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Barbara Corcoran’s ‘Golden Rule’ for Real Estate Investing
By Kristopher Kane,
10 hours ago
Image Press Agency/NurPhoto / iStock.com
Investor, real estate mogul and one of the “sharks” on ABC’s popular “Shark Tank,” Barbara Corcoran frequently offers advice about investing in real estate. You might want to pay attention — though she may have started her career as a waitress, she’s currently worth about $100 million, and it all started with a $1000 loan.
During her rise to a level of wealth that most people only dream about, Corcoran hasn’t deviated once from her “golden rule” for real estate investing. In an interview with BigPockets Real Estate Podcast from last year, Corcoran was asked to explain her “golden rule.”
Corcoran’s strategy for investing in real estate is as powerful as it is simple.
Her golden rule is made up of two parts. The first part is good advice for any real estate purchase: make a 20% down payment. The second part is renting the property out to tenants for enough to cover the mortgage, even if you don’t profit initially.
Let’s break down why this is such good advice.
20% Down Payment
While some mortgage lenders will allow you to buy a house without putting any money down, making a larger down payment is an effective strategy for several reasons.
It has the immediate effect of reducing the monthly mortgage, and by buying a greater share of the home’s equity outright, you’ll be better prepared to deal with any unforeseen rises in mortgage rates and housing prices. And with less principal to pay, it means you’ll hit a break-even point that much quicker.
You’ll generally also avoid the need for mortgage insurance with a larger down payment. Many lenders require you to carry this kind of insurance with smaller down payments. Though you’re footing the bill, this insurance protects the lender if you’re unable to pay your mortgage in full. It’s an additional cost that can seriously impact your ability to realize returns.
Corcoran said that at a bare minimum, your tenants should cover the full amount of your mortgage payment from day one. Though you may not be making money at the beginning of your real estate investment journey, you won’t be out any money or in a position where you have to continue funding the investment.
Instead, you’ll be free to invest income from other sources in other opportunities. You’ll also be in an even better position to reach that break-even point, after which the investment starts to show returns.
Corcoran emphasized that she doesn’t expect to make money on an investment property for the first couple of years, but as time goes by and rents increase, the money the tenants pay becomes profit. That profit can then be reinvested in other things.
Why It Works
It seems pretty straightforward, but if you’re thinking of putting this plan into action for yourself, you might want to understand the theory behind it and why Corcoran’s advice is solid.
Real estate, like any investment, isn’t a sure thing. There’s no guarantee you’ll be able to rent or sell an investment property at a profit, but by following Corcoran’s method, you’re mitigating much of the upfront risk involved.
You’re also making sure you’ll have a steady cash flow, which means the investment isn’t eating up any more resources beyond that 20% down payment.
Patience Is a Virtue
It should be noted that this isn’t a get-rich-quick scheme. Like many good things, this kind of wealth generation takes some time. Bear in mind that Corcoran’s strategy won’t show any profit for at least the first couple of years. And when profit does start to come in, it will be modest at first.
The key is to be patient, plan for the long term and realize wealth-building isn’t a sprint but a marathon. Holding on to investment properties longer gives them time to appreciate in value, and if you do ever decide to sell, you’ll do so at a profit.
To emphasize this point, Corcoran also warned against taking money out of your investments too soon.
“You cripple your business if you start taking money out,” she said. “You want to see how long you can go without touching a dime.”
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