Real Estate Secrets
Article 7: Real Estate Investing Secrets for Beginners (How to Invest Locally in Real Estate)
Article 8: The Real Estate Secret Home-Repair History of Any House: The CLUE Report
Article 9: Real Estate Secrets: How to Find Good Tenants
Real Estate Investing Secrets for Beginners (How to Invest Locally in Real Estate)
By Dr. Steve Sjuggerud
‘I’ve tried everything, Steve. And this is what works for me…’
Gene’s been a real estate investor full time for the last nine years. The interesting part is, because of real estate, Gene has never really had a regular job, though at this point he could easily write a quintessential guide to real estate investing for beginners. You see, Gene is only 35 years old, and already he’s accumulated a wealth of practical real estate secrets in his professional career. I met him when I was speaking at a Van Tharp seminar (www.iitm.com) on the stock market. Unlike the rest of us, since his properties don’t require a ton of work now, he’s actually looking for something to do to fill his time, so he was thinking about trading stocks.
Gene got into real estate right out of school. In fact, he got into real estate DURING school. After graduating from Brown University, he went to the University of Florida for a master’s degree. But a funny thing happened on the way to his master’s degree… Gene discovered that he could probably make more money in real estate investing than he could ever possibly make in his chosen field.
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.
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 come a long way since his beginner days in real estate investing, and he’s still learning the ropes.
But he’s sticking with his core premise.
Here’s one of Gene’s central real estate secrets: 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 for him.
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.
There’s a difference between real estate speculating and real estate investing. 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% as a beginner in real estate investing?
A realtor friend told me about a valuable real estate secret of the insurance world: There’s a little-known way for you to do a background check on any house you’re thinking about buying. It’s called a CLUE report, which stands for Comprehensive Loss Underwriting Exchange. This database is made up of more than 90% of the companies that insure homes. The CLUE reports will give you the details on any homeowner’s insurance claims filed on a particular home. Although you can’t order a CLUE report on someone else’s property, you can ask the seller to provide one for you. The price of the CLUE report varies, depending on where you live. In Maryland and a handful of other states, it’s free. At most it will cost $8. The CLUE report can help you in two ways. First, it will let you know if there’s a history of significant damage, such as roof problems or flooding. Second, if you see a history of high claims, you’ll know that it may be hard for you to get a good deal on homeowner’s coverage. You may be able to use that information as a negotiating point. For more information on the CLUE report, go to www.choicetrust.com. Click on “home,” and scroll down to “CLUE Report.” Real Estate Secrets: How to Find Good Tenants A friend of mine recently told me one of his real estate secrets for finding good tenants. He makes his living entirely with real estate, and if you own rental real estate, you might want to try the same thing. There are the obvious things, such as checking credit and business references, as well as other landlord references. But my friend recommends the following real estate secret that few others dare to follow: Be willing to rent to people with kids or pets. Most landlords shy away from these tenants because of the extra wear and tear on their properties. But the truth is, he says, such tenants are usually not only more responsible, they tend to stay longer than individuals or couples because they know they’ll have a hard time finding a new place. All you have to do is charge a larger security deposit.
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