! But maybe you’re asking, “But wait… if I buy a distressed property that won’t cash flow immediately but presents a good opportunity, that’s okay, right?” It definitely is. But you need a solid, conservative plan to stabilize the property and make it cash flow positive. Marco says he’s spoken to many investors who buy a property at a breakeven point and are okay with that. Rather, they are okay with it until the rental market softens. Then, when they have to start paying the mortgage out of pocket, things get dicey quickly. Don’t put yourself in that situation. Have a plan. Stick to it.
5. Be Market-Agnostic
Do not go after a market because it’s sexy. Don’t be married to a specific market either. Many investors I’ve met think they have to invest in their own backyards or to invest in properties that are within a one or two hour’s drive from their home. Marco says that’s a mistake and doesn’t make much sense. In reality, you want to put your money where it is going to work the hardest for you, which may mean markets that aren’t close to home. The United States is a very large country made up of hundreds of local real estate markets. Each market moves up and down independently of one another due to a variety of local factors. As such, you should recognize that there are times when it makes sense to invest in a particular market and times when it does not. Only invest in markets when it makes sense to do so, not because you live there or because you bought property there before.
6. Take a Top-Down Approach
Always start by selecting the best markets that align with your investment goals. Many investors make the mistake of falling in love with a property because it is pretty, has nice curb appeal, and/or has been nicely renovated. The numbers look attractive on paper, but that doesn’t mean it’s a good investment. These investors don’t stop to consider what is going on in the market, which is a common trap that many international investors fall into. They are sold properties in depressed markets because they don’t know any better. It would be far better for them to do research on the different markets before making their investment decisions. Using a top-down approach means looking at the state, the city, the neighborhood, the local economy, and then the job market, demographics of the population, the growth rate in the area, and the unemployment rate. These are all factors of any good real estate investment decision.
7. Diversify Your Portfolio
Once you have steps 1 through 6 down, and you have a decent portfolio, diversify across multiple markets. You should have three to five income-producing properties per market. However, this is subjective to the investor – it can be 10, 5, 3… whatever you want – but three to five properties is a great starting point. After you have three to five properties in a particular market, move to another geographically different market with its own local economy. Ideally, select a market that is in a different state. Build your portfolio to three to five properties in that location and then move to the next market. This is easy to do when you have the right team or are working with a reputable turnkey property provider. Diversifying within the real estate asset class will help reduce your overall risk. Real estate is one of the few investment vehicles that allows you to control your downside and risk, so be sure to take full advantage of all that real estate investing has to offer by diversifying your portfolio across different markets.
8. Use Professional Property Management
Unless you are a property manager yourself, you shouldn’t manage any of your own properties. If you do, you’ll likely find that it is a thankless job and requires a great deal of expertise and even more of your time. At the end of the day, your time is one of your most valuable assets. You should be spending it with your family, on your career, and looking for more properties rather than managing properties. If you’re new to real estate investing, go ahead and manage the first couple of properties. You’ll see what Marco means fairly quickly.
9. Maintain Control
Many people don’t think about maintaining control, but Marco recommends that you be a direct investor. Control your real estate, own it, and be the boss that calls the shots. You really cannot do that with any other asset class. So why not take full advantage of that if you have the time, desire, and expertise to do so? Marco says he has many passive real estate investment partners who don’t have the time, desire, and/or expertise to source and buy real estate like he does. In that case, it makes sense for them to be passive investors. But if you have the time, desire, and expertise to be active, then you can certainly make more money by maintaining direct control of your properties.
10. Leverage Your Investment Capital
Marco understands that the beautiful thing about real estate investing is that you can use or borrow other people’s money to purchase and control income producing properties. Sounding like a broken record, you cannot really do that with any other asset class. Banks are willing to lend up to 80% of the purchase price, which only magnifies your overall rate of return, which in turn accelerates your wealth creation.
Marco’s Best Ever advice were the 10 rules of successful real estate investing:
- Educate Yourself
- Set Quantifiable Investment Goals
- Never Speculate
- Invest for Cash Flow
- Be Market-Agnostic
- Take a Top-Down Approach
- Diversify Your Portfolio
- Use Professional Property Management
- Maintain Control
- Leverage Your Investment Capital
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