When asked about the inherent risks associated with his mega shipping empire, Aristotle Onassis replied – if you expect to make any serious money hiring out your ships for profit, you’ll need to set a course that exposes both the ships and their crews to many unpredictable dangers on the high seas. It’s impossible to earn much money floating around in the safety of a protected harbor!
Many “wanna-be” investors I talk with seem to want me to immediately focus on the risk factor when I attempt to explain all the benefits of investing my way. Friends, allow me to blurt this out loud and clear – risk comes with the territory. There’s no way to invest in real estate without any risk – it’s simply the nature of investing! It’s also the juice that keeps the game alive and exciting. How much fun and excitement would there be for a tight rope walker if we stretched his rope out on the ground instead of forty feet high above the crowd? Not very much I suspect! Besides, he’d probably give up without having any challenge!
Education is the Best Defense Against Risk
When you dedicate the time and effort to learn what you’re doing, you will automatically reduce the risk factor. Onassis learned a lot about the business long before he ever owned his first ship. As a young teenager, he sailed with the master seaman of his day. He learned about the treacherous currents, about weather patterns and how to seek out the safest sea channels which would one day protect his fleet from the violent typhoons and hurricanes. Onassis wasn’t born with these sea-faring skills! He learned them from the best teachers he could find, but most importantly; from teachers who practiced what they preached. This is the very same recipe investors can use to pursue their dreams with real estate. Education will reduce your risk so that it becomes very manageable.
Many neophyte investors are of the opinion that multiple unit investing, which, of course, I very much favor – and mostly teach about, is somehow a lot more complicated than acquiring a single house. Nothing is further from the truth – the only difference is that your investment training will be more concentrated on personal benefits you receive.
Quite often new investors will say to me “Jay, I like what you say about multiple unit properties having more benefits, however; I’ll be lucky with my available resources (money) to pay for a single house.” That statement to me means you’ve never seriously looked into buying multiple units before – otherwise you would know that quite often the down payment amount needed to purchase a single house could just as easily be the same amount required to purchase six separate units. Down payments – or the “buying in” costs have very little to do with which property you’re buying. The down payment amount has more to do with a seller’s motivation – or desire to sell what he has.
I’m aware that buying a house for a home rather than for a rental property will allow credit worthy buyers to purchase for very small down payments. However, for the purpose of this article, I’m talking about acquiring investment properties, not homes to be occupied by the buyer. Investment properties are higher risk for institutional lenders and will normally require larger down payments for safety! When you begin to own a string of rentals, you’ll find down payments on a percentage basis will be hardly any different whether you buy singles or multiples.
Buying Your First Colony
Most readers already know, my specialty, and of course my primary focus, is multiple unit rental properties. I call these properties my colonies. In size, they range anywhere from 5 to 12 units, with a few somewhat larger. These are what I call my “bread-n-butter” investments. I use a teaching model with six (6) separate colonies, consisting of 40 rental units to demonstrate how small-time Mom & Pop investors can set themselves up in the real estate business and earn $100,000 annually. As a bonus, the $100,000 is tax sheltered so that the investor gets to keep nearly everything he earns. That’s a real plus!
Obviously, you’ll need to learn a few lessons and work your tail off, but consider the possibilities. I’m talking about a lifetime income stream, financial security and a worry-free retirement, regardless of whether you collect on Social Security or not! After creating your own financial independence and building a substantial net worth; I’ll teach you how to double your profits earning what I call – “pajama money”. This means selling out and living your retirement years like a king! In much the same way Onassis began his shipping career, you’ll need to learn the ropes – and you’ll need to accept some risk. But when you measure the extraordinary possibilities as opposed to paddling around in the harbor, going nowhere – your decision should be a lot easier – AGREED!
Eating the Elephant – One Colony at a Time
Buying your first colony is the way to get started! This way, you’ll educate yourself as you go along, which is extremely important! Although your ultimate goal may be to purchase six (6) colonies like my teaching example; it’s important to break the total task down into “bite-size” acquisitions because buying one colony is doable right now! There’s also much less risk because it gives you time for testing and making your mistakes early while you work the bugs out. Trying to speed up the process will cause you to repeat the same mistakes over and again with each new purchase. I can assure, you, Onassis didn’t start out with a full fleet. In fact, his very first ship was somewhat of a rusted out junker! Just imagine all the education he got simply trying to keep the thing afloat!
One of the very first things you must learn as a new investor is what things are worth (values) in your town – or buying area. You cannot delegate values to anyone! Why, you ask? It’s because we’re talking about your dollars – your money and hopefully, your profits. I constantly communicate with newbie types who ask their real estate agents questions like — What do you think this property is worth? What should rents be in this area? And so forth. Please promise me you’ll put a stop to this kind of nonsense right now, if I’m talking about you! It’s your responsibility to pay the right price, your price, and it’s up to you to know and understand about the rents and what your potential customers will pay you in your local investment area. There’s no problem finding out what the renters are paying when you buy a property – but I want to know if the location is desirable enough so I can increase the rents by 50% when I make the property a nicer place to live. I will assure you – no one gives a rat’s hoot about this kind of information if they’re not the profit minded owner! You have to get this right or you’ll be buying properties in the wrong locations.
Where Should I Be Looking?
There are basically two locations where you’ll have the most luck with your search – especially beginners. The first location is in the older residential areas of town. You’ll be looking for older houses and small apartments – or sometimes combination of both, built in the 1940’s and ‘50’s. You’ll often find oversized city lots with a large main house fronting the street and several smaller apartments or cottages in the rear. Sometimes you’ll find the units behind the main house have an alleyway access from the back. Be snoopy when you’re looking’! Park the car – get out and wander up a few driveways. Watch for dogs and irritable owners.
The second location is in the downtown areas of your city where you’ll find residential units mixed in with commercial buildings. Many young renters like living downtown where
they’re close to work, but they want decent housing. I have owned many multiple-unit properties in my downtown district – houses and small apartment sitting on C1 lots (commercial). Don’t fuss about the zoning. If the property has been a rental property for years, it can stay that way! It’s what we call grandfathered! The use can stay the same so long as the property is kept in good condition. Sometimes selling agents will rave on about higher value because of the future potential – or future commercial value. Basically you should tell them to go suck rocks. We pay for residential rentals only.
Six or eight rental houses tucked in behind the supermarket or next to the shoe factory or department store can make an ideal location for a colony – especially when it’s fenced off and separated with small yard for privacy. Let me remind you – we are looking for locations where renters want to live! That’s our goal. Renters have a completely different mindset than home buyers. They want convenience, affordability and safety.
Don’t Buy Properties in Unsafe Neighborhoods
Do not buy properties in dense slum areas! In fact, do not agree to sign on or become the owner even if the property is free! The risk is simply not worth the rewards. I’ve had students who ignored this advice and wish they hadn’t. The biggest issue is the constant harassment from troublemakers. One student bought a scumbag property so cheap, she simply couldn’t imagine why it wouldn’t be profitable! It didn’t take her long to find out! She jumped in, cleaned up all the junk surrounding the four unit building and gave it a brand new paint job – the trim and everything. Next morning, the glistening white building was totally spray painted on all four sides with ugly black graffiti. They even did the windows! Slum dwellers are slow to accept sudden changes to their environment!
Beyond the physical problems of trying to operate in the slums; there’s also a serious matter of the economics! It’s almost impossible to increase the value of a slum property no matter how many improvements you make. Can you relate to that age old saying – “its money down a rat hole”? That’s the picture I’m trying to paint here! From a pure operating standpoint, I have two primary reasons why I won’t buy property in the slums. The first has to do with the rental customers – the other is actually quite personal! From a rental customer standpoint, I’m almost totally dead-bang sure I’m not going to like the folks who show up to rent my property in the slums. I simply don’t want customers who are willing to live in slums! The second reason is personal – yet very important to me. I don’t want to end up dead! I personally don’t feel comfortable working in the slums, nor do I wish to send my workers there either!
Always Consider the Isolation Factor
Before you consider buying any property – you should stand back – perhaps across the street and look very closely at the units! Next, I want you to ask yourself this question — What could possibly go wrong here that might hurt my rental business? Think about bad things that might happen where you would have very little control to fix the problem! This is what I call my isolation factor! I’m looking at bad neighbors, too much traffic, too many rental units around mine – or perhaps you’re within smelling distance of the local sewage treatment plant. I’m always happy to see fencing, which separates me from the neighbors – also, I like lots of mature trees and shrubs which provide a natural barrier between neighboring properties. Tenants (my customers) pay top dollar rents when I can offer them decent privacy and seclusion.
I like my small colony properties to have adequate separation between me and the adjacent properties surrounding mine. I don’t want tenants from the surrounding units hanging out at my properties. I like fences and natural barriers like thick shrubs or berry vines that would make the neighboring tenants walk around or cause them some extra effort to borrow sugar from my renters. Closeness or ganging up breeds landlord problems, which I make an effort to avoid.
As an exercise I suggest, and what I have students do when we visit properties at our Fixer Camps, is to stand out front – or even across the street from any property you’re seriously considering, and try to visualize how neighboring properties (the occupants) might affect your new property if you become the owner. Consider what you might have to do, such as building fences to create some isolation and privacy for your new tenants. Obviously, you should factor in this cost, the same way you would when you observe a bad roof that needs replacing. When you can isolate your property from others fairly well, you’ll find as I have – it makes your management job a whole lot easier.
Jay P. DeCima, aka Fixer Jay, lives in Northern California where he operates multiple rental properties. With nearly 50 years’ experience, he’s a street-wise landlord and best-selling real estate author. Nearly 70% of Jay’s seminar students have acquired income-producing properties over the past 28 years. Investors are invited to download Fixer Jay’s informative eBook, LIVING THE DREAM at www.bit.ly/aoa-15