Successful real estate investing is a long term game. Following the right strategy with discipline and perseverance will allow smart investors to weather the market’s cycles and build equity. Time and leverage are your friends.

But don’t underestimate the importance of the time part of the equation. In the past I’ve compared the performance of the real estate market with the stock market. For the disciplined investor, real estate performs favorably to the stock market over any reasonable period of time, but you’ll need a few years for the strategy to be effective. If you’re only going to stay in the game a year or two you might as well buy a mutual fund and call it a day. But investors with perseverance will see their wealth grow much faster by pursuing a prudent real estate strategy than they will betting on the stock market.  So to take advantage of time you’ll need a little endurance. Sticking with your real estate investing plan is a lot easier if you’re prudent about your decisions and keep your eye on some fundamental points.

Landlording and long-term investing go hand-in hand. Being a landlord isn’t for everyone, but if you have the right personality and decision making skills then it’s a snap.

Here are five tenants tenets that I’ve determined to be the most important. Ignore these at your peril…^*

• Principle #1: Look before you leap
• Principle 2: Select the right tenant
• Principle 3: Take care of your tenants
• Principle 4: Don’t take shortcuts with repairs
• Principle 5: Know when to say “when”

I'll talk about the first two in today's post:

Principle #1: Look before you leap

Many real estate investing courses are just personal motivation seminars with a thin veneer of real estate education . These courses may serve some use if they cause you to take charge of your financial future, but you don’t want to go charging into battle without the right tools.

A great source of real estate bargains is burned out investors who’ve jumped into a project without a realistic idea of what it would take to get it done. It’s easy to underestimate rehab costs when you’re bidding on a property. Don’t let your optimism lead you down the wrong path.

When a good deal pops up you’ll often have to act quickly, but even when under a deadline there is still time to conduct a basic economic evaluation. Compare the cash outflow (mortgage plus taxes and expenses) to the cash inflow (rental income) to get an idea whether or not you should expect the property to break even on a month-to-month basis. And things break, so don’t forget to include a reserve fund that should be around 1.5% of the property value per year. The best way to maintain your peace of mind is to invest in properties that offer an adequate return, and this will require you to do your homework.

Principle 2: Select the right tenant

Before I bought my first investment property my wife ran out and rented Pacific Heights on video and forced me to watch it. Perhaps you remember this movie: Michael Keaton plays a evil con-man who rents half of a San Francisco duplex from a naïve yuppie couple then turns their lives into a living hell. Bloodshed and drama ensue.

Well it’s not a great movie so I won’t recommend that you sit through it, but I will share with you the film’s primary insight: if you’re renting a high-end property do a credit check the applicant before signing the lease. Housing laws vary from state to state, but one trait that they have in common is that they’re designed to protect the tenant, not the landlord. If you end up renting to a family who destroys your house or refuses to pay the rent then you’ll surely spend a fortune and a lot of time and effort getting them out.

If you’re renting a lower-end property then doing a credit check on the applicant is less likely to yield any useful insights since applicants for inexpensive properties may not have established credit histories. You’ll have to rely on other methods of evaluating applicants, such as references from previous landlords and from employers. Call the references. Follow up.

And lastly, learn something about the applicants when you meet them (and yes, you should meet them – don’t leave this to your realtor). Do they arrive on time? Do they strike you as someone who will treat your property respectfully?

In the end you’ll have to trust your instincts. Having a vacancy is stressful, but it’s not nearly as stressful as having a unit occupied by a tenant who makes your life difficult. It’s not a good idea to indiscriminately accept the first applicant who waves some cash in your face, tempting though it may be. Remember – housing laws are first and foremost designed to protect the tenant; they’re not designed to protect your rights as a landlord. Renting your property to the wrong person is an expensive mistake.

I'll write about the other principles soon....stay tuned. 

* once you start writing tenets about tenants you're setting yourself up for this kind of typo.