What Are Real Estate Fundamentals?

Compared to other asset classes, real estate investing offers us more control over our finances as long as we take the time to establish a solid foundation first.

Master Investor
May 08, 2024

Summary:

To invest in real estate successfully, one needs a strong foundation of knowledge.
When investing in real estate, there are four basic principles to consider.
Get input and break negative habits.
Real estate investing offers autonomy and control.

Let's say we are constructing a home. We want the strongest foundation that we can have? Knowing what makes up our current foundation, getting rid of things that weaken it, and adding and building things that will strengthen it are all necessary to make our foundation strong. Like in the fable, if we construct our home out of sticks and straw, our foundation will ultimately give way and the house will collapse.

Similarly, in terms of investing, we want to lower our risk by starting with the fundamentals of real estate and building a solid foundation. Let's investigate why.

Some investors were completely shaken by the 2008 housing and stock market crashes, leading them to conclude that "investing is risky." Indeed, there is some risk associated with all investments. However, the true issue lies in the fact that different people have different definitions of what "investing" means.

The majority of people define investing as any scenario in which we make a financial commitment in the hopes of earning a return. Regretfully, a lot of what passes for investing is really gambling. This explains why the events that occurred over ten years ago scorched so many individuals. When the real estate market was booming and prices were skyrocketing, a lot of so-called "investors" made their purchases with the expectation that home values would continue to rise. They even took on homes that were worth less to rent than they could have paid to buy and keep. And then, whoosh! Their risk cost them dearly when the bubble burst.

However, seasoned investors who were knowledgeable about the fundamentals of real estate declined to purchase homes that couldn't generate a profit (cash flow, as we all know, is king and a crucial factor in reaching financial independence; more on that in a moment) and instead sold homes they had previously purchased before the boom for a healthy return. That seems like a far safer (and better) business plan, doesn't it?

Being an inside investor (capitalist or master investor)

Knowing the basics is what separates the "gamblers" from the actual investors when it comes to real estate investing. Investing is significantly less risky when one understands and adheres to the fundamentals. There will always be some risk, but it may be significantly minimized by adhering to sensible investing principles and making plans for any losses.

Basically, the biggest danger we run is not actively enhancing our financial intelligence, which means we won't be laying the groundwork or adhering to the principles. We have to educate ourselves and keep learning new things every day.

Therefore, begin with these four real estate principles if we are new to this asset class:

Our pocketbook must be enriched by the investment. Check for cash flow first. Seek recognition for our efforts. Building their asset column is the business of a successful investor. Therefore, an investment is not an asset if it does not increase our cash flow.
The investment needs to be the only thing it is. We cannot use the wealth of one business to support a subsidiary business; an investment cannot thrive on the cash flow or finance of another venture. Every company needs to turn a profit on its own. Investing is no different.
Whenever feasible, maintain control over the investment. We have control over our income, expenses, and debt with real estate and business. Seek to enhance the investment and augment its worth or the amount it yields back to we consistently. This is where continuing education is beneficial.
There needs to be an exit strategy or options for any investment. This is a strict guideline: Always plan our sales before making purchases. Numerous factors, including price, date, market developments, and even personal experiences, could influence this choice. Despite knowing what it would take to sell them, many wealthy investors have a tendency to hang onto their real estate holdings.

The freedom in real estate

Why then are we concentrating on real estate? For a variety of reasons, real estate is a popular choice for investments. It's profitable, enjoyable, and gives us the autonomy to manage our own investment.

One of the most stressful aspects of life is money. The main cause of this is that people frequently believe they have little control over their finances. Whether it's for our taxes, mortgage, insurance, or utilities, everyone is vying for our money. We frequently have little control over where our money is spent.

Additionally, we don't have much control over the money we invest. We are free to select the asset type that best suits our investment needs.

However, the ability to influence an investment's performance is restricted, even for the most astute investors with unparalleled financial acumen.

That's exactly the reason why real estate is so alluring. We have complete control over our money when we make a real estate investment. We make the decisions, do the study, and we benefit from the findings.

For a great deal of diligent individuals, this is welcome news.

Suppose we purchase stock in a company and make an investment in it. Even with all our hard work and research into market trends, businesses are ultimately managed by individuals who aren't we. Their actions and decisions have an impact on our finances.

However, we make the decisions if we invest in real estate. Both the power and the money are in our hands.

Three factors that we can manage when we invest in real estate are listed below. We have complete control over these choices, and we can do anything we want with the extra money we earn from them.

How we make our money? There are two types of real estate investments we can make: capital gains and cash flow.Cash flow is the favored investing strategy at masterinvestor. Investing for cash flow means buying homes that will bring in a consistent monthly income that we can keep.Contrarily, investing for capital gains entails purchasing a property and then selling it for a one-time profit. It's our decision to purchase an investment in real estate. For what purpose will we invest?Would we like to invest for the long term and benefit from a consistent monthly cash flow? Or are you more interested in making a one-time investment and flipping the home quickly?When used properly, both tactics have the potential to be profitable. The best part is that we are in complete control of how we will be compensated.There are plenty of investment products that don't let us pick how much profit we make. If they do, there are numerous guidelines that specify how and when we will get our refunds.However, we have greater freedom to decide when and how to make the earnings when we invest in real estate.Without anyone telling us how to make money, we are free to establish our own rent and buy and sell properties whenever we want.
The value of our investmentThe value of our investment can be directly increased by us. There is seldom another asset class that offers us this kind of influence or power. We have no control over commodity prices or stock performance. Numerous external circumstances, such as war, politics, and economic cycles, can influence our other assets.However, we can make decisions in real estate that will immediately affect our earnings. We can enhance the property, add more square footage, use the land creatively, and boost the operational efficiency of the property to raise our return on investment.Few other investments can make that claim. Investing in a firm does not grant us the authority to start manipulating its operations in an attempt to increase profitability. It is beyond our control to influence the price of oil in order to maximize our profits. However, we hold the power when it comes to real estate. It also represents lovely independence, even if it can also come with a lot of responsibilities.
With whom we collaborate?Do companies contact us whenever they decide to hire a new employee if we invest in their business or buy stock in them? Naturally, no!However, we have the freedom to select the tenant when we invest in real estate.We have the option of renting out our home to a quiet newlywed couple or to a bunch of boisterous college students.Additionally, we decide who we invest with. Using other people's money (OPM) to finance our venture is one of the best aspects of real estate investing. It's not necessary for us to finance the entire investment; we can ask other investors to contribute to the cost of the property.A compelling deal will draw in a large number of investors eager to part with their cash. The fact that we may select who we collaborate with is the best aspect.Working with people we trust is essential to our investment strategy since it will help us find and assemble the correct team of investors. Not every investment gives us that option. Our finances are constantly impacted by the decisions and actions of others. One area where we may influence the people around our investment is real estate investing.

Thus, we too can become a wise investor if we take the time to study these real estate basics (and eventually live and breathe them), start with tiny possibilities, gain experience, and further our financial knowledge.