Investment U

When he finished his masters, he didn’t even bother getting a job in his field. You see, while in school, he bought up a few tiny little properties in Gainesville (where the University of Florida is), for what he thought were good deals. He spruced them up himself. And he either sold them or rented them out – both for truly extraordinary profits.

It’s Never Too Late

At that time, it seemed easy – too easy. Gene had to have been lucky, he felt. So he started ordering everything out there on real estate to find out what works – he tried foreclosures, auctions, high-end properties, low-end properties, and he bought those courses from the infomercials. He tried it all. But none of them worked nearly as well as his initial instinct. Nine years later, he’s learned a lot on the way, and he’s still learning. But he’s sticking with his core premise.

Here’s what he does: He says he buys middle-to-lower class properties on the fringe of good neighborhoods. He only buys at what he considers to be a 20% discount or more to the market value of the property. And he only buys when he can NET 8%+ a year in rent. That’s it. After trying all the hype, this is what works.

When I asked ‘why middle-to-lower class properties?’ he said, ‘Look, the lower-class rents are nearly as high as the middle-class rents [I don't remember exactly what Gene said, let's say $600 a month versus $750 a month]. But the middle-class properties generally sell for twice what the lower-class properties sell for or more. So by buying middle-to-lower class properties, right on the fringe of good neighborhoods, I earn twice the income.’ Makes good sense.

He buys right on the fringe of good neighborhoods where his properties can potentially get swallowed up by expansion of the good neighborhood, potentially earning him a large profit. But he doesn’t count on that. The rents have to be there first.

Speculation vs. Investing

There’s a difference between SPECULATING and INVESTING in real estate. SPECULATION is buying a chunk of earth and hoping it goes up in value, without considering the rental income. INVESTING is making sure you get a nice return on your money. Gene only INVESTS in real estate – he only buys properties that will give him a great return on his money now, through rent.

He had a lot of sensible sayings, like when I asked him about economic downturns: ‘There will always be a demand for the properties I buy in an economic downturn, middle-class folks move down to these so they can pay less rent. And in an economic upturn, lower-class folks will move up with these.’

I asked him about rent collection and property destruction, both of which might be issues in a lower-class neighborhood. He says he gets a huge security deposit, and his leases are written such that the resident knows that if they screw up, they lose their security deposit. Also, Gene makes sure that every deal he does makes sense even if up to 40% of the rent he collects goes away due to expenses or bad tenants.

Gene told me he’d tried more expensive homes, but the return wasn’t there. He said that many ‘investors’ own these homes just to say that they own them. But the real money to be made is in properties that nobody else is willing to take a chance on. He quotes Warren Buffett’s margin-of-safety concept, figuring that if you can make a sound enough investment at a low enough discount to its underlying value, and get paid handsomely, there’s sufficient margin of safety that you should be fine regardless of what happens.

I was paying close attention to Gene. He was making good sense. I came home from the conference and started looking at rental properties.

Where else can you get 8%?

Well, there IS a place. And you don’t have to do all the work Gene does. There are no closing costs or other big fees. You simply buy shares of Equity Residential (NYSE:EQR). By doing this, you don’t own individual apartment complexes or homes like Gene does. You actually own a diversified portfolio of a quarter million apartments in 36 states, all professionally managed. Equity Residential is paying a 7% dividend – a percent less than the 8% or more Gene shoots for. But still, Gene has big closing costs, and hassles with residents. You simply get the income, plus or minus any capital appreciation

All the benefits, with many fewer risks.

It’s time to get into local real estate. Nationwide. Consider Gene’s rules, and get into real estate locally yourself. Or do it the easy way, and buy yourself some share of EQR.

Good investing,

Steve

Today’s Investment U Crib Sheet

• I’ve written extensively about other real estate income trusts like EQR in my newsletter, ‘Steve Sjuggerud’s True Wealth.’ For more information on how you can subscribe to it, please follow the link. That will take you to a free, no-obligation report that describes my letter in full detail and also outlines the Four Laws of Lasting Wealth that it is based on.