Real Estate Investing: The Golden Rule

Let’s face it, investing in real estate is anything but straight forward, but clarifying what is most critical in choosing an investment should be. However, fewer than 5% of those I’ve interviewed over the last 18 years have known what the single most important factor is when it comes to real estate investing. Some believe it is selecting the right market, the type or quality of property or the cash flow it generates.

While each are important, none come to the heart of what is most critical.

Whether you are an “Equity Investor” or a “Cash-Flow Investor,” the most critical piece of the puzzle is this: “Managing Your Holding Cost.”

While it might seem elementary, most new investors fail to carefully consider the importance of managing holding cost. You see, if you can’t actually afford all the extra costs of owning your property, above and beyond the basic mortgage, you lose the property.

ALL mature markets cycle. They all have a period of decline, stagnation and appreciation every 7 to 10 years. At some stage the market appreciates or rises in value, and real estate is non-discriminatory, meaning that it doesn’t care who owns it during the uptick in that cycle. If you can’t pay the mortgage at the end of the month and subsequently hold on to the property, then chances are the bank takes it back or an investor swoops in and picks it up.

Whoever owns the property during the appreciating period in the cycle is the one who makes all the money – it’s as simple as that. And the goal is, obviously, to be that person. Doing thorough financial analysis is therefore critical. When it comes to managing your holding cost, be conservative with your numbers to make sure you can go the distance!

Timing a rising market is great, but being able to hold on long enough to enjoy that part of the ride is paramount.