Kim Kiyosaki on stage addressing the audience

4 Fundamentals First

With a strong foundation, your risk level for real estate investments drops

Let’s pretend you’re building a house. You want the strongest foundation possible, right? In order to make your foundation strong you need to know what makes up the foundation you have, get rid of anything that makes the foundation weaker, and build and add what will make your foundation stronger. If you build your house out of sticks and straw, just like the fairy tale, your foundation will be weak and the house will eventually come tumbling down.

The same is true when it comes to investments: You want to start with the fundamentals—build your strong foundation—in order to decrease your risk. Let’s examine why.

The housing and the stock market crash of 2008 shook some investors to their core, leaving them to believe that "investing is risky." Sure, all investments have some element of risk. But the real problem is that not everyone defines "investing" the same way.

Most people think of investing as any situation where you put down money with the expectation of getting a return on your money. Unfortunately, what many people think of as investing is actually gambling. This is why so many people were burned by those events nearly a decade ago. Many so-called "investors" bought into the real estate market when it was hot, prices were soaring, and they invested on the hope that home values would keep going up and up. They even took on properties that cost more to buy and maintain than they could be rented for. Then, pop! The bubble burst and their gamble left them in financial ruins.

On the other hand, experienced investors who understood the fundamentals of real estate investing refused to buy houses that couldn’t cash flow, and sold properties they’d acquired before the boom for a nice profit. Doesn’t that sound like a much better (and less risky) business model?

Becoming a Savvy Investor

When it comes to real estate investing, what sets the “gamblers” apart from the true investors is having an understanding of the fundamentals. Knowing and following the fundamentals takes much of the risk out of investing. Again, there’s always some level of risk, but by sticking to sound investment strategies and planning for ways to cover the downside, the risk can be greatly reduced.

Essentially, the largest risk you face is not actively improving your financial intelligence—and thereby not building your foundation or following the fundamentals. You must educate yourself and continue learning every day.

So if you’re new to real estate investing, start with these four fundamentals that I always abide by:

1. The investment must put money in my pocket. First, I look for cash flow. Second, I look for appreciation. A successful investor is in the business of building her asset column. So any investment that doesn’t put money in your wallet is a liability, not an asset.

2. The investment must stand alone. An investment cannot survive off the cash flow or funding of another investment—meaning you cannot use the wealth of one business to keep a subsidiary business afloat. Each business must be profitable on its own. The same is true for investing.

3. I want to control the investment whenever possible. In real estate and my businesses, I control the income, expenses and debt. I’m always looking for ways to improve the investment and increase its value or the value it returns to me. This is where the ongoing education comes in handy.

4. Every investment must have an exit strategy or exit options. This is a hard and fast rule: Always know when you will sell before you buy. This decision could be based on any number of factors: price, date, market events, or even personal events. Robert and I tend to hold onto our real estate investments as opposed to selling them. However, we always know what it would take to sell. In 2006 during the peak real estate market, we were offered a generous price for one of our apartment buildings—one that was operating at maximum cash flow. What did we do? We sold that property and moved the profit into a grander apartment building that gave us a much higher return on investment.

So if you take the time to learn these fundamentals (and eventually live and breath them), start with small opportunities, gain experience and increase your financial education, and you too can become a savvy investor.

Original publish date: November 02, 2017