Investing In Real Estate – Made Simple

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By PETER ROSENTHAL, President
V.I.P. Trust Deed Company

I am often asked to explain “how to get into real estate investing,” and also what to expect for the future with a real estate purchase. The following column is NOT intended to make you a professional but, in fact, just the opposite. Just buying one small piece of real estate, i.e. single family residence, duplex, triplex or fourplex, can greatly improve your net worth and retirement without leveraging into other properties or buying large properties. My following example could have taken place 30 years ago, 20 years ago, 10 years ago or today.

A 30 year old couple buy a four unit apartment building. They put 10-30% down and the building either breaks even or has a positive cash flow based on their down payment. Hopefully, the building is NOT pride of ownership so that they can arrange or do the painting and fixup work on their own. Over the next year or two, they put in extra time on weekends and bring the units “up to snuff.” As a tenant moves out, they ask market rent and over the next few years the overall rents have gone up approximately 15-20%. Though I can lay out many instances where rents were raised 15-30% overnight, that “quick profit” is not what I am referring to here. Using my example, a good, spendable cash flow has now developed.

Some time during the first ten years of ownership, the real estate market gets “hot” and they have an opportunity to sell these units at, perhaps, a 50% increase in price. Assuming an original 10-30% down payment, the return on investment would be fantastic. This couple, however, bought this property for retirement. Obviously, over this 10 year period of time the balance owed on the first trust deed has been reduced and though it would have been further reduced dramatically by overpayments with the now abundant cash flow, I am still trying to keep this investment simple and pure.

By the time this couple has owned this property for 20 years, the rents have increased unbelievably since the original purchase and the mortgage is now “almost paid off.” Since this story was intended to last 30 years, let’s now jump ahead to the 30th anniversary of this purchase. The 30 year mortgage is now paid off and the rents are, perhaps, ten times (or more) the rental schedule 30 years past. This couple is now facing retirement and the value of this one house or small multiple unit building is now a significant part of their net worth and now produces far more income monthly than their upcoming retirement. I am certainly ignoring any extra 401K type plans.

I have authored columns on this subject at least once every year or two, dating back some 20 years. At the time I started writing about this subject, the typical mom and pop were a one income family, with the typical wage earner husband working for the post office, a supermarket, an auto mechanic or even small business owner. Over the years I have personally witnessed hundreds of these true “mom and pop” investors who have turned a rental house or small starter building into a retirement that GREATLY EXCEEDED their retirement income from their profession of 20-30 years.

I have purposely used a “buy it and hold it for 30 years” example. Most investors do not hold as stated for 30 years. Most people tend to sell or refinance along the way. Many of these investors refinance to purchase more property or exchange the equity for other properties. Though fortunes have been made on leveraging into more property, I wanted to remind you how simple real estate investing can really be with the aim of producing SUBSTANTIAL RETIREMENT INCOME.

Over 30 years, real estate cycles come and go and it is even possible that you bought at “the wrong time.” The wrong time in recent history would have been 1989-1990. Though many investment properties have not yet come back to where it was ten years ago, my 30 year scenario will certainly work. If a property was purchased in 1979, there were certainly no gains until the mid 1980’s. Time tends to heal all wounds. Certainly my 30 year scenario has worked wonders in the past.

Okay, you are convinced. Now I will tell you the simplest way to start a real estate investment future. Though cash flow in real estate is greater as the number of units increases, the simplest and easiest method of investing is just to buy your next house WITHOUT selling your existing house. Instead of selling your present house and using ALL of your equity as the down payment, put a smaller down payment on the new house and KEEP your existing house as a rental. Get professional help in picking a tenant and, hopefully, the rent you receive will pay all or almost all of the costs of your existing mortgage, insurance, property tax, maintenance, etc. Just imagine this scenario 10-20 years from now, when the houses have appreciated 50-100% or more.

As I said when I started this column, this is not how most real estate investors make substantial profits, this is merely the simplest way to make your first real estate investment.

Peter Rosenthal
VIP Trust Deed Company