Let’s get one thing perfectly clear:

Investing in real estate is hard

And you’re reading this because you want to make it easier

Here’s the good news:

What you’re about to read will establish principles

Principles to make real estate investing more definitive

Principles to make decision making easier

Below are my real estate investing principles

They may be helpful to you

They may not

But they will stimulate your brain

And help develop your own core real estate investing principles

So, lets get into it

Most real estate investors shoot from the hip.

They see an opportunity that meets a few criteria, feels good, and they go after it.

In today’s issue, I am sharing a different, in my mind, more precise way to guide investing decisions.

Unfortunately, most investors don’t have guiding principles. And when you lack a north star, you often times get lost.

5 Real Estate Investing Principles

1: Seek Investments in Supply Constrained Areas

Throughout my real estate career, there have been two concepts drilled into my head:

1. Be wary of many cranes

2. Always understand the barriers to entry

Both concepts are another way of saying:

Avoid areas where there is nothing stopping newcomers entering your market.

You see, I don’t like competition.

If I had my choice, I would prefer a monopoly.

That’s not an option.

So I choose to invest in areas where it is difficult to enter my market and introduce competition.

2: Seek Positive Leverage

Lets set the stage:

You buy a $10mm asset

You finance it with $7mm of debt

The stabilized yield is projected to be 6.50%

Scenario A:

6.25% interest rate

Cost of debt (principal + interest / loan amount) = 7.39%

Spread to yield = -89 bps

Scenario B:

4.50% interest rate

Cost of debt (principal + interest / loan amount) = 6.08%

Spread to yield = +42 bps

The goal of any investor is to mitigate risk and maximize returns.

Positive leverage assists in both

3: Do Not Speculate on Interest Rates

In 2021, we saw many operators use short term, floating rate debt to buy value add apartments.

Here’s the problem:

Interest rates began to rise in 2022.

The rise in rates outpaced their ability to increase revenue.

So they couldn’t pay their debt service.

And some operators lost their properties. And their equity.

They speculated on interest rates staying lower for longer.

And lost.

I am not in the business of speculating on interest rates.

4: Finance Long Term Assets With Long Term Debt

Great real estate is irreplaceable.

In the fullness of time, great assets are worth more tomorrow than they are today.

The worst thing you can do is finance them with short term debt.

Why?

Often times you have to pay up for great assets.

That means the yields are lower.

If you put short term debt on an asset, and interest rates increase when you need to refinance, what happens?

You’re suddenly in a bad situation.

In general, the longer the term, the less the risk.

5: Invest Where a Competitive Advantage is Possessed

Real estate is inherently a local business

Locals know certain streets are better than others

Locals know why certain neighborhoods are better or worse than others

Locals know which businesses are coming and going

Local real estate investors know their market better than out of town investors

This is one of their competitive advantages

In any real estate investment, you must ask yourself:

Why is this person uniquely qualified to execute on the business plan?

The right answer often reveals a competitive advantage

Summary

Real estate investing is hard.

Don’t make it harder by lacking a few “north stars”.

I hope the principles above serve as a launching point to create your own set of core investing beliefs.

Thanks for reading - until next week,

Jake