When dealing with real estate investments there are many steps to go through before investing.  Here are my top 10 keys to a successful real estate investment.

(1)    Education – If you are not experienced in real estate investments the very first thing you should do is to get educated.  Take the time to find out what all of the risks are in the investment type you are interested in.  Find others that can help educate you on the investment type, which are not involved in the transaction you are doing specifically so there is no conflict of interest.  Buy books, tapes, and go to multiple seminars in order to continue your education, and don’t buy the ,000+ books and tapes sets from the gurus.  Buy your educational material from the bookstore and save yourself thousands of dollars. 

(2)    Goal Settings – If you do not have a goal lined out for your real estate investments how do you plan on getting there?  Most investors buy one property, or invest based on emotion rather than having a set goal in mind.  For example, you could have a goal of obtaining ,000 per month in passive rental income from your investments through buying single family rental homes and apartment buildings.  Your goals should be clearly defined and should include protections and risk mitigation techniques to make sure it is a stable viable plan that can be obtained. 

(3)    Building Your Ressources– You WILL NOT become a successful real estate investor without resources.  In real estate resources include, capital investors, property leads, team members and much more.  For this you must go to networking events if you do not already have your resources built.  It’s imperative that you go to networking events and expand your relationship base.  Real estate is a team sport so if you do not go network you cannot build your team.

(4)    Building Your Team –In order to make your investments work you must build your team.  Some of the team members you need are Real Estate Agents, Brokers and Bankers, Private Lenders, Appraisers, CPA’s, Attorney’s, Affiliates, Inspectors, Property Managers and Contractors.  There are much more but it’s pretty impossible to name them all.  It takes quite a bit of time to develop your team and make sure they can be relied upon.  I have found that building a team is the most important aspect of investing other than your due diligence on the investment itself.

(5)    Due Diligence – Before investing in any real estate asset your due diligence is crucial.  You need to analyze the market your investing in, the market timing relative to that market, the specific neighborhood, the market value of the investment, the cash flow it produces, the rental income it should bring in, all of the expenses related to the investment and much more.  Inspections should be done as well as review of all of the backup documentation such as leases and contracts.  Think like an auditor, review all of the backup information provided by the seller and verify it with an outside source as much as possible.  I hear horror stories all the time about how people lost money in real estate.  After inquiring as to what happened I can say that 99% of the time the investor did not do or know how to do the right due diligence on the investment in the first place.

(6)    Property Management– Property management can make or break your investment.  If you do not have a competent property manager that actually cares about your investment and your success you will have a losing investment.  We went through about 5 different property management companies before finally starting our own company and bringing the management in house.  Most managers are bad at some of the basic management functions such as accounting, rent collection, tenanting, leasing and background checks, repair calls and taking care of the tenant. By far the most important and biggest problem is communication with the owner of the property.  Communication is crucial because without communication the investor cannot make decisions regarding the investment and lack control.  Property management also needs to be structured based on performance, meaning, they get paid if it’s occupied only, not when it’s vacant and there are incentives in place to optimize performance. 

(7)    Marketing – If you do not know how to market for property, capital, property sales, and resources you will not be successful in real estate.  Marketing and sales is one of the most important parts of any business.  During economic problems and recessions most companies cut back on marketing when it’s most important to increase your marketing efforts.  If there are less investors, buyers, and resources available because of the economy, there is more of your competition going after your resources.  So in order to attract those resources before your competition you have to market more.  Marketing and sales is a business all in itself so getting educated on marketing strategies is imperative to your success.  When most people think marketing they think of posting classified ads, sending out mailers, coupons, billboards and more but the most important and underutilized marketing strategy is internet marketing.  Internet marketing is revolutionizing the way most companies market and if you do not understand it or start to learn about internet marketing you will not gain the market share you deserve and will not be as successful.  85% of buyers go online first for investments.  It is an online world weather you know about it or not.

(8)    Treat Your Investments As a Business – Most investors buy one real estate investment and do not fully utilize all of its capabilities from a business perspective.  If you own one property or 50+ properties you should be treating it as a business.  Be sure to keep track of ALL of your expenses related to the investment, the due diligence you did, travel costs you incurred, etc so that you can get a deduction for those items against income from other sources.  These types of expenses can happen annually and a percentage of your personal expenses can be used as a tax loophole in order to deduct more against your active income from your job.  Your biggest expense in life is your taxes.  It is the government’s job to find more creative ways to tax us.  It is our job to find creative ways to legally not pay taxes.  If you are not winning against the government, start to educate yourself on key tax saving strategies. 

(9)    Legal Protection And Tax Structuring – It is crucial that you protect yourself from financial predators.  There are people out there that will sue anyone they possibly can.  It’s really important to obtain additional umbrella insurance or put your assets into a proper entity so that you are not liable in frivolous lawsuits.  Generally for tax purposes you want to keep passive investments (investments like rental real estate that produce income you do not work for) in an LLC and active investments (investments you actively work for) in an S-Corporation or similar entity.  Please consult your individual tax advisor to go over your specific situation as it is impossible for this advice to relate to every situation.  Also be sure to keep yourself separate financially from the investment or entity you hold the investment in so that you do not pierce the corporate veil.  If you co-mingle your funds there is a very real possibility that in court your legal entity protection that you worked so hard to setup is worthless. 

(10)Investing In Sustainable Investment Types – Invest in asset types and real estate investments that are sustainable in the long run.  Look closely at the cash flow included in the investment.  If it’s negative, unless you are flipping, do not invest.  Flipping can be much more dangerous than investing for cash flow because you typically have a payment on a flip investment that is not covered fully by the rental income and if you get stuck with the property you find yourself in a negative cash flow situation and can only sustain as long as you have money in the bank that can make that payment.  Many people lose a lot of money trying to flip property, not knowing fully what they are doing and the risk they are taking only to lose a significant amount of money.  On the other side when you are investing for cash flow only invest in quality assets.  Typically if you invest in low end assets in your market you get low end tenants also.  What I consider a low end tenant is someone that does not pay the rent on time if at all, causes damage to your property and is a nightmare to deal with.  This happens quite frequently in low end property for a particular market.   You want to invest in quality long term assets that are going to produce positive monthly cash flow and make you a great return on investment after you have been conservative with the numbers.

I truly believe if you do these things along with increasing your financial IQ you will be successful if you work hard for it.  Most of the wealthy individuals in the world work hard for their money and are constantly evaluating their financial situation and investment goals.  Putting a personal budget together and reviewing it monthly, creating additional income sources, implementing tax savings strategies, protecting your money from financial predators and constantly educating yourself are the keys to becoming wealthy.   

As long as the average business man was an habitual borrower of money and possest no private fortune outside of his interest in his business, he was not greatly concerned with investment problems. The surplus wealth of the country for a long time was in the hands of financial institutions and a few wealthy capitalists. These men, the officers and directors of banks, savings-banks, and insurance companies, and the possessors of hereditary wealth, were thoroughly equipped[8] by training and experience for the solving of investment problems and needed no help in the disposition of the funds under their control. During the last ten years, however, these conditions have been greatly altered. The number of business men to-day in possession of funds in excess of their private wants and business requirements is far greater than it was ten years ago, and is constantly increasing. These men are confronted with a real investment problem.

While they have not always recognized it, the problem which they are called upon to solve is really twofold—it concerns the safeguarding of their private fortune and the wise disposition of their business surplus. They have usually seen the first part of this problem, but not all have succeeded in clearly understanding the second. When the treatment of a man’s business surplus is spoken of as an investment problem, it is meant, of course, not his working capital, which should be kept in liquid form for immediate needs, but that portion of his surplus which is set aside for emergencies. It is coming to be a recognized principle that every business enterprise of[9] whatever kind or size should establish a reserve fund. It is felt that the possession of a reserve fund puts the business upon a secure foundation, adds to its financial strength and reputation, and greatly increases its credit and borrowing capacity. The recognition of this fact, combined with the ability to set aside a reserve fund, has brought many men to a consideration of the best way in which to dispose of it. It is obviously a waste of income to have the surplus in bank-accounts; more than that, there would be a constant temptation to use it and to confuse it with working capital. Its best disposition is plainly in some safe interest-bearing security, which can be readily sold, so that it will be available for use if necessity demands.

Confronted with the double problem thus outlined, what measure of success has attended the average business man in its solution?

It is safe to say that the average man has found it easier to make money than to take care of it. Money-making, for him, is the result of successful activity in his own line of business, with which he is thoroughly familiar; while the investment of money is a thing apart from his business, with which he is not familiar,[10] and of which he may have had little practical experience. His failure to invest money wisely is not due to any want of intelligence or of proper care and foresight on his part, as he sometimes seems to believe, but simply because he is ignorant of the principles of a business which differs radically from his own.

The investment of money is a banker’s business. When the average man has funds to invest, whether he be a business man or a pure investor, he should consult some experienced and reliable investment banker just as he would consult a doctor or a lawyer if he were in need of medical or legal advice. This book is not intended to take the place of consultation with a banker, but to supplement it.

The advantage of such consultation is shown by the fact that if a man attempts to rely on his own judgment, he is almost certain not to do the best thing, even if his business instinct leads him to avoid those enterprises which are more plainly unpromising or fraudulent. It should be remembered, however, that widows and orphans are not the only ones ensnared by attractive advertisements and the promise of brilliant returns. In most cases, widows’ and[11] orphans’ funds are protected by conscientious and conservative trustees, and it is the average business man who furnishes the money which is ultimately lost in all propositions which violate the fundamental laws of investment.

The average man is led into these unwise investments through a very natural error of judgment. Accustomed to take reasonable chances and to make large returns in his own business, he fails to detect anything fundamentally wrong in a proposition simply because it promises to pay well. He forgets that the rate of interest on invested money, or pure interest, is very small, and that anything above that can only come as payment for management, as he makes in his own business, or at the sacrifice of some essential factor of safety which will usually lead to disaster.

For the successful investment of money, however, a good deal more is required than the mere ability to select a safe security. That is only one phase of the problem. Scientific investment demands a clear understanding of the fundamental distinctions between different classes of securities and strict adherence to the two cardinal principles, distribution of risk and[12] selection of securities in accordance with real requirements.

One of the most important distinctions is that between promises to pay and equities. Bonds, real-estate mortgages, and loans on collateral represent somebody’s promise to pay a certain sum of money at a future date; and if the promise be good and the security ample, the holder of the promise will be paid the money at the time due. On the other hand, equities, such as the capital stocks of banking, railway, and industrial corporations, represent only a certain residuary share in the assets and profits of a working concern, after payment of its obligations and fixt charges. The value of this residuary share may be large or small, may increase or diminish, but in no case can the holder of such a share require any one, least of all the company itself, to redeem the certificate representing his interest at the price he paid for it, nor indeed at any price. If a man buys a ,000 railroad bond, he knows that the railroad, if solvent, will pay him ,000 in cash when the bond is due. But if he buys a share of railroad stock, his only chance of getting his money back, if he should wish it, is that some[13] one else will want to buy his share for what he paid for it, or more. In one case he has bought a promise to pay, and in the other an equity.

It is not the intention, from the foregoing, to draw the conclusion that equities under no circumstances are to be regarded as investments, because many of our bank and railroad stocks, and even some of our public-utility and industrial stocks, have attained a stability and permanence of value and possess sufficiently long dividend records to justify their consideration when investments are contemplated; but it is essential that the investor should have a thorough understanding of the distinction involved.

The principle of distribution of risk is a simple one. It involves no more than obedience to the old rule which forbids putting all one’s eggs in the same basket. The number of men who carry out this principle with any thoroughness, however, is very small. Proper distribution means not only the division of property among the various forms of investment, as railroad bonds, municipals, mortgages, public-utility bonds, etc., but also the preservation of proper geographical proportions within each[14] form. Adherence to this principle is perhaps not so important for private investors as for institutions. A striking instance of the need for insistence upon its observance in the institutional field was furnished by one of the fire-insurance companies of San Francisco after the earthquake. It appeared that the company’s assets were largely invested in San Francisco real estate and in local enterprises generally, where the bulk of its fire risks were concentrated. As a result, the very catastrophe which converted its risks into actual liabilities deprived its assets of all immediate value. This instance serves to show the importance of the principle and the necessity for its observance.

The principle of selection in accordance with real requirements is more complex. It involves a thorough understanding of the chief points which must be considered in the selection of all investments. These are five in number: (1) Safety of principal and interest, or the assurance of receiving the principal and interest on the dates due; (2) rate of income, or the net return which is realized on the actual amount of money invested; (3) convertibility into cash, or the readiness with which it is possible to[15] realize on the investment; (4) prospect of appreciation in value, or that growth in intrinsic value which tends to advance market price; and (5) stability of market price, or the likelihood of maintaining the integrity of the principal invested.

The five qualities above enumerated are present in different degrees in every investment, and the scientific investor naturally selects those securities which possess in a high degree the qualities upon which he wishes to place emphasis. A large part of the problem of investment lies in the careful selection of securities to meet one’s actual requirements. The average investor does not thoroughly understand this point. He does not realize that a high degree of one quality involves a lower degree of other qualities. He may have a general impression that a high rate of income is apt to indicate less assurance of safety, but he rarely applies the same reasoning to other qualities. When he buys securities, he is quite likely to pay for qualities which he does not need. It is very common, for example, when he wishes to make a permanent investment and has no thought of reselling, to find him purchasing[16] securities which possess in a high degree the quality of convertibility. From his point of view, this is pure waste. A high degree of convertibility is only obtained at the sacrifice of some other quality—usually rate of income. If he were to use more care in his selections, he could probably find some other security possessing equal safety, equal stability, and equal promise of appreciation in value, which would yield considerably greater revenue, lacking only ready convertibility. Thus he would satisfy his real requirements and obtain a greater income, at the expense only of a quality which he does not need.

The quality of convertibility divides investors into classes more sharply than any other quality. For some investors convertibility is a matter of small importance; for others it is the paramount consideration. Generally speaking, the private investor does not need to place much emphasis upon the quality of convertibility, at least for the larger part of his estate. On the other hand, for a business surplus, ready convertibility is an absolute necessity, and in order to secure it, something in the way of income must usually be sacrificed.[17]

Again, some investors are so situated that they can insist strongly upon promise of appreciation in value, while others can not afford to do so. Rich men whose income is in excess of their wants, can afford to forego something in the way of yearly return for the sake of a strong prospect of appreciation in value. Such men naturally buy bank and trust-company stocks, whose general characteristic is a small return upon the money invested, but a strong likelihood of appreciation in value. This is owing to the general practise of well-regulated banks to distribute only about half their earnings in dividends and to credit the rest to surplus, thus insuring a steady rise in the book value of the stock. Rich men, again, can afford to take chances with the quality of safety, for the sake of greater income, in a way which poor men should never do. In practise, however, if the writer’s observation can be depended upon, it is usually the poor men who take the chances—and lose their money.

In the quality of safety, there is a marked difference between safety of principal and safety of interest. With some investments the principal is much safer than the interest, and[18]vice versa. This can best be illustrated by examples. The bonds of terminal companies, which are guaranteed as to interest, under the terms of a lease, by the railroads which use the terminal, are usually far safer as to interest than as to principal. While the lease lasts, the interest is probably perfectly secure, but when the lease expires and the bonds mature, the railroads may see fit to abandon the terminal and build one elsewhere, if the city has grown in another direction, and the terminal may cease to have any value except as real estate. On the other hand, a new railroad, built in a thinly settled but rapidly growing part of the country, may have difficulty in bad years in meeting its interest charges, and may even go into temporary default, but if the bonds are issued at a low rate per mile and the management of the road is honest and capable, the safety of the principal can scarcely be questioned.

Stability of market price is frequently a consideration of great importance. This quality should never be confused with the quality of safety. Safety means the assurance that the maker of the obligation will pay principal and[19] interest when due; stability of market price means that the investment shall not shrink in quoted value. These are very different things, tho frequently identified in people’s minds. An investment may possess assured safety of principal and interest and yet suffer a violent decline in quoted price, owing to a change in general business and financial conditions. In times of continued business prosperity very high rates are demanded for the use of money, because the liquid capital of the country, to a large extent, has been converted into fixt forms, in the development of new mines, the building of new factories and railroads, and in the improvement and extension of existing properties. These high rates have the effect of reducing the price level of investment securities because people having such securities are apt to sell them in order to lend the money so released, thus maintaining the parity between the yields upon free and invested capital.

As an illustration of this tendency, within the last few years New York City 3½-per-cent bonds have declined from 110 to 90, without the slightest suspicion of their safety. Their inherent qualities have changed in no respect[20] except that their prospect of appreciation in quoted price has become decidedly brighter. Their fall in price has been due to two factors, one general and the other special—first, the absorption of liquid capital and consequent rise in interest rates, occasioned by the unprecedented business activity of the country, and, second, to the unfavorable technical position of the bonds, due to an increased supply in the face of a decreased demand.

It will be seen that the question of maintaining the integrity of the money invested is a matter of great importance and deserves to rank as a fifth factor in determining the selection of investments, altho it is not an inherent quality of each investment, but is dependent for its effect upon general conditions. If it is essential to the investor that his security should not shrink in quoted price, his best investment is a real-estate mortgage, which is not quoted and consequently does not fluctate. For the investment of a business surplus, however, where a high degree of convertibility is required, real-estate mortgages will not answer, and the best way to guard against shrinkage is to purchase a short-term security, whose[21] approach to maturity will maintain the price close to par.

The foregoing comments, in a brief and imperfect way, serve to indicate the main points which should be considered in the selection of securities for investment. The considerations advanced will be amplified as occasion demands in the following pages. For the present, the main lesson which it is sought to draw is the necessity that a man should have a thorough understanding of his real requirements before he attempts to make investments. For a private investor to go to a banker and ask him to suggest a security to him without telling him the exact nature of his wants is about as foolish as it would be for a patient to go to a physician and ask him to give him some medicine without telling him the symptoms of the trouble which he wished cured. In neither case can the adviser act intelligently unless he knows what end he is seeking to accomplish.

It is plainly impossible within the limits of a small volume to consider the needs of all classes of investors. Special attention will be paid to the requirements of a business surplus and of the private investor. In the field of private[22] investment two distinct classes can be recognized—those who are dependent upon income from investments and those who are not. Both classes will be considered. For the investment of a business surplus, safety, convertibility, and stability of price are the qualities to be emphasized; for investors dependent upon income, safety and a high return; and for those not dependent upon income, a high return and prospect of appreciation in value. In the following chapters railroad bonds, real-estate mortgages, industrial, public-utility, and municipal bonds and stocks will be considered in turn; their advantages and disadvantages will be analyzed in accordance with the determining qualities above enumerated, and their adaptability to the requirements of a business surplus and of private investment will be discust.

Investing small amounts can be done very easy. Most people think they need a great capital to start investing and often don’t understand why they should invest. They consider investing as a financial instrument which can only grow if you spend a large amount in the stock market.

It is true that rich people can easier invest money because they can afford to set more money aside for several years without struggling to pay their bills. Investing is nowadays a necessity because everyone needs to save for a secure future and for some long-term goals.

There are several plans where you can invest small amounts of money in the stock market but it’s maybe better to invest in mutual funds because you invest immediately in several companies. Diversification is the key to have success if you want to build up your investment portfolio and it’s impossible to diversify with investing small amounts in stocks of individual companies. The fees are too high if you want to invest small amounts in stocks; so the best choice is definitively mutual funds.

Before you start investing small amounts of money you need to know the purpose of your investment and if you can afford to take any risk. Do you want to invest for short term or long term goals? There are plans for every investor.

Here are some possibilities how you can invest small amounts of money and you can consider choosing one or more of these options if it fits your goals and the risk you want to take:

*A savings account

Everyone needs a savings account for unexpected expenses and to build up a financial safety net. Nobody knows what will happen in the future and it is best to start with making a budget and you can calculate how much you can invest every month. Online savings accounts offer the best interest rate and it’s best to compare these of different banks. The rates are often twice as much compared with a traditional savings account. It is maybe best to withdraw in the beginning of every month small amounts of money from your bank account to your savings account.

*Investing in mutual funds through systematic investment plans

A savings account is the best start to invest your money but you will likely reach higher returns with money you don’t need immediately. It is possible to invest small amounts of money in these plans and it is maybe best to consider investing every month a same amount. This system of investing has the benefit that you don’t buy always on peak prices and often reach the higher returns than you spend a large amount of money at once. Systematic investing will reduce your average cost of investing.

An important issue is the risk you want to take and it is often wise to invest in balanced mutual funds (mutual funds which invest for 50% in shares and 50% in bonds). If you come near to the age of retirement you can limit the risk and switch them in mutual funds which invest for a higher percentile in bonds.

*Retirement plans

Retirement plans are popular and a necessity for the future. It is maybe the best system of investing small amounts of money. You only need to know that you can’t withdraw from this account before you reach the age of retirement. It’s an investment plan which provides money when you reach the age of retirement. You can’t invest in these plans for ten years to buy a house or something else.

There are different retirement plans between all the countries and certainly in different continents but the main principles are the same. You can invest a small amount of money every month or once a year in these plans. IRA’s and 401(k) plans are popular in America; pension funds are popular in Europe. There are plans with a fixed rate which is much higher than a savings account but you can only choose for an investing system in mutual funds according your risk profile.

These plans offer also tax benefits. Every time you invest in these plans you will enjoy tax benefits. In other words have two benefits; all these investments reduces your tax bill at the end of the year and you will reach a higher return when you reach the age of retirement compared with a savings account. It is wise to take the necessary precautions because you may need to limit your risk.

*Investing in bonds or shares

You can invest small amounts of money in bonds or shares but you will likely pay too much costs compared with investing in mutual funds. There are many shares which can be bought for a small amount but the fixed fees are often too high. There is one system where you can avoid these high fees and you even don’t need to buy a whole share but these plans are not well known because it is forbidden by law to advertise these plans. Direct purchase plans allow investing small amounts to buy stocks; it is already possible for .00 each month. The disadvantage is that you need to invest in at least 20 companies if you want to diversify to limit the risk.

There is plenty of choice to invest small amounts of money and you may need several options to limit your risk. A savings account is a necessity for building up your safety net but you may need to invest small amounts of money in mutual funds and retirement plans to reach your goals. Investing is a necessity and you don’t need much money to start investing and before you know you will reach a high investment portfolio.