When investing in real estate, the most important thing to remember is that it’s all about the long-term.  Of course, we would all like to buy low and sell high, but that is rarely how it works for most investors.

It actually isn’t necessary to get your investment situation perfect as long as you can figure out how to handle any storms that come your way during turbulent times.  

Your number one rule should be: don’t get yourself in a situation where you run the risk of losing your investment. 

We all know that real estate goes up — and sometimes goes down — but in the long run, it always goes up.  Real estate tends to perform particularly well during periods of inflation, and we believe that inflation is here to stay.  So, how do you protect your real estate investment so that you are never put in a bad position?  

#1 Rule: Don’t speculate on real estate investments.  

This is my wife, Tanja, and me in front of the first property I ever purchased when I was just 19 years old.  I won’t pretend I haven’t made mistakes in investing and business over the years, but I feel confident that sticking to my non-negotiable rules toward real estate has helped me immensely.

Real estate speculation is when people play the market instead of focusing on cash flow via renting or property upgrades.  This means that speculators tend to buy and sell properties frequently — it’s a high-risk, high-reward approach to real estate investing.  There is nothing wrong with speculating if that is what you like to do, and it doesn’t bother you to win some and lose some.  It just takes a certain type of person who wants to do that. 

However, if you are an investor and the thought of “losing some” keeps you up at night, then you must commit to these criteria.  There are three fundamentals all savvy investors should follow.  

1. Ensure positive cash flow

If you have (and can maintain) positive cash flow, then you will make it through the tough times.  Even if the value of your real estate goes down in price for a period of time, that won’t be a big problem and certainly won’t put you at risk of losing it.  

2. Don’t over-leverage

There is only one way to over-leverage, and that is if you don’t have the cash reserves to make the payments on your investment property during times when cash flow may be tight.  I understand that many investors don’t like debt because they see it as risky.  It makes sense to feel that way, but it’s much more of an emotional decision than a good financial one.  Debt itself does not make an investment risky.  The risk comes in the form of not being able to service your debt regardless of how the property is performing… which brings us to our third rule to invest by.

3. Build up, and maintain, your cash reserves 

One of your best protections for weathering those turbulent times (that inevitably show up throughout all of our investing careers) is having sufficient cash reserves.  It might seem like I’m stating the obvious, but it unfortunately happens all the time that some real estate investors fail to follow this rule and end up losing their property and investment. 

Why are points two and three related?  

It’s somewhat ironic: if you do use leverage, that allows you to have cash reserves, which then means you are not over leveraged.  You are just leveraged and now have control of your cash instead of it being tied up within the property making it illiquid. 

To this point, one of my team members said: “I don’t think that’s how it works for most people.  The typical investor with $100k to invest is usually comparing purchasing a $100k property free and clear with purchasing a $300k investment with $200k in debt.  The cash reserve left over with each of those scenarios ends up being the same.”

But what I’m saying is don’t do that.  Invest $85K, and keep the $15K for a rainy day.  That way you’re leveraged and have reserves. 

I will give you a personal example of how this works.  

This is one of our short-term rental properties in Scottsdale, AZ.

I recently purchased two short-term rental homes in Scottsdale, Arizona, that I used for a 1031 Exchange so I wouldn’t have to pay any taxes on the sale of my property.  I needed to purchase enough property to meet, or exceed, the sale of my property sold, which included some debt.  I used my equity from the sale and borrowed some short-term private debt to get the two homes purchased.  This also allowed me to make cash offers, which was very attractive to the seller and helped them to accept my offer.  I purchased both homes within my 1031 Exchange 45-day time restriction and then immediately refinanced them into a 30-year fixed interest loan to take out my short-term private money loan.  This is where it gets interesting.  

I was able to take out cash, tax-free, from my 1031 Exchange through a cash-out refinance.   

Three things transpired out of this refinance:

#1: I was able to leverage the properties to give myself a better return, along with all the tax benefits I will receive since it’s a real estate investment.

#2. It freed up a tremendous amount of cash for me, compared to leaving it tied up as “trapped equity” in the properties.  Trapped equity — meaning, equity that just sits there instead of being reinvested — doesn’t do you any good (especially in times when that cash may be needed).  During times like that, your only option is to sell the property or do a refi on it.  The problem is that, in those times when you need the cash the most, sometimes neither option may be viable or even possible. 

#3. I now have a large cash reserve for whatever is thrown my way, enough to weather years and years of negative cash flow (if that were to ever happen).  I will invest some of my cash reserves and I will keep a portion of them in short-term liquid investments in case I need them.  

Always think about your investing with a long-term outlook

If you stick with that mantra, then the timing of the market isn’t that important.  

This is not to say “buy any property you want at any time!”  Of course not.  

But if a property follows a conservative proforma where the numbers work, you know the downside risk, and you know you can weather the storms when they appear, you will be fine in the long run.