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I never had to come up with a lot of money at any one time— never more than 25 percent of what I had saved that year, even when I was saving less than $10,000. But the small investments added up. Frequently, I was able to swap a piece of property that had appreciated (in some cases, doubled in value) for another one that I thought had greater potential. Sometimes, I traded one unit for two.
Most important, I bought a lot of properties in partnership with friends and colleagues. Having had the very good experience of owning the Baltimore property with partners, I reasoned that it was better to own 50 percent of two buildings rather than 100 percent of one. I wanted to put as much diversification as possible into my local rental real estate portfolio.
And it worked. In less than eight years, I accumulated more than 20 properties—the smallest being a condominium apartment I bought for $65,000 (that is now worth $160,000 and producing $12,000 a year in cash) and the largest one being a 21-unit apartment complex. All totaled, these properties are worth millions of dollars. Yet, except for the big one that came later, I never laid out more than $20,000 at any one time.
The appreciation I’ve enjoyed has been tremendous—more than a million dollars in eight years. And best of all, it happened with so little work on my part. My partners found the properties. They, or someone we hired, did the renovations. A management company I
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hired does most of the rentals. What it doesn’t do, my partners take care of for some modest fees. The equity I have in these buildings is probably going up at least $250,000 a year right now. And what am I doing? Nothing!
And this is just my residential rentals in South Florida. I’ve also enjoyed some equally wonderful deals in the commercial arena. The building I’m writing from at this moment was an 11,000-square-foot warehouse that my friend and I bought for $400,000 about seven years ago. We fixed it up and bought an adjacent parking lot (another $200,000). Today, it is generating about $70,000 in net cash income—plus, the value has increased by considerably more than a million dollars.
With this kind of experience under my belt, how could I not be enthusiastic about real estate?
A Few Cautionary Words . . .
But I must issue the required cautionary warnings. Real estate does not always appreciate. The national historical average might be 5 percent or 6 percent, but there are plenty of regions where land has not appreciated a nickel in a hundred years.
When investing in real estate, you have to think about trends. When it comes to real estate trends, I like growth areas and especially waterfront growth areas.
Another caution: As I write this, I believe real estate is at the peak of a very significant bubble. I expect to see single-family home prices in most of the country’s major growth areas decline by 15 percent. Commercial real estate could drop 20 percent or more, and condo-miniums—always the riskiest part of the residential real estate mar-ket—might drop by as much as 40 percent.
That said, I’m still shopping. If you can find properties, as I’ll explain later, that can sustain themselves through such downturns, you will eventually come out richer for it. (A good example: that Washington, D.C., disaster I told you about. I eventually got out of it after losing $35,000 on my $65,000 investment because I couldn’t afford to put more cash in it. Yet if I had held onto it, I’d be smiling. Because today, that unit is worth at least $650,000.)
I was able to get into real estate in a small way, learn from my mistakes, leverage every investment with mortgages, and use the cash
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returns to buy other properties, which compounded the equity I was earning in leaps and bounds.
And as I said earlier, I did this without ever coming out of pocket more than $20,000 and without ever spending more than four or five hours on a single deal. The entire time I devote to managing my real estate portfolio today is less than four hours a month.
If you are an investor in local real estate rentals, you probably have good stories of your own to tell. If you are new to the game, we’re going to go through a few basic things you need to know right here.
Don’t forget the most important secret in building your fortune in real estate: Knowledge is everything.
Net Rents Are Your Safety Net
There are four ways wealth builds in a real estate investment: compounded appreciation, leverage, net rents, and amortization. In Chapter 4, we looked at an example of buying a property for $100,000 that appreciated at an annual rate of 6.5 percent. In the first year, it went up $6,500. But in year 11, your annual 6.5 percent appreciation worked out to $12,200 because the value of the property had compounded to about $187,700.
You leveraged your investment by financing 90 percent of the purchase price. That means you put down $10,000. When we factored in closing costs ($2,000), the appreciation in year 11 alone worked out to be more than 100 percent of your original investment (since $12,200 is more than 100 percent of your original $12,000 total initial investment).