If you’ve been following my letters, you’re likely well-versed in personal finance. As we near the conclusion of this series, I want to guide those of you wondering “What’s next?” in the right direction. Today’s topic is real estate.
Why Discuss Real Estate?
If you delve into the paths of those who have achieved early retirement, you’ll notice most have built wealth through either entrepreneurship or real estate. While there’s some overlap—buying and selling property is a form of entrepreneurship—today’s focus will be strictly on real estate.
Since the next four letters will cover startups—especially in the software domain—this letter aims to provide insights for those leaning towards real estate investment. Plus, many of us aspire to buy a house someday, making this information relevant to a broad audience.
This letter will be divided into two main sections: principles for buying and principles for renting to tenants. I won’t dive into the debate of whether to rent or buy; my stance is straightforward: if you’re questioning it, you’re likely better off renting for now. Instead, let’s focus on fundamental principles to help you profit through real estate.
Principles for Buying
- Mindset
Remember, buying a house is fundamentally a business transaction. It’s crucial to disregard any emotional impulses during the process. When tempted to overlook a higher price because of “that lovely view,” remind yourself: you’re purchasing land and materials, not just a view. To maintain a clear focus, consider writing down detailed criteria for what you seek in a property. If a listing doesn’t meet all your requirements, pass on it. This method, often used by top investors, helps eliminate emotional decision-making and keeps you on track. - Timing
Generally, the best time to buy is during economic downturns—historically, the period after 2008 was a prime time for real estate purchases in the U.S. Rather than guessing if it’s a good time to buy, consider these tips to secure a property for less in any market:
- Target houses listed for at least three weeks.
- Conduct thorough research using your previously established list of criteria. If the house meets all your standards, confidently approach the seller.
- Offer to buy the house immediately at your price, since sellers with extended listings are usually eager to sell.
- Location
Avoid getting sidetracked by deals nationwide. If a house fits your criteria but requires traveling across the country for purchase, reconsider your strategy. Focus on local properties, keeping a keen eye on listings in neighborhoods you like. Use platforms like Zillow to track sales and listings, and choose neighborhoods where you feel safe. Aim for the best neighborhood you can afford, as homes in desirable areas typically appreciate better over time. Pro Tip: School districts significantly influence property values. Homes near reputable schools tend to attract more buyers and tenants. - Identifying a Good Deal
A solid deal is one that maximizes your potential profit. Here are guidelines for spotting a good opportunity:
- If a house costs more than 20 times the annual rent it can generate, it’s likely overpriced.
- Three-bedroom, two-bathroom homes are most sought after, enhancing demand.
- Properties with garages or basements appeal to renters due to storage needs.
- Smaller yards tend to draw families with children and pets.
- Avoid houses near busy streets or corner lots, as these typically sell for less.
Principles for Renting
- Seek Long-Term Tenants
When prospective tenants indicate they plan to stay for one or two years, aim for long-term stability instead. You want tenants committed to staying for three years or longer to minimize turnover and associated costs. Homes with features like garages or basements attract tenants with belongings, increasing their likelihood of staying put. - Choose Responsible Tenants
Seek tenants who will treat your property with respect and pay rent on time. Building a rapport with your neighbors can help; provide them with your contact details and encourage them to notify you if there are issues with your tenants. To encourage responsible management, consider offering incentives for timely rent payments or maintenance responsibilities. For instance, you might reduce rent for tenants who handle minor repairs themselves.
Next Steps
This letter merely scratches the surface of the real estate world. For those interested in a deeper dive, I recommend connecting with the remarkable team at Adventuring Along. They successfully transitioned from zero to retirement in five years through real estate investments! Their insights can be found in an interview with the Mad Fientist.
Additionally, consider reading John Schaub’s book, “Building Wealth One House at a Time,” to learn tried-and-true real estate strategies that endure in any market.
The most valuable teacher, however, is experience. When the time is right for you financially, commit to purchasing a property and renting it out; practical experience will far surpass academic learning.
As John Schaub wisely advises: “Buy one investment house a year for ten years, and then purchase the house of your dreams outright.”
In Summary
Today, we covered:
- The two primary pathways to wealth: entrepreneurship and real estate.
- Essential principles for buying a property.
- Key considerations for renting out a house.
- Additional resources for furthering your real estate knowledge.
Thank you for joining me today!
Let me know if you need any further adjustments or additional information!