By Ron Boatright, Ph.D.

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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
  • Negotiation

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)

  • 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
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.

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