Why 'Shark Tank' Investor Barbara Corcoran's Golden Rule Of Real Estate Investing May Not Work For You

Like many investors, "Shark Tank" star Barbara Corcoran started small when building her portfolio. Ironically, she didn't intend to become a real estate magnate when it all began. Corcoran's real estate adventure began after she had been unsuccessful at a string of different jobs and decided to take a stab at real estate management.

She borrowed $1,000 from her then-boyfriend to start her property management business out of a tiny office in New York City. It was during this period that Corcoran developed what she calls her "golden rule" of real estate investing. This rule calls for investors to put 20% down on properties and then get tenants whose rent payments cover the mortgage.

Over time, the property will appreciate and the rent the tenant pays will turn to residual income as the mortgage is paid down. Eventually, the mortgage is paid off and all the tenant rent — minus management fees, insurance and property taxes — becomes pure monthly profit for the owner. Repeat this method will give you a nice portfolio of income properties to support you a decade or so down the road.  

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Corcoran is living proof. She used this method to build her Corcoran Group real estate company into a powerhouse worth $66 million before selling it to real estate giant NRT in 2001. But there is a significant problem keeping modern investors from copying Corcoran's method.

Corcoran is in her 60s, which means she started her real estate empire roughly four decades ago when $1,000 was a 20% downpayment on a $50,000 property. Fast forward to today, and $1,000 barely gets you an iPhone — not a piece of income property. You might have to go back in a time machine to the Carter administration to find the last time you could buy income property in New York City for $50,000.

These days, $50,000 is a 20% down payment on a $250,000 property. If you're thinking of investing in New York, Los Angeles, Chicago or any of America's big cities, the cost of single-family homes can be more than $1 million. Income properties or commercial real estate in prime areas will likely cost several times that amount. Yes, following Corcoran's golden rule would still put you in a good position with equity in the property and allow you to get an affordable mortgage.

But only a small percentage of investors have the capital necessary to make a 20% down payment on an investment property at today's prices. This is one of the main reasons real estate crowdfunding, fractional ownership and real estate investment trusts (REITs) have become so popular.

Even if you've only got $1,000 to invest, you can find offerings on platforms like Arrived and CityVest. Other platforms like Yieldstreet, RealtyMogul and EquityMultiple have minimum investments of $5,000 for offerings in a diverse range of real estate sectors. That won't get you 20% equity in those properties, but it's still a good way to start small and build a winning portfolio of passive income-generating properties.

The fundamentals of real estate investing that make Corcoran's 20% rule a success still exist, even if the 20% is now more money than most investors can afford. A potential way to adapt is to buy small slices of different properties until all those small slices add up to a full pie that will sustain you in retirement or boost your income. 

The good news is that it's still possible to build a real estate empire of your own by making a slight tweak to Corcoran's approach. Remember that Rome wasn't built in a day, and big things have small beginnings. If you approach real estate or any other type of investing with this mindset, you have good odds of winning in the long run.  

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