Real Estate Investing

4 Fundamentals of Real Estate Investing


Adnan Ul Haq

Module 3:Real Estate Fundamentals and Rules

4 Fundamentals of Real Estate Investing

Adnan Ul Haq

4 Fundamentals of Real Estate Investing


Without a doubt, one of the most important things in real estate is understanding. If you know more about how it works and what drives prices higher or lower at different times throughout each year, only then you will be able to take profitable decisions. 

There are four fundamentals of real estate. If you know these fundamentals, only then will you be able to make better decisions. You will know better about where to invest money as you will have valuable information that can lead towards successful investment. 

Following are these four fundamentals:

  1. Money into Pocket

The very first thing to consider is whether the real estate is putting money into your pocket or is it taking it out from your pocket. If the money is coming into your pocket, then its fundamentals are strong, it will give you growth in the future, and it will build your wealth and make you rich.

If the money is going out of your pocket, you need to consider the difference between the expense and income of the real estate. If the expense is more than income, then that real estate is not beneficial. For example, if the income is Rs. 100 and the expense is Rs. 110; then it is not beneficial.

If the income and benefit are more than the expense, then it is beneficial; it is putting money into your pocket instead of doing otherwise. For example, if the benefit is Rs. 110 and its expense is Rs. 100 then it is beneficial.

If you keep the property only for appreciation, then it could also backfire. The actual important thing is the cashflow. Your property must ensure a good future cashflow

  1. Standalone

The second fundamental is that the investment must stand alone and be independent. You should not be taking the money out from one place and investing it in another.

We must not take money out of the income-producing asset and invest it in the property that is going into loss. It will continue going in loss. The income-producing asset will continue funding the loss-producing asset; your wealth will suffer, and you will not be able to compound your income.

The investment should be standalone, and a standalone investment should be profitable. If it is not profitable then it means your fundamentals of investment are weak. 

  1. Investment Control

The third point is how much investment control do you have. 

  • Do you have control over your property’s expenses? 
  • Do you have control over its rental?
  • Can you multiply the income by improving it? 
  • Can you lessen the expenses by making the improvement or not?
  • Are you renting out the place yourself, or is someone else doing it?
  • Are you spending the money, or is someone else doing it?
  • How many of the bills are fixed?
  • How many of it is variables could be improved?

You must ensure the answers to all these questions. The fixed bills can not be improved, but the variable bills can be fixed by making some improvements like improving the efficiency, changing the meter, etc.  

If we can do all this, then its fundamentals are strong, and we should invest in it. If we could not do all this, then we should not invest in it. You must have control over your property in order to improve its income from time to time. 

  1. Exit Strategy

The fourth point is very important. Understand exit strategy.

Many people, new property investors, often get stuck here. They invest in a plot or a house; they get stuck because they do not have any exit plan. Or they have bought land, it's vacant, no buyer is coming, there is no market there, and no tenant is coming. 

Such conditions are very critical and troublesome for the investor.

You should plan an exit strategy by keeping the following questions in mind:

  • How would you exit? If you are stuck somewhere or are going in loss, how would you exit?
  • When would you exit? You should ideally exit when the market value is high.
  • When will there be a market? It is when there are buyers.
  • When will there be buyers? It will be when the buyers have money.

These basic factors will define your exit strategy.

Before making the investment, think about how you would exit it. If you are going into a cave and the door gets closed, how would you come out of it? If climbing a mountain, how would you climb down from it? 

We must have an exit strategy before making the investment. How will we come out of the cave, or how will we climb down the mountain? 

This is called an exit strategy. If you have it, your fundamentals are strong. If you do not have it, your fundamentals are weak. So, you must design an exit strategy before planning an investment so that you may not face any kind of loss. 

When you are thinking about investing, always keep these four fundamentals of real estate in your mind. These will help make sure your investments are safe, and you don't lose money.