First-timers find a place to call home

Part 1: How to start investing in real estate
By: Robert J. Bruss: Inman News
There are many methods to become very wealthy, or just modestly wealthy, with your real estate investments. Although I have personally done "pretty good" investing in real estate, many of my friends, college real estate students and subscribers have done much better. I'm extremely happy for them! This four-part series will explore the question: Why do I want to invest in real estate?

1. I want to own my personal residence. This is the very best reason for getting started on your real estate investment career. Whether your home is a single-family detached house, a townhome, a condominium or a cooperative apartment, it will be probably the best investment you will ever make. That's right! Your home is not only a place to live, but it will probably be your best real estate investment.

Accidentally, when I bought my first home it also got me started investing in real estate and discovering the wonderful benefits of investment property. Long-time subscribers have heard the story before, but it's worth repeating.

EXAMPLE: Having lived in too-many rental apartments during my college years and early business career, I became tired of wasting money on rent. One day I told a friend and college pal that I wanted to buy a house. He said "I've got the perfect place for you and it will only cost you a $5,000 down payment." That got my attention. It turned out to be a triplex in Redwood City, Calif., near my apartment. Fresh out of law school, just starting my real estate law practice, I bought that property. Only at the closing table did I discover my "friend" was selling me just a 50 percent interest in the property! But I moved into the two-bedroom house anyway and soon discovered the joys of being a landlord for the two rental units at the back of the property. A few months later, after one of the tenants moved out and I inspected his studio apartment, I discovered I was a slumlord! When I confronted my "partner," I said we have to fix up this dumpy apartment. He replied, "A quick coat of paint will fix it up." Realizing we had a fundamental disagreement between partners, I said, "How much would it take to buy out your 50 percent of the property?" Fortunately, he needed cash. He replied "$5,000." I happened to have $5,000 available (borrowed from my parents – and repaid long ago!), bought him out, fixed up that studio apartment, and lived happily ever after. That was my first, and last, real estate partnership.

Incidentally, although I bought that property "subject to" its existing mortgage from an S&L (Savings & Loan), it wasn't long before I heard from the mortgage lender. It seems there is something called a "due on sale clause" in most mortgages! Because it was a low-interest-rate mortgage, around 5 percent, the S&L lender wanted me to pay off the entire mortgage. But upon paying a visit to the lender, I learned what the lender really wanted was to boost my interest rate to the market level (8 percent as I recall) and have me pay a 1 percent mortgage assumption fee. Considering I had no credit at the time, it was a "good deal" for me.

I highly recommend buying real estate "subject to" existing mortgage financing, but be prepared for the possible consequences of either (1) paying an assumption fee and adjusting the interest rate, or (2) refinancing with another lender if the lender insists on enforcing the due-on-sale clause. When I asked the mortgage officer how he learned I bought the property, he said, "That's easy. We received your new insurance policy showing your name instead of our original borrower."

During the 11-year period I owned those three units, I refinanced that property several times with the same lender, taking out tax-free cash each time. As my equity gradually increased due to a few improvements and market-value appreciation, I placed a second mortgage on the property to provide cash down payments for other acquisitions.

Eventually, I made an Internal Revenue Code 1031 tax-deferred exchange sale of that property at a huge obscene profit to one of my tenants who, as far as I know, still lives there with his family. I then acquired another investment property in the trade. But I shouldn't have sold! Today, that property is worth at least three times my top-dollar sales price.