Warren Buffett is famous for his two rules of investing.
Rule #1 – Don't lose money.
Rule #2 – Don't forget Rule #1.
In my experience, the way to keep Buffett's rules as a buy and hold investor is to implement a Successful Investor Model, which involves three key steps.
1. Know The Values
The first key to success as a buy and hold real estate investor is to know values. By knowing values, I mean that you understand the market rate for rents and properties in the area where you are looking to purchase a rental.
The best way to learn rent values and property values in a specific part of town is by reviewing comparable properties. Some of the best sources for comps include the local Multiple Listing Service (MLS), Zillow, Craigslist, County Assessors, local appraisers, Realtors, property managers, and other investors.
Early in my investing career, I called every For Rent sign in my target neighborhoods to determine the market rental prices. Similarly, I inquired of For Sale By Owner (FSBO) signs to discover the market price for houses. I did this so I could know for certain what the values were for the houses wanted to purchase.
Once you are fluent in market prices for rent rates and house values, you are ready for Step 2.
2. Find Opportunities
The second key is to find opportunities. If you know values, it is infinitely easier to determine whether a property is an investment opportunity or not.
It is very easy to decide whether a rental house is a good deal if you know the market rent rate and/or the market price for the property. The trick is that you have to have a way to look at opportunities. In real estate investing we call the way to find deals “sourcing”.
Sourcing deals is a fancy term that means finding as many opportunities as you possibly can. The local MLS is a constant source of For Sale properties. Similarly, Zillow and Craigslist always have properties for sale on their websites. Oftentimes, property owners bypass local real estate agents and attempt to sell the property by themselves in a transaction referred to as a FSBO (pronounced “fiz-bow”, meaning For Sale By Owner). Auction company and websites are other sources of properties. All of these sources are essentially repositories for prospective purchasers to review opportunities.
Knowing values allows the successful investor to quickly decide whether an opportunity is worth pursuing, which means it is important to have as many sources as possible to compare properties.
3. Make Deals
The final key to success as a buy and hold real estate investor is to make deals. Knowing values allows you to locate opportunities. But, you have to make deals in order to take advantage of the opportunities you find.
The best opportunities are only good if you can get the deal closed, which can be easier said than done. Just like learning values and finding opportunities, knowing when to act (and then following through with the action) is a discipline that successful investors develop with practice.
One easy-to-remember saying that has helped many an investor make a deal is the phrase, “Your price, my terms; my price, your terms.” All this means is that there is usually a way to make a good opportunity work if both parties collaborate and strive for a win-win solution. Buyers and sellers have to work together to make a deal. If not, both sides lose.
The Successful Investor Model in Action
Over a decade ago, I set out to buy rental houses in my hometown of Memphis, TN. The first thing I did was to determine the rent rates and market prices of properties in the rental neighbors close to my personal residence. I looked at Zillow, the County Assessor, the MLS, and other resources to figure out the market. Very soon I learned what a 3-bedroom, 1-bathroom house would cost and what it would rent for.
Next, I started looking for opportunities to buy 3/1's in our target area. I searched the MLS, Craigslist, FSBO's, and other sources. After seeing many properties For Sale that were not being offered at bargain prices, I eventually found a great opportunity at the County Tax Sale. In fact, the house I found was selling for less than 25% of its market value.
At this point, I had to make a deal. I bid “my price” on the property, but then had to comply with the County's terms, which meant I had to jump through several loops to make the deal work. After a set period of time, I owned a gem of a property at a fraction of its fair market value, all because I (1) knew the value, (2) searched for the opportunity, and (3) worked hard to make a deal (and I still own the property today!).
If you follow the three keys of the Successful Real Estate Investor Model (i.e., know values, find opportunities, and make deals), then you should have very little trouble keeping Buffett's first rule of investing, which means you'll keep his second rule, too!