Never Negative Gear and 11 other rules for investing

By John Burley

Investor John Burley has a portfolio of 160+ residential properties, shares and businesses. In this article he shares the 12 rules of investing that help him continue to build his wealth.

Take a good look at the rules you are currently using in regards to money and investing. Are YOUR Rules empowering or limiting your financial success?

RULE 1 - Integrity

In my opinion the most important thing is Integrity. If the people I’m playing (working) with don’t have Integrity I don’t play (do business) with them. I have found out the hard way that people with questionable (or lack of) Integrity usually turn on you before the deal is done. Remember that Integrity is more important than anything else.

RULE 2 - Know the Rules

Before I play ‘The game of investing’ I want to know 3 things - a) the Rules of the Market; b) the Rules of ‘The Game’ (based on my Niche); c) my Rules

RULE 3 - Buy Wholesale

As an Investor I know that to make a profit I must buy wholesale (or sub-wholesale) and then resell at retail (or just below).

RULE 4 - Profit at Purchase

You make your money when you buy, not when you sell. When making a decision on what to offer for a property I make my decision solely based on the cash flow or capital gains profit (after expenses). I NEVER include the tax savings or appreciation. I don’t include them because they are unknown, constantly changing and not guaranteed.

RULE 5 - Low Risk Idea

I only invest a small percentage (0-5%) of MY net worth in any one investment. I do this because even though I have never lost money on an investment I want to eliminate the possibility (fear) of being wiped out on a couple of deals gone bad.

RULE 6 - House Money

I use OPM (Other People’s Money) whenever possible. Leverage allows me to do far more transactions than I ever could own. Remember, it’s always better to have a piece of the pie than none of the pie.

RULE 7 - Money Back

I structure my transactions so that I get all my money back as soon as possible. Remember, one of the major keys to money is to have it work for you and once you have your initial investment back your money is working for you at the rate of return of infinity. On most of my transactions I have all of my money back within the first year.

RULE 8 - Don’t - Wanters

I buy from people who don’t want their property. This means I buy my properties from highly motivated sellers. If someone doesn’t want their property they are much more likely to be flexible on their price or terms.

RULE 9 - Cash Flow

Although I often acquire properties solely to turn them around for a capital gain, I prefer to make as much of my profit as I can in the form of positive Cash Flow. Note that I NEVER negatively gear a property.

RULE 10 - Define the investment

I prefer to invest in single family homes that meet my criteria or definition that I have very clearly laid out:
• 20% below the median price
• Livable condition
• 3 bedroom, 1.5 bathrooms
• Acceptable neighbourhood
• Covered parking
• No more than 30 minutes
• Fenced yard away from my home

RULE 11 - No Emotions

When I invest all I care about is the Return on Investment after taxes. The only thing that matters is the Bottom Line. I don’t care what colour the carpet is or about the pretty garden. Just give me the numbers. When it comes to investing, the numbers are the most important thing. Emotions play a very small part. I always tell students who are calling for assistance, "Don’t tell me about the house. Tell me about the numbers." So be like the professionals.

Don’t get emotionally involved. Get Rich instead.

RULE 12 - Ride the Winners and Cut the Losers

I have found that most people do the exact opposite. They often do this because of the advice of their so-called "Professional" advisors. This happens because stock brokers are trained to tell you to "sell" when you make a small profit. The bottom line being, the broker wants to make more commission when you sell and then reinvest (over and over and over). How often have you or someone you knew, sold an investment for a respectable profit only to see the investment continue to go through the roof? How often have you held on to an investment despite the fact that it was a "Dog", hoping that some day it would come back? Top investors "Ride the Winners and Cut the Losers". You should do the same.

WINNING THE INVESTING GAME

I recommend that you take a good look at how your Principles and Rules compare with top investors. Emphasise those things you are doing right and learn from those things that you need to change. I know that if you apply the generalised Principles and follow YOUR RULES that you will WIN the ‘Money Game’.