Single-family homes best spot to sink money

Part 2: 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? (See Part 1: First-timers find a place to call home.)

2 – I want to earn huge profits from appreciation in property market value. This is the primary reason many investors get started investing in real estate today. Big fortunes have been earned acquiring rental property, which is not the investor's principal residence. But in some areas, especially Las Vegas, real estate speculators have driven up property prices more than 40 percent in 2004. That rapid appreciation rate won't continue as mortgage interest rates gradually rise.

When I started investing in real estate, I thought the best type of profitable investment property to buy was apartment buildings. I read and re-read (and even outlined) William Nickerson's now-classic best-seller book "How I Turned $1,000 into $10 Million in Real Estate in My Spare Time" (now out of print, but still available at public libraries, and on e-Bay for around $100), which recommended starting with a small run-down rental property, fix it up, and then make an IRC 1031 tax-deferred exchange for a larger rental property. That became my formula! I traded up to a nine-unit apartment building in San Francisco overlooking the ocean and the old Playland at the Beach (old-timer San Franciscans will remember that classic place, near the famous Cliff House).

Although there is nothing wrong with using Nickerson's "forced inflation" to increase rental property market values, as I did with those nine units by making profitable improvements to raise the rents, including painting every apartment (because I couldn't afford to hire a professional painter at the time), I abruptly changed my "modus operandi."

On a vacation in Hawaii in the late 1970s, one morning I was sitting at the coffee shop counter of the Sheraton Princess Kaiulani Hotel across from Waikiki Beach. I was re-reading Nickerson's great book. When I put it down, the Pan Am pilot sitting next to me said, "I see you're interested in real estate." That began a conversation that changed my real estate investment direction.

The pilot said he had recently taken an excellent real estate investment course from John Schaub and Jack Miller about "Making It Big on Little Deals." Thanks to that pilot, I got in touch with Schaub and Miller, signed up for their next seminar, and at that weekend course in Reno, Nev., I learned why single-family rental houses make the best real estate investments because they are easiest to buy, finance, manage and profitably resell.

After that weekend real estate seminar, I became quickly motivated to get rid of my nine-unit apartment building because I discovered why single-family houses were better investments for many reasons. As a further inducement, one evening I started receiving frantic phone calls from my nine tenants. I had made the big mistake of giving my tenants my home phone number. Never do that! I learned my tenants had no heat. In San Francisco, no matter what time of the year, in the evening having no heat in apartments is a "big deal." The boiler in my nine-unit building had quit! It was a Friday evening. Paying a repairman would cost me double-time. I called the repair company and they fixed the problem on Saturday morning for only 1.5 times their usual outrageous hourly rate. As a result, I sold that building (at a substantial profit) and henceforth began investing in only single-family rental houses where, at worst, just one tenant at a time has a maintenance problem.

The Schaub-Miller formula of investing in single-family houses, which have the best rate of market-value appreciation, has proven to be very profitable. Yes, there were a few years when my rental houses didn't appreciate in market value. Please be aware real estate goes in cycles – the long-term trend is always up, but there will be plateaus and valleys along the way. However, over the long term (and real estate investing is a long-term investment), I don't know of any better safe investment. Do you?

Incidentally, John Schaub just wrote a great new book recently published by McGraw-Hill titled, "Building Wealth One House at a Time." In that superb book, Schaub reveals that during his more than 30 years of investing in single-family rental houses, he has never obtained a bank loan to acquire a house. Instead, he uses seller financing and other finance techniques explained in his book, such as lease-options. Schaub still teaches his excellent course, "Making It Big on Little Deals." Phone him at 800-237-9222 for information on his next classes and multispeaker conferences.