Editor's note: Emotions can trick you into making bad investing decisions...

Regular Digest readers know how dangerous it is to become fond of a particular investment... and how your feelings can cloud your judgment in the process. But according to our colleague Steve Sjuggerud, emotions can run even higher with real estate investing. After all, unlike with stocks or bonds, you can see and touch a house – and it's easy to get attached...

That's why Steve says emotion is one of the biggest challenges to successful real estate investing. It can make it hard to spot a good deal – and even harder to walk away from a bad one...

In today's Masters Series, originally from the June 22, 2020 Digest, Steve details how he first got started in the real estate business in the 1990s... and shares the first of three simple rules you can apply to any investment in the sector...

Why I Bought a House With a Hole in the Ceiling

By Steve Sjuggerud, editor, True Wealth Real Estate

Most folks get introduced to real estate when they buy their first home...

They're called "starter homes" for a reason, after all.

But for me, it started with surfing trips in the early 1990s. You could say I did things a bit differently. I couldn't help myself...

I didn't set out looking for deals on property. But against all odds, I realized something that planted the seed. And by 1999, I was having an awkward conversation with my wife...

"I need to buy a beachfront lot in Nicaragua," I told her.

We hadn't even bought our first home yet. She wasn't amused. But I'd thought this through...

You see, I had been taking surfing trips to Nicaragua since 1993. And I found a wave that I believed would someday be one of the hottest destinations in the world. It was that good.

That's why at 28 years old, I thought I'd unlocked the code. I was going to buy a lot right by that wave... and build a house on it. I was sure that location would be a big deal in the coming years.

Amazingly enough, my wife agreed.

We closed on a strip of dirt in a foreign country for $15,000. That was more money back then than it is today... And for us at the time, it was a LOT of money.

To the best of my knowledge, I was the first person to build a home at Rancho Santana, Nicaragua. I was right about the wave, too... The hot spot, Playa Popoyo, has since hosted the International Surfing Association world championships multiple times.

My plan for the Nicaraguan property was simple...

I'd rent the house out (just like an Airbnb). The property would pay for itself... And I would have access to one of the best surfing locations in the world.

Over the years that I held the property, lots of friends and acquaintances stayed there...

They were having a blast. And the once-secret surfing spots were becoming popular destinations. My road map was playing out just as I thought it would.

But there was one major problem... Not a single penny of the rent money ever made it back to me.

I had someone taking care of the property locally. And by the time they got paid... plus cleanings, upkeep, and fees... I made no money at all.

My house was the surf destination. But somehow, I wasn't making money on it.

To this day, I don't know exactly where the hole in the bucket was. Folks paid to be there. But between fees, maintenance, cleaning, and who knows what else, none of it ended up in my pocket.

I wish I was able to stop the hole in the bucket. I couldn't seem to, though. So after a few years, I sold the house for about three times what it had cost me. It was a major win, even after the rent issues.

More than that, it was a big learning experience...

I learned that managing property thousands of miles away comes with unique challenges. And fortunately, I also learned a lot more than just that...

In the years since, I've continued to seek out real estate opportunities. And most of them ended up being darn successful.

More important, each venture came with its own learning experiences. And each opportunity presented itself in different ways. The thrill and chase of a real estate deal, aside from being profitable, can also be a lot of fun.

Today, the majority of my investable wealth is in real estate. I own plenty of stocks, too. But I tend to gravitate toward property first.

To say I've learned a lot would be an understatement. So today, I'll start with the biggest takeaway I've learned from my personal investments...

When it comes to real estate, no matter what you're looking at, there are only three things you need to understand. And no, they aren't... "Location, Location, Location!"

Once you understand these three simple principles, you can apply them to any real estate investment... from homes to raw land to apartments. It always works.

I'll share the first rule today. And we'll cover the next two tomorrow.

Let's get started...

My first rule is simple – don't pay too much.

This may seem obvious... so obvious that you're wondering why I bother bringing it up at all. But believe me, overpaying is a trap that's easy – and I mean EASY – to fall into.

The problem is emotion. Folks get emotional about their stock investments, after all. And real estate is much more tangible. You see it with your eyes and touch it with your hands.

Emotions can run wild... and trick you into making bad decisions.

Without realizing it, you can fall in love with a particular property. That leads to a willingness to pay any price. And overpaying is the easiest way to get into trouble.

If you're not buying for investment purposes, it's a different story... Your home, in my opinion, is more about living than it is about making an investment. Buy the home you actually want to spend time in. That's fine.

But investment real estate is different...

You've got to seek out deals. Getting at least a 10% discount to true market value is key. And that's AFTER estimated closing and renovation costs.

To get a grip on true market value, you must look at similar sales in the area. For any home, figure out the typical sale price based on price per square foot.

Not every home is identical, of course... Remodels and amenities can alter numbers. But if you look at 20 or 30 recent sales, a trend will emerge. Make sure you're buying at a discount to that price.

I've had a lot of success buying homes this way. Over the years, I've been fortunate enough to buy at discounts of about 20% to the market.

That sounds good on the surface... Buy stuff cheap and the rest works out. But I know what you're wondering... How did I actually do it? How do you get from cheap prices on paper... to successful deals in reality?

I believe these were the three keys for me...

1. I was willing to walk away from the deal (it didn't HAVE to be THAT house).

2. The houses I bought showed terribly, but were fine structurally.

3. The sellers lived out of state and didn't have a strong emotional attachment.

Ultimately, the point is... don't ever overpay. There are plenty of other properties to choose from. So be willing to consider properties that look ugly... but that you can easily shine up.

This is exactly how my wife and I bought our first home.

We moved from Florida to Baltimore in 1998 for business reasons...

My wife and I had just gotten married. And I'll be honest, Florida was our home. We weren't that excited about the change.

Longtime Digest readers know I love the beach... I've been surfing for as long as I can remember. That led to what's honestly an addiction to water sports. Windsurfing, foiling, paddleboarding, and kiting – I've spent time doing it all.

Simply put, being near the water is at the core of who I am. So moving to Maryland for work was a tough decision. But I had a plan...

As we decided to move, I told my wife, "I need three years. After that, I'll be able to work from anywhere in the world."

Obviously, Baltimore wasn't at the top of my list. I planned to get back to the water as quickly as I could.

That might not sound like the ideal starting point for buying our first home. But once again, the opportunity was there...

Two years into our three-year stint, we found a home in the Homeland neighborhood of Baltimore. It's a pretty fitting name, if I do say so myself.

It's one of Baltimore's nicer neighborhoods. Today, the median home price is roughly $465,000.

The homes are old... Many were built in the 1930s and 1940s. And they're covered with beautiful stone and brick facades.

Now, you might be thinking, "Well, that's nice. Steve bought a home in one of Baltimore's most expensive neighborhoods. Of course it worked out for him."

Yes and no... We did buy in one of Baltimore's nicest neighborhoods – the nicest we could afford, at least. But we did it in a particular way...

We could afford to buy in that neighborhood for one reason... We bought what was, by far, the worst home for sale in the neighborhood.

The yard had totally grown over. From the outside, it looked like the house was abandoned. Step inside, and you'd find pet stains covering the carpet. It got worse, though...

There was a big hole in the ceiling on the main level. It was so big you could look right up into the upstairs bathroom above it. It was like the tub had just fallen out of the sky.

Simply put, the property looked terrible... It obviously needed a lot of work.

But the thing was, its bones were (mostly) in perfect order... Nearly everything that needed fixing – aside from that hole in the ceiling – was cosmetic.

So we bought the house at a great price. And then, Home Depot became my best friend. My wife and I practically lived there...

We rented tools. We bought supplies. And we put in a lot of "sweat equity" cleaning the place up.

Don't get me wrong... It was a lot of work. But we were young and had the time. Fixing it up didn't cost much.

We bought the house for roughly $125,000. A year later, it was time for us to move... Our three years were up. And I was eager to be back by the beach.

That meant it was time to sell the house. We'd already done the hard work of getting it into shape.

Unfortunately, the sale ended up being a learning experience, too...

You see, the listing agent told us, "You just bought this house for $125,000. There's no way you can list it for more than $175,000."

My wife and I had seen the comparable homes on the market. We thought $175,000 was too low. We'd spent a lot of time fixing the place up. And we wanted a fair payoff for that work.

But we were young. And the listing agent was pushy. So we caved.

"Maybe he just understands selling homes better than we do," we told ourselves.

Still, it felt like the wrong thing to do. And it was... Our home sold in less than 24 hours. The agent hadn't even put a sign in the yard.

It wasn't a hot market, either... It was just a "too good to pass up" opportunity in a nice neighborhood. Someone who understood the "don't overpay" rule got an amazing deal on that house.

I still regret not listing our first home for more. But it's not like we made out bad...

In that year, my wife and I made an extra $50,000, minus the small cost of our repairs. And all it took was seeing the beauty in the worst home... in the best neighborhood.

Remember, we bought at a discount. Sure, we put in the work. But that discount is what locked in our future profits.

Had I stuck to my guns, we could have done even better. But I learned that lesson... And I can assure you, I never made that mistake again.

Regardless, we made good money on that sale because we followed my first rule... We didn't overpay. And, my friends, that's crucial for success in real estate investing.

It's not the only thing you need to know, though. Tomorrow, I'll share my next two rules.

Good investing,

Steve

Editor's note: Tomorrow, Steve will share his second and third rules to successful real estate investing. But in the meantime, he recently uncovered a huge story that he says could be the setup of a lifetime...

According to Steve, the confusion in today's markets is creating a buying opportunity that could lead to a series of gains up to 1,000%. Even better, he has identified a way to make those types of gains in a group of stocks that almost nobody is paying attention to yet. That won't be the case forever, though...

Steve recently came forward to show you exactly what he recommends you do today – before those assets explode in value. Plus, he explained why he believes this idea could be better than gold for the next decade. Watch his brand-new presentation right here.