How I Almost Got Rich
by David Barth
written December 3, 2006
This account was written to show on the process I used and the mistakes I made in an attempt to gain significant wealth in real estate. It failed because I
didn't stay the path and work out the issues and problems inherent in my business. Had I followed through with a few simple actions, my situation would be a
lot different today. It is possible that the methodology described here could work for someone who has the desire to gain wealth.
Hundreds of books have been written about this subject. This article reflects my experience and is no guarantee that it would make anyone else rich.
I came close.
This method achieves wealth through the time value of real estate assets. Real estate increases in value faster than most other investment vehicles. It rarely
decreases more than a few percentage points in valuation, and these down markets are usually temporary. Real estate investment also allows the investor to
keep his regular job to support the process.
The person embarking on this venture should be prepared to work it for the long haul because it can take 30 or 40 years to achieve a significant return. The
underlying factor that supports real estate investment as a viable wealth generator is the continuing increase in property buyers due to the population explosion.
Also, to paraphrase Will Rogers, new land isn't being made anymore. The location for this endeavor can be anywhere, but a locale where housing prices are
moderate and within the individual's income capacity can be advantageous.
When considering the purchase of property, it is best to be in a city where you plan to stay for awhile because it is easier to control the assets when they are
close to you.
Before buying, consider your income/debt ratio to determine how much you can spend on purchasing your first property. If you already own a house, decide what
needs to be done to make it a good rental unit. Lender rules favor owners who will occupy the purchased property. The best financing usually requires you to move
from your present residence into the new purchase. The advantage of this is that you can live in the newly purchased house and fix any deficiencies before moving on.
However, it is possible to get an 80 percent (20 percent down payment) conventional loan on investment property that you don't have to occupy. I purchased an
additional property about every one to two years, depending on what I found available on the market and my financial situation at that time.
When you rent out a property you own, you need to know that you are not allowed to discriminate based on several, widely published factors. However, you are
allowed to decide who will rent your property based on financial aspects. I never ran background checks on renters. I went by intuition, which resulted in some
bad renters from time to time.
It is a good idea to develop a friendship or association with someone who knows how to evict undesirable renters or learn how to do it, yourself. I never did formally
evict a renter. A couple of times I suggested to a non-paying renter that he leave and rent property that he could afford. Some cities have clubs for property investors
and other business people where you can gain knowledge. Also, the local chamber of commerce can often provide contacts.
After you have two or three properties, the burden of maintaining them can become significant. My downfall was not hiring a property management company that
would take care of all my rental units. I began to get discouraged by the overload of cleaning, painting, and repairing homes that had been vacated, showing them
to prospective renters, and addressing ongoing maintenance issues such as plugged toilets, drains that needed to be snaked, roofs that needed repair, water
heaters that needed to be re-lighted, etc.
If I were to do this again, I would do exactly what I did before, except that I would hire a property management company after I had a few rentals. These companies
charge 7 to 10 percent of the gross rental income. Some will take you on as a client only if you have a minimum number of properties. Shop around for the one you
like the best. These companies will do background checks on rental candidates, evict non-paying renters, and alert you of maintenance issues. They have contacts
with repair specialists who can be called in to fix problems. If you have an entrepreneurial disposition and sufficient capital, along the way, you can start your own
property management company to service your own properties, then horizontally integrate it into providing the service for other property owners.
One factor I found that helped me acquire property was that I didn't spend all of my disposable income from my regular job, and I was able to save some of it to build
a down payment for the next acquisition. That meant that I couldn't buy a new car very often. I had to do without things that other people bought. I conserved my
money in preparation for the next purchase. Building a down payment for the next property buy often took a year or two.
When starting out, check to see if local government agencies will assist you. For example the Colorado Housing Finance Authority (CHFA) will guarantee a loan
that a qualified buyer gets through a lender. This can result in a much lower down payment and, possibly, a more favorable interest rate. Factors that they consider
are the buyer's income and assets. Institutions such as this usually favor lending to first-time buyers who do not have much income or many assets, but my second
house purchase was made through a state program like this.
When buying real estate, try to choose a real estate agent you like working with. It helps to stay with one agent because your purchases earn him money, and if
you continue to work though him he will be on the lookout for good buys. A good agent can provide guidance regarding the various neighborhoods that might be
good investor targets, historical home sale comparisons ("comps"), and access to the Multilist.
Most house transactions generate around 6 percent sales commission, paid by the seller from the proceeds of the sale, which is divided between the seller's agent
(sometimes called the "listing agent") and the buyer's agent. A desirable situation for an agent is to "double-side" a house transaction where he is the seller's agent
and the buyer's agent. Although this would seem to be a conflict of interest, buyers need to realize that, traditionally, every agent represents the seller unless one of
them is, by contract with the buyer, specifically a "buyer's agent." If both agents represent the seller, the commission split is agreed upon between them, and it is
usually a 50-50 split. However, a buyer's agent has to have a contractual relationship with the buyer and the selling agent so that he can participate in the split. Some
buyer's agents simply charge the buyer a commission. I never used a buyer's agent, and it never caused me concern.
The real estate agent usually assists in qualifying a buyer to ensure that he can make the payments for the property that he is interested in buying. The agent can
also recommend a lender although it is good to shop around for an attractive interest rate.
Most loans are for 30 years, but some can be had for 15 or 50 years. I prefer a 30 year loan because it offers a decent monthly payment and it can be paid off in a
reasonable length of time. Consider that the interest rate can cause the total loan payback, including interest, to be three times the buy price of the house. I never
made principal-only payments to pay down the mortgage and reduce total interest. Interest on investment property is a tax deduction, so there is some benefit to
paying interest.
Investment property must be depreciated either by normal or accelerated methods. I always took the accelerated option and let my tax person do the calculations.
One thing I decided to do was to pay other people to do things such as taxes and property buying and selling. I never did a "for sale by owner" (FSBO) when I did sell
property because the real estate agent not only knows the latest rules, but he takes care of numerous details, and he is responsible if there are any glitches. When I
sold a house, I added the 6 percent commission to the sale price. After all, that is what retailers do. They tack their costs on to the price that the
customer pays.
When a buyer puts down earnest money on a house, if he backs out of the deal, I believe the seller should always take the earnest money except in unusual
circumstances such as a death or inability to qualify on the buyer's side. Some agents want to establish a relationship with buyers, and they try to get a seller to
give back the earnest money if a buyer decides to buy a different home. This is a strike against the agent who should consider the interest of the seller, first, not a
buyer who bails out on the deal. I dropped agents who tried to give the earnest money back simply for them to groom a buyer to sell a different property to them.
As a seller, I wanted to establish the concept that only serious buyers interested in my property should put down earnest money, and if they backed out, they were
going to lose that money just as the contract specified.
In addition, I found agents who made extra money by telling the seller that some things in the house needed to be improved. I had an agent try to get me to put
carpet on basement stairs, put on a new roof, and do many other non-critical improvements. He always said that he had showed the house to a potential buyer
who wanted those improvements, but that buyer never wrote a contract. In every case, the agent recommended that I use a repair person whom he knew and had
worked with. I smelled "kickback," and I dropped the agent. Using a different agent, the house sold at the price I wanted, without any of the improvements.
Sometimes an agent suggests improvements that help make the sale. You have to judge for yourself. Don't let them push you around. If they do, get another
agent.
The key player in a house sale is the Title Company. The Title Company guarantees that the title is passed correctly from seller to buyer and that there are no
"glitches" in the title that might cause a prior owner or his descendents to challenge ownership. Also, the Title Company processes all of the paperwork and
handles the money and mortgage issues for the lender. The seller and agents walk away with checks and the buyer walks away with a mortgage. The lending
company usually chooses a title company that they like to work with, and I've never had any problems in this area.
It takes a long time to generate wealth in real estate. Rarely does a house value increase in a short period of time, allowing you to sell it at a huge profit within a
few months following purchase. I don't recommend taking a second mortgage except in a real emergency because it simply increases the debt load without
increasing the asset base. When a house is finally paid off after 30 or so years, and it has been depreciated to zero as per IRS rules, this is where maximum profit
can be had when the house is sold. Of course, if you don't need to sell it, the average value will continue to increase, probably much better than a bank account.
In my experience, houses I purchased went up in value by a factor of 10 over a 30-year period, and along the way, renters paid the debt load and I received tax
benefits. Do the math.
I really don't have much more to say on this subject. Getting started is the most difficult issue. Once you have acquired house number two and you have rented
one of the houses, you are on your way to wealth, if everything goes right. At one time I owned a dozen properties valued at over a million dollars, all mortgaged,
of course. The financial situation was no problem because, although there was a small negative income in the first year or two, it was easily covered by the
disposable income from my regular job, even if one or two of the houses were temporarily vacant. Besides, if you have a fixed mortgage instead of an adjustable
rate mortgage (ARM), rents go up over time due to inflation, but your payment remains constant. You don't need a real estate license to do this. I got one in later
years, just to learn a little more about real estate, but having one is not necessary.