1. Develop a Personal Financial Vision
- Develop specific, achievable financial goals for income and wealth (assets, liabilities, and net worth)
- Develop a specific strategy (plan) for achieving the financial goals (include elements such as property type, location, price range, age-condition, etc.)
- Develop and maintain a high credit score, such as over 800
- Develop and use a personal financial vision statement as a key planning tool; prepare a current financial statement each year; evaluate the current statement with the vision statement; take corrective action as needed to achieve the financial goals
2. Develop Technical Expertise
- Appraisal: market analysis, highest and best use analysis, income analysis, sales comparison analysis, cost analysis, and value analysis
- Finance: sources of financing, financing alternatives, analysis of financing terms
- Investment analysis: property type, location, physical and functional characteristics,
operating characteristics, discounted cash flow analysis
- Financial calculator skills
3. Be Proactive
- Develop a search strategy
- Actively search for viable investment alternatives
- Develop and use units-of-comparison benchmarks, such as price per unit, income per unit, gross income multiplier, overall cap rate, etc. to identify potential investment opportunities
4. Buy the Income - NOT the Real Estate
- Always buy the expected future income, not the physical real estate
- The income from an investment "drives" the cash flow, cash reversion, and price/value
- Identify the potential sources of income benefits from the cash flow, tax savings, mortgage amortization, capital appreciation, and financing/refinancing proceeds
- Forecast the income benefits under four alternative scenarios: worst case, most likely, conservative estimate, and better-than-expected scenarios to obtain a range of possible outcomes
5. Analyze and Manage the Risk
- All real estate investment involve risk
- Identify the sources and types of risk: internal and external
- Develop measures of risk, such as loan-to-value ratio, debt coverage ratio, operating expense ratio, cash breakeven ratio, and payback period
- Develop your limit of acceptability of risk; do not ever exceed the limit
- Within your limit of acceptability, the income and return should always justify the risk
- Always seek to insure the risk, minimize the risk, shift the risk, etc.
6. Negotiate Favorable Terms
- Assume you can negotiate anything
- Negotiate the strategic variables, such as price, up-front investment requirement, interest rate, closing costs, etc.
- Establish specific, favorable outcomes for the strategic variables (begin with the end in mind); negotiate towards these goals (targets)
- Learn the major negotiating strategies
- Get the other party to make his or her offer first, then counter with your offer first
- Use a third party to facilitate the negotiation when possible; this allows you to be detached, reflective, and totally rational
- Know when you have great terms - then close the "deal"
7. Make Rational Decisions (not Emotional)
P.S. Your ultimate success will primarily be determined by 1 word "discipline": 1) the discipline to learn and incorporate the above principles into your knowledge structure AND 2) the discipline to apply these principles in your real estate investment decision making.
- Develop a list of relevant investment criteria, such as equity investment requirement, cash flow, return on investment, risk, liquidity, investment management requirement, etc.
- Specify your limit of acceptability for each investment criteria; reject any investment that exceeds your limit of acceptability
- Identify your five most important investment criteria, then prioritize these from 1 to 5
- Use an "executive summary and decision matrix" to facilitate the making of a maximally rational decision