No matter what you invest in you must create and stick to personal investing rules. It doesn’t matter if you invest in real estate, currency, stocks or options, before you begin you must create strict strategic rules that you will hold yourself accountable to.
Here is an example of the rules a real estate investor may have:
• I personally look at 10 foreclosure properties a week.
• I only invest in foreclosures that I can obtain at 30% or more below market value.
• I only buy properties that potentially have great curb appeal that will help sell the property fast.
• I do not buy properties that may generate less than $20,000 in returns.
• I do not buy fixer-uppers that require more than $10,000 in repairs and upgrades.
• I only invest in properties that need cosmetic and minor repairs. I will not consider properties that have problems with the foundation, termites or mold.
• I do not use more than 20% of my investment capital in a single investment property.
• Holding onto my cash is okay if it means waiting to find the right opportunity.
• I put my properties back on the market 15 days before they are back in show condition.
• After 60 days of no serious offers, I lower the price 3% and offer incentives, such as a free plasma screen or no closing costs.
• After 90 days of not selling the property, I list the property as a “rent to own.”
• In the event 6 months go by without selling the property, I will sell the property to another investor at break even in order to wash my hands and walk away safely.
• At least 50% of my profits are re-invested into acquiring more properties. The rest is for me to have fun with.
The rules above provide a checklist for the investor when considering opportunities. By creating strict criteria, it places limitations on the investor and takes the emotion out of the decision. There could be multiple properties that the investor finds that he knows will create great returns if he does $15,000 in repairs, or cleans up a small mold problem, but it simply does not fit into his rules for investing. Therefore, he would pass on such an opportunity.
Secondly, these rules provide a clear exit strategy with deadlines. The investor knows going in that he can potentially make $20,000, but more importantly he also knows the potential that he can lose by not selling the property in a certain amount of time. By having a backup plan, and a backup plan for that plan, the investor minimizes the downside and eliminates the need to make an important decision that is influenced by emotion or hope.