The Golden Rule of Real Estate Investment

The Golden Rule of Real Estate Investment

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Many people have considered investing in real estate at one time or another. For some people, what this means is that they have looked at a couple of properties, or maybe even half a dozen, tried to figure out a way to make the deal work, and then given up, concluding that it was all too difficult.

So let me start by making one point very clear: Investing in properties is a numbers game, where the numbers involved are big. And I am not just talking about your profits! I am talking about the numbers of properties you must look at.

This can best be summed up by the 100-10-3-1 Rule. What this rule says is that if you look at 100 properties, put offers in on 10, and try to arrange financing for 3, you may end up buying 1.Good deals are not just there for the picking. You have to spend a bit of time sorting through them.

Of the ten offers that you submit, not all will be accepted. In fact, if you found that all your offers were being accepted, what would that tell you about your offers? Simply that you were offering way too much. You could have bought many of the properties for less than you were willing to pay.

So let’s assume that of the ten offers you submitted to sellers, only three were accepted. Does this mean that you own three properties yet? Not quite, since you still have to arrange financing for them. So you try to arrange financing for these three properties. Again, it is no foregone conclusion that you will have all three properties successfully financed. Maybe only one will work. In this case, you will have looked at 100 properties to successfully buy one.

Of course, if none of the three works out, then how many more properties will you have to look at to buy another one? Another 100. Conversely, if all three are successfully financed, then no doubt you will be very happy.

This whole concept of looking at 100 properties in order to be able to buy one is a daunting concept for many people. You need perseverance to make this work. Let me explain what typically happens, especially to beginner investors.

In a flurry of excitement, you look at a whopping sixteen the first weekend. You are doing well. You are nearly one third of the way there! But the following weekend it’s raining, and you are still a bit tired from the party the night before, so you defer looking to the weekend after. Except that weekend, cousin Ann is getting married, and you can’t miss it. The following weekend is the Super Bowl, and promised you would host.

The next weekend you are supposed to take your kids hiking, and you really enjoy that as well, so of course that takes priority! The weekend after that you announce (to yourself more than to anyone else) that this whole thing about looking at 100 properties is impossible. 

It astounds me that people will spend more time, read more reports, compare more options, drive more miles, and talk with more sellers when looking for a new car that will cost money and depreciate during the few brief years of ownership, than they will spend looking for an investment property that will appreciate and feed them forever.

The reason why it is so important to look at a ton of properties is that, in the process of looking at what’s out there, you will get a gut feeling for what is the norm. You will know whether in the area you are looking it is normal to have two bathrooms, a double garage with an automatic garage door opener, and a quarter acre of land, or not. Then, when you stumble across a property with three bedrooms and a triple garage on half an acre of land that is selling for less than the others, you will know that in all probability this really is a bargain. You will know, from having looked at dozens and dozens of other properties, that you have found one that is worth investigating further.

If you did not look at 100 properties, how would you know what is good and what is not? How can you expect me to tell you what is a good buy in your area, when I may not even have been there in my life? How could I define a “good deal” for you? Imagine if I said that a garage is a requisite, when you lived in New York City where owning a car is not the norm? Or what if I said that air-conditioning was a real bonus, and you lived in Iceland or Siberia? What is desirable is entirely relative. By looking at 100 properties in your target market, you will get a great understanding of what is a great deal and what is not.

Ready to invest? Contact us today. We can help!

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