The 5 Golden Rules of Real Estate Investing

What's up, you guys? It's Graham here. So I'll just get right into it. These are the five real estate investing tips to live by and keep in mind. And this is coming from somebody who owns five investment properties already and someone who's been in real estate now for almost a decade. It'll be almost ten years in April, and that just seems crazy to me.

So anyway, these are some of the most important tips that you should keep in mind any time you're investing in real estate. The first one is that you make money when you buy, and this is absolutely crucial when it comes to investing in real estate. You either need to be buying into equity or buying into cash flow, or maybe just a combination of the two.

Don't do what everyone else does, which is buy something at market value for market rents without allowing yourself any room for improving these things and therefore also improving your investment. Like I said earlier, I own five properties, and every single one of them was bought with significant upside in both cash flow and rent. I think I mentioned in a previous video I've made several hundred thousand dollars just the last year in equity alone.

This gives you a huge safety net and a lot of wiggle room in case anything goes wrong. You overspend on renovations, maybe you've miscalculated something, or maybe the market ends up going down. If you're buying into a significant amount of equity or cash flow, it almost just eliminates the majority of your risk going into that investment.

And this doesn't mean that these deals are ever easy to come by, because the truth is they're not. The thing is, everybody else is looking for the same good opportunities and investments as you are, so it's gonna be something that's going to take a lot of time, a lot of searching, patience, and perseverance to actually find something like this. Even for me, as a real estate agent who's checking the market tons of times a day, I don't have a life besides looking at real estate. It took me six months to find a deal with enough upside that I can buy into where I knew I can make money.

But when that magical moment hits, when you can buy into a lot of equity, when you could buy into a lot of upside and cash flow, you can make a ton of money by doing so. Keep in mind this doesn't always mean that you'll just need to buy something under market value. You could be also buying into something with just immediate great cash flow instead, or you could buy into something where you can strategically remodel it to improve rents and therefore improve your investment at the same time.

But ideally, there should be some type of upside when you go and buy the property; either buying into immediate cash flow or being able to do renovations to improve those and therefore boost up your investment.

The second rule to live by is to never fall in love with your investment, and this is something I see way too many people doing. They initially go out and start looking for the perfect investment, but then fall in love with a home because it's super charming, it's got a lot of character, maybe it reminded them of the home that they grew up in, despite it being just an absolutely money-sucking terrible investment. But hey, maybe the property just has a really good vibe to it, right? Or maybe it's just a really cute neighborhood.

Point being, this is an investment, it's a business; it is not a romantic comedy. You just can't ever get emotionally attached to a property that you're going to be investing in for the purposes of being an investment. Now, this is a tough one for some people to do if they're naturally just sentimental and emotional about their decisions.

Now, it's one thing to trust your intuition and to trust your gut about something, but it's another thing entirely to ignore all the red flags, all the really bad P&L statements, all of just the money-sucking negativeness of a property because you feel good about the property and because you're attached to it. Ideally, you have to be completely detached and unemotional about what you're buying.

Some of the best investors that I've ever met and seen don't give a sh about the property. They don't care at all. They will look at it on a piece of paper and determine exactly what it's worth to them and what they're willing to pay, and if it doesn't work out, they don't care. They feel nothing at all; they turn the piece of paper, maybe they crumple it up, and then burn it, and then they move on to the next deal with absolutely zero emotion whatsoever.

Now, I'm not saying you have to be that emotional investing in property. I am somewhere in between; I don't get emotionally attached to properties, but I do really care, and I do trust my intuition and my gut a lot of the times. So you don't need to go that extreme, but you can still trust your instincts at the same time and do what's right with the intention that this is an investment, and it doesn't matter if this home is the one or the cutest home ever, or just the best ever, and this is it, and you can't lose it, because they've heard it all before—it's an investment at the end of the day.

What really matters the most when you're doing this? The whole point of doing this is for money—it's all for money. You're making an investment for money; you should not get attached to your investment because that will cloud your judgment when it comes to making money.

The third rule to live by is to have a bigger picture with a laser-like focus. When it comes to investing in real estate, it’s a very localized economy, and every single city is going to be different. Don't get too caught up with headlines and national trends, because at the end of the day, real estate is really such a micro economy.

Every single property in every single city is like its own little investment opportunity. Think of real estate almost like stocks; every single stock is going to be different. You can add the same stocks in the same sector, and one is going up and the other one is crashing to the ground. Think of real estate investing a little bit like that, and it's the specifics of every single property in every single investment that really makes the most difference.

Even though the markets can trend, overall, going up or down, like I said, every single city is different. I can tell you in the Pacific Palisades here in Los Angeles, new constructions are having a difficult time selling because builders have built so many of them. There's so much competition, and now they're competing with one another for the limited pool of buyers, whereas 20 minutes away in Inglewood, a new construction will sell dramatically over asking and multiple offers because there just aren't that many of them, and they sell at a premium.

Keep in mind, same overall city, 20 minute difference apart, two totally different markets. Real estate is such a localized investment, and your market will have opportunities going on outside of everything else. So it's really important that you make sure to do your best to find those deals and then hold them.

Now, of course, you can also follow wider data and trends; this will have an overall impact on the economy and who's buying or selling. But at the end of the day, when it comes time to invest, it's so important that you have a really laser-like focus on the area that you really want to invest in because that area will always have its own individual deals where it's a good value outside of everything else.

My fourth rule when it comes to investing in real estate is to have a long-term outlook and also get a fixed-rate loan. This is something that some people might disagree with me on, and maybe they have a different approach. Maybe they want a shorter term fixed-rate loan and a lower interest rate, and they're okay taking a riskier approach. That is not what I personally like to do, but my philosophy is quite simple: it's just buy once and hold.

Even though you might be able to get a much lower interest rate by getting maybe a five to ten-year adjustable-rate mortgage, which just means that your rate is locked in for that term, you may as well, if you plan to hold the property long-term, lock in the longest term you can now at a fixed interest rate, especially while rates are overall still pretty low.

Otherwise, what's going to end up happening is that five to ten years from now, your rate is going to readjust, and I'm almost positive that five to ten years from now rates will be much higher than they are now. If you lock in a 30-year loan now at a fixed rate, you will at least know what your holding costs are for the entire ownership of that property.

If you lock it in for, let's say, seven years, you can really only guarantee that your payment will be the same for seven years. If rates shoot up dramatically after seven years, you're gonna have to reevaluate if that property is even worth it to keep, and you're gonna be subject to whatever the local market is at that time.

Maybe it's not the best time to sell; maybe something happened in the short term, you have no idea. But if your plan is to hold it, you're gonna have to reevaluate at that time if it even makes sense to continue holding it because it totally depends on what the interest rate is.

Getting a long-term fixed-rate loan really just mitigates your risk of maybe the markets going down, interest rates going up, and possibly forcing you to sell when you wouldn't ordinarily sell, just because the interest rate is too high for it to ever make sense. Either way, I really wouldn't recommend taking a short-term adjustable-rate loan unless you're 100% sure that you're gonna be selling after that time. If you know 100% you're only gonna keep the property for like seven years, then sure, don't get the 30-year loan; get the seven to ten-year loan.

But if you know and you intend to keep the property for a long time, but you just want the lower interest rate up front, it's very short-sighted to think that way, and there's a huge risk that interest rates will spike up, and that severely impacts your cash flow once that happens.

For the way I see it, real estate is one of these markets where time in the market will outperform timing the market. And then my fifth and final rule is to make sure it cash flows. Now, I am one of these investors that personally likes finding homes in underappreciated areas where I can go in, buy under market value, and add a significant amount of equity in an area that's greatly appreciating.

But this is pretty risky, and I mitigate this risk with my first piece of advice, which is make money when you buy it. This is why I always buy into instant equity. In many scenarios, your market is not going to be like Los Angeles, which just has terrible cash flow but insane appreciation.

So in many situations, appreciation shouldn't be something that you'd count on, but would more so just be a great bonus if it happens. Instead, you should focus more on cash flow—how much money you are investing and how much you're getting back every single month in return.

Do not barely operate on a thin margin of cash flow unless you're making a ton of equity where you have the cash reserve to pay for anything that could come up while you own that property. The biggest problem I see with a lot of people is that maybe they're barely cash flowing on the property, maybe just like a few hundred dollars a month, and then something drastic comes up.

Maybe the HVAC goes out, and it's five grand to repair that. There goes a few years' worth of cash flow if you're only making a few hundred dollars a month. Even if they've ended up making a ton of equity at the same time, where maybe it doesn't really matter, just making sure you have those cash reserves is so important, and this is much harder to do if your property is not actively cash flowing.

So this is why I recommend focusing on cash flow first and then taking everything else into account later. And just as an extra bonus here, my sixth tip is don't be best friends with your tenant. Now, I'm a really, really nice landlord, and when I first started investing in real estate, I went out of my way to be like buddy-buddy with the tenants and just be that cool landlord; that was a bad idea.

It's often then that you end up getting taken advantage of, and it's usually not even something that's intentional. But this is something where they feel comfortable, that if they have a money problem, that he's cool; we're friends, who'll let me slide a little bit on the rent if something comes up.

He's cool; he won't worry about it because we're friends. He'll fix this, even though it's not his responsibility, because we're friends, and he's cool, and he's nice. This often puts you in a difficult spot between being a business owner and running it like a business but still trying to maintain a friendship at the same time.

Once you've opened up the friendship floodgates with your tenants, it's very difficult to then shift back over to the business side of being a landlord and really putting your foot down without having everything just get messy in the process. My biggest piece of advice here is to treat it as a business, because it is a business.

Be friendly to your tenants, but do not be their friends. Make sure you stick to the contract and enforce it, and this will end up saving you a lot in the long run. So with that said, I really hope this helps you guys, and if you found it helpful, if you want to see more videos like this, if you've liked this video, do me a favor, hit the like button.

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Thank you again for watching, and until next time.