Remembering Early Investment Lessons or Oatmeal Never Killed Anyone

Beyond most of the thoughts you might have when buying investment property, being fairly certain of a profit should be an early rule.  I can reroimember buying a duplex in the late 80’s.  Not long out of college and I was saving most of my income and lucky enough to have a nudge in the right direction.

Return on Investment sounds nice, but the average investor is worried about paying the bills, keeping a tenant in place and having enough left over each month to put something in the bank.  I use estimates or, when available, actual numbers today.   Over time, I picked up a handful of ideas.  Beginning with having something left each month, is good, but not really enough to compare properties.   Valuing a property needs to include a way to judge the cash flow, value of the land and building, updates to the property and the return, based on the particular property, financing options and future.

I started from a little different place than most brokers.  The family business was real estate and, after graduating college, I realized how much freedom it gave me.  Granted, I ate oatmeal with a multi-vitamin for breakfast for the first 6 months and my recreation for the first year was a workout at a local free-weight gym for $10/month, but investing always felt like freedom.  Anyway, within 2 years, I’d built a first home and begun buying small rentals.  Just out of college, I only really cared about positive cash flow and the ability to borrow money for the next project.  With each buy, I built up a little bigger reserve of cash.  I’m guessing my reserve rarely dropped below 12 months of living and loan expense.  Saving was easier than you might think.  I knew enough to do quite a bit of the work when

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First Home late 80’s

building my first home, but would make a point of paying subcontractors immediately after completion.  Whenever possible always added my own labor.   When I needed a roof, an engineer friend showed me how to start and I spent the next 2 1/2 days finishing…along with help from a friend.  Some of my best memories are of working on my first home.

Several rentals later, I finally gave up doing all the maintenance.  I began to look at the cost if I hired someone, instead of writing off the cost of my time and labor.   It worked, but sweat equity has value in your time.

As I remember, my first calculations for actual gross income included 90% of market rent to allow for vacancy, less tax, insurance and maintenance (10% of rent), less reserves.   Subtract monthly loan cost and add back in the benefit of depreciation, if any, for a net number, then compare the return to the initial investment for ROI.  Before looking at depreciation or any other part of the calculation, I just wanted to know if money would be left over each month, after considering fixed expenses, repairs, vacancy and reserves.   I never used a rental manager, so the 10-15% added a little more safety. When selling, I generally saved a selling side broker’s fee and, instead of cheering, would add to my reserves.

What would I tell a beginning investor? Identify the work you can do and are capable of doing well.  Be sure it can be at or exceeding code and is work you can legally complete.  Save money and always have a reserve.  The more properties you control, the more important it will become to keep a decent reserve.  Back in 2007, I watched brokers, attorneys, contractors and more, lose live savings and credit.  Most were overextended and held property longer, hoping they would somehow recover.  In my case, I sold a lot of property, never lost good credit, but had some lean years.  Sometimes having a front seat view is educational.   Regardless, you should always be frugal and, if you ever need to sell, don’t argue with a profit.  Real estate can be unforgiving and buyers aren’t always cooperative.  Buy older cars for cash.   I drove one great BMW for 7 years and paid about what everyone else paid for a Honda.   Friends traded cars 3 or 4 times, while I just kept replacing the tires and smiling.  I think I paid $12,000 for a 3-year-old car and drove it another 7 years.  No payments for 7 years is a really big deal, when car payments add up to down-payments on investment property.   I didn’t make a payment on a car until my late 40’s and only because the interest rate was just ridiculous.  This goes along with two rules I tried to follow.  First, buy income property to hold and try to never hold anything vacant.  It should be obvious, but financing is easier for income property, you can use depreciation and tenants pay your cost of holding.  The return is multiplied with leverage.   The second rule is to live within your means.  Try not to make payments on anything with a decreasing value.  Oddly enough, I almost always pay with a credit card, but have, for many years, used only cards with a zero fee and annual rebate.  That said, I only used the card to avoid paying with cash and never used it to borrow….better credit and no debt.

You should always want the market to pay off a part of any debt with appreciation.  It never became part of an investment formula, but it is there.  The safety is in buying “long-term”.  Real estate, over a long period of time, will generally go up by 3 to 5% per year.  By the way,  I never bought a mobile home as a rental, because I felt the buildings actually decreased in value and become more difficult to finance.  Essentially, mobile homes always looked like financial traps, no matter how wonderful the cash flow.   When you look at an investment, think about whether it makes sense.  Would you want to live in the property or do business from the location, if needed.   Never buy anything you really would not want to use.  Tenants change based on convenience and a bad location isn’t worth buying.   If the tenants aren’t happy, you won’t be happy.

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