Real Estate Investing – The Basics

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

Though most of you fully understand what I will lay out in this article, I thought it would be good to revisit the beauty of the starter investment in a single family residence, duplex, triplex or fourplex. Certainly a better case can be made for an investment in larger units, but today’s thoughts are aimed at the typical “mom and pop” or first real estate investment. Though hindsight is 20/20, this scenario would have worked over any 30 year period you can remember.

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.

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.

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 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.

As I said in the beginning, most of you realize the truth in the above facts. I just wanted to reiterate again the true real estate opportunities available for “new investors,” even forgetting the additional benefits of leverage and depreciation.

Peter Rosenthal
VIP Trust Deed Company