Real Estate: my philosophy

I have noted that my philosophy about real estate is very peculiar. While I am eager to invest more and more, I only take a step ahead when I see that the deal complies with all my rules. Here are they:

  • I only buy undervalue, and in particular 20%+ undervalue. The funny thing is that money is there to be made even on fair deals. Well, tomorrow may be a different day. If you buy undervalue, you’re protecting your butt. If the market comes down by a 20% factor, you are still fine. OK, this sounds trivial so far, so let us analyze the complicated questions: if the only great deals I find are in less prosperous areas, do I still buy? Depends on what is less prosperous, but yes, I am willing to take up way more risk. The only thing I really care about is having tenants I can serve (see point 2). Rule #1: I know my market inside out.  
  • All my investments have to be paid off in 15 years, including all commissions and taxes, but not fixing costs. In my case, this means that a €50K condo should rent for about €500. A €40K condo should rent for about €400. A €100K condo should rent for €1000 a month. As 80% of the market is willing to pay up to 350€ a month, I need to find extremely good deals to make it happen. It is tough, though. Rule #2: The numbers must add up.
  • I must have tenants. I talk to real estate agents every second month. I ask them how is the market, what type of people are renting and what do they want. As I work on a very local market (medium city, low volatility, etc), it barely changes. I have statistics, though. I suck up all the data I can and I do the math. Typically, a large chunk (80%+) of the population wants the same type of property, and that is the only type of property I go after. Rule #3: I do the math!
  • I serve my tenants exceptionally well. Every 6 months I tell my property manager to check with the tenants (either via mail or in person) if something is to be fixed up. When a tenant informs my property manager about his intentions to leave, I always demand to know why and I try to negotiate. Sometimes, the excuses are not that strong, and I offer to upgrade the home such that they want to stay longer. I’d rather invest $300 in a new dishwasher, upgrading my home, than paying $300 to my property manager to find new tenants (once you pay the property manager, the money is gone. Upgrading your property means retaining value). Even if it is too late, the next tenants will stay longer, on average. Rule #4: I learn with my tenants!
  • I invest in the foundation. If a pipe breaks and the contractor says it will cost $500, I ask him what else could be fixed since the walls are already opened. I end up paying 20% more and fix a lot more things. Chances are they won’t be a problem in the future, which saves a lot of money: you only pay the contractor once, you only brake the walls once and of course you only disturb the tenants once. Rule #5: I leverage problems!
  • I know many contractors and real estate agents. This can actually get tricky, because RE agents they typically don’t like you to hang out with other agents, and you may have to tell ’em a few harmless lies so they stay on the boat. This way you get way more deals, and you buy more deal for the same money, if you catch my drift. Regarding contractors, it is always good to have more than 1 (I personally have 3). One, they may be busy when you need them the most. Two, sometimes they mess up with budgets and you end up with one budget that is 2x higher than the others. Rule #6: The people factor is huge.

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