Great Investors

In the last 35 years, no one’s equity has grown at a faster rate than the couple I call “Mark and Sharon.” They each had more than 20 years of working for other people’s benefit before I met them. She is a doctor, and he had a command position within a major fire department. For more than a generation, her job was to keep people healthy or help them become healthy again. His job was to make sure somebody on his team brought the baby out of the burning building.

In other words, these were not hardhearted, greedy Scrooges. They had a history of taking personal risks for other peoples’ benefit… before they owned any rental property.

Wise Choices

I met Mark and Sharon when they were in their 40s. It was the second marriage for both. They bought a new home together and rented out the house and condo each lived in before. They were thinking of buying another rental house when we met.

We traded the two rentals into some apartments, cleaned them up, painted them up, fixed them up, and sold them for a profit. They doubled their equity in each investment within three years. When I wrote about them in Building Legacy Wealth, they owned 60 units; Today they own 90.

Part of what enabled their equity to grow fast has to do with their concern for others and their clarity about building their equity efficiently and ethically. 

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Mark and Sharon made wise choices. Here are some things they do that you can do, too.

Buy Property with the Right Things Wrong with It

The best value creation happens when you purchase properties with the right things wrong with them. The right things are solvable problems where the fix adds value. Some problems can’t be solved, like the freight train that roars past a building at 2 AM every night. Some solvable problems don’t add value. Spending thousands fixing a roof does not bring higher rent.

Renovate to Add Value

Prioritize your renovation dollars. First, solve any health and safety issues. Then allocate renovation money to get the fastest possible return. Typically, that has meant moving out the least desirable tenant or the person whose rent was the furthest below market value.

Mark and Sharon became disciplined improvers. Within a year, each apartment had been improved and rent grew faster than inflation. In their early acquisitions, upgrades were often installing matching ceiling fans, faucets, fixtures, hardware, and the currently stylish outlet covers and switch plates. More recently, they were averaging $10,000 per unit for bigger renovations.

They understand that the cash flow is only the dimes. The dollars come from wealth creation. Income property is valued as a multiple of rent. Value can increase 10- 20 times as much as the rent increases. Because of their liquidity and income, Mark and Sharon were able to fund renovations more aggressively and faster than many of the other millionaires that I serve.

Be a Good Landlord

This couple is not perfect but there’s no way that they would ever deliberately exploit a tenant. Some observers might even say that Mark and Sharon “trust people too much.” Probably some tenants have deceived them and probably they have been a bit more generous with the refunding of security deposits than facts alone would justify. Hundreds of people have rented from them in the last generation, and they are probably among the best landlords that most of the renters have ever dealt with.

On the other hand, lenders and others in the industry trust and respect them. That means from time to time they may get the good guy discount or speedier service or some other benefit that comes to people of proven character.

Maximize Equity Growth – Review Your Situation Regularly

Once the equity has doubled, expect to trade up. In Mark and Sharon’s early years, some assets doubled in equity in less than two years. That’s not always possible.

We review their portfolio every year, and they choose whether to refinance an asset and pull-out equity or sell one of their prizes. The default inclination is to acquire more apartments.

Summing Up

Mark and Sharon know what they want in life and investment real estate. They invest the time and attention to build their legacy wealth. They also have a bias for action. They do their homework, and when it’s time to make a decision, they make it. When it’s time to close, they pull the trigger.

As you think about your legacy, remember money is a great slave, but it’s a terrible master. Mark and Sharon own about 90 rentals. None of the rentals own them. They are an example of people who have done well by doing good. Their objective has been to maximize their wealth ethically and they have excelled in that objective.

Terry Moore, CCIM is an investment real estate broker with a proven history of success in creating value, 1031 (tax deferred) exchanges, and building wealth through apartment investments. He has taught at UCSD, National University’s MBA program, the Appraisal Institute, SD County Tax Assessor, California Association of Realtors and is a National Certified Commercial Investment Member. For more information contact Terry at [email protected] gmail.com; call 619-497-6424 (Direct), 619-889-1031 (Mobile) or visit www.SanDiegoApartmentBroker.com. (License #0091851).