During the 1970's free-market-oriented investment advisors have had few kind words to say about real estate. Indeed, most of them have considered real estate to be a liability, something to dispose of as soon as possible in preparation for economic troubles to come. Financial salvation, it was said, lies in gold, silver, and Swiss francs, not in lowly real estate.
Meanwhile, in 1972, 1973, and 1974 this writer's investment clients were "salting away" as much usable real estate at rock-bottom prices (just as the advances began) as they were gold and silver coins! Many folks just starting out, in their 20's and 30's, made many thousands of dollars in real estate. While hard-money markets dropped back sharply in 1975 and 1976, real estate prices continued their advance. The pace of sales speeded up.
Therefore, the editors of REASON thought it might be interesting to bring you the opposing viewpoint—buying and owning real estate, as opposed to panic liquidation—and you know which economist was selected to play Devil's Advocate. No one else was in sight!
To give you an idea of how fast prices have been advancing, statistics just released in Southern California show that existing homes jumped 11.5 percent in value from April to October 1976, an annual rate of increase of some 23 percent—and this while gold was busting new lows! Not only that, in the two previous six-month periods, the six-month rates of increase were 9.4 and 7.7 percent. Not only were prices rising at a fast clip on in-place housing, but the rate itself was steadily accelerating. By the time you read this article, there may be further price rise statistics, showing additional continued increases!
The demand for new homes far out-paces the supply. In March of this year, reports Dick Turpin "Eighty-seven persons waited in line to buy 56 Sea Colony/Point Loma townhomes on a Saturday. All 56 were sold in three hours. People began lining up three days earlier and by Friday evening, some 45 prospective buyers were camped out at the sales office.
"The last phase of 85 new homes at Country Hills (Torrance) had a near sell-out last weekend. Of the 85, only 12 remain. Prices on these remaining homes range from $115,000 to $134,000.
"Foxridge, hilltop community in Westlake, is sold out. Within two hours on a sunny Saturday morning, all homes in the final phase were eagerly purchased by 51 lucky buyers. They were the fortunate families selected by lottery drawing from 150 names.
"The investment-wise, of course, have added to the panic by buying for a quick turnover or buying-to-rent. Lotteries were instituted to eliminate most speculative buying but once the lottery winner gets his house, he can live in it, rent it or sell it.
"At Woodbridge, where housing history was made last June as the Irvine Co. attempted to cope fairly with 8,000 potential buyers, speculation has involved an estimated 30 percent of some 500 homes.
"There are reliable reports also that some of the originally bought 311 dwellings have been sold twice and even three times at profits of $5,000-$10,000. Other homes are rented." (Los Angeles Times, March 13, 1977)
If there is any doubt in your mind that the kind of real estate I have been recommending has been rising in price, don't take my word for it, just check the statistics. Don't confuse individually owned real estate and dwellings with the plight of large cities like New York, or glutted downtown office space, or ghastly ghettos. The kinds of real estate I recommend then, and am discussing now, are the single-family residence, small buildings up to four units (exempt from Nixon's rent controls last time around), and small, commercial buildings (also exempt from rent controls last time); particularly on the fringes of metropolitan concentrations of 500,000 population or more. That was, and that is, the only kind of real estate recommended—usable, already-built, in-place structures—not leases, not condos, not boondocks land, not downtown office space, not ghetto redevelopment.
Contrary to widespread belief, you don't have to be a genius to nail down thousands of dollars in profit either. Example: for most folks, their own house has proven their best financial investment of all, in terms of price appreciation, and rent saved, and tax deductions.
Lest there be any misunderstanding, let's dispel any myths immediately. Your author-economist is pro-free market, pro-gold. Kamin's First Law states: "All currencies will decrease in value and purchasing power over the long-term, unless they are freely and fully convertible into gold, and that gold is traded freely without restrictions of any kind".
To make money in real estate, the second myth you'll have to dispel is that you can't make money because: A) you're too young, B) you're too old, C) you don't want to join the establishment, D) you can save money renting, E) you're single, F) you're married, G) you're going to be there less than five years, H) you're going to be there more than five years, I) you don't want to be tied down, or J) the country's going to come apart sometime in the next six months on a Black Tuesday, and the only safe place will be a cave in the hills with a rifle and dehydrated food, K) you've got a wart on your nose, a one-legged uncle, or some equally silly reason.
Once you've gotten rid of these self-imposed limitations, you are ready to begin making money on real estate. On the other hand, no one can make you a real estate millionaire in one magazine article, if you've already managed to avoid becoming a millionaire in the last 5, 10 or 20 years.
There are some good places to start in, though, and some measures that you can take to help pave the way for your success in this often misunderstood and misadvised, but lucrative area. Several books are "basic training" for anyone who wishes to make thousands of dollars in real estate consistently.
1. The Land Game—By Al Winnikoff. Encouragement to any young couple with low capital. Fully detailed case histories, blow-by-blow account how he built a $100,000 estate in less than 10 years; easy-to-read, detailing pitfalls to avoid when venturing in real estate. $7.95; 288 pp.
2. How to Make Money Fast Speculating in Distressed Property. (1977 edition) By John V. Kamin. Clear, frank, and forthright facts to help you buy on a limited budget. How, when, what to buy, how to negotiate for lower prices; how to buy way below market value. Furnishings, food, cars, etc. at 10 cents to 25 cents on the dollar…where to get them, how to find the right broker, sell for top dollar. Helpful advice for senior citizens. How to make $1 in repairs worth $4 when you sell. When should you rent, when should you sell? Insider "tricks" to enhance your property's value. Get a mortgage at lower interest rates; refinancing. Becoming a financial individualist. Using escrows for profit: three methods to buy property equity cheap. Working person's five-prong housing strategy. How to lower risks. Selling your property. How to save commissions. Wholesale auctions. Questions and answers. Recreational land. The wrong way to buy a house to live in—the right way! One transaction could save you $1000s. $12; 250 pp.
3. Winning Through Intimidation – By Robert Ringer. What may appear to be a real estate book is really a book about life! How to avoid being intimidated! How to negotiate successfully and profitably. How to collect your money. The universal attorney-to-attorney respect law, 30-year cycle theory, "iceball" theory. Written with a sense of humor, you'll take pleasure in the many cartoons. $9.95; 237 pp.
These three books are easy, fun reading, present a wide-ranging diversity of viewpoints, and are available from bookstores, our firm, libraries, or directly from the publishers. William Nickerson's paperbacks are also good, available at any bookstore. I suggest you read all three authors.
While you're reading them, you can take Step 2, and that is: start saving up some capital. You'll need a minimum $1,500 to $5,000 to begin, as a practical matter. Since that kind of money doesn't appear overnight, you can move forward on both the "reading" front and the "money" (capital accumulation) front simultaneously, shortening your interval to success. If you already have some experience in real estate and some capital, all the better. You can shorten the intervals that much more.
Today, you hear people say they are afraid to put their capital into real estate because of differing views about the Carter administration. But people said the same during the Ford administration, the Nixon administration, the Johnson administration, the Kennedy administration, and the Eisenhower administration. And, in the meantime, that well-selected improved real estate went up, up, up.
Is there any doubt in your mind that we'll have more inflation, most of the time, over the next 10-20 years? Just as we have had continual inflation in the past? Is real estate the perfect hedge? No, there is no perfect hedge. A search for the perfect hedge would be fruitless and waste a lot of time and money. While you live in the here and now, you've got to operate under the conditions existing here and now, even though today's conditions may not be to your liking or your personal choice. As a professional economist, I maintain that carefully selected usable property can 1) give you freedom from landlords, 2) bring some financial independence over time, 3) help you beat the inflationists at their own game.
It is the price of new housing in metropolitan areas that helps set the bidding on existing buildings of the kind recommended. Let me ask you some questions. Do you see evidence that labor costs, the wages of the craftsmen who build new houses, are going up or down? Do you see the price of desirable improved metropolitan land, suitable for immediate housing construction going up? Or down? What has been the trend over the past 30 years? What has been the trend over the last three years? What will be the likely trend over the next three to 30 years? Sure, during 1977 you can walk into any gathering, and hear old timers say "Real estate prices are too high". Chances are, you could have walked into any gathering and heard them say the same thing in 1976, 1966, 1956, 1946, and 1936! Chances are they will be saying the same thing in 1986. Are you going to hold your breath and wait for them to drop 10 percent? Or are you going to get out there and learn something about the real world of real estate yourself?
Is a quick plunge the answer? Can you just wave a fistful of $1000 bills and make a killing? Such a belief is naive. It may happen, but the odds are against it. Free-market libertarians know that knowledge is power and ignorance is weakness. The more knowledge you have, the better your chances of making money, making that eventual killing! As much as I would like, then, I won't give you any "hot" tips that would enable you to triple your money with a $1000 bill tomorrow.
Real estate is a specialized and complex area of study, which lends itself well to the acquisition of personal knowledge supported by some risk capital and personal action. Where, then, do you go next? I suggest you start by reading the books briefly summarized in this article. In fact, if you were a client of mine, I would insist you read these books, so that we are both talking the same language, before going any further.
Second, I suggest that, as a novice, you confine your real estate activity to improved properties that can be occupied, or rented, or sold on that basis, properties that appeal to broad markets. That means single-family residences, small but modern commercial buildings, duplexes, triplexes. It does not mean vacant desert, large commercial lots, tumbled-down ghetto firetraps one step away from being condemned!
Third, I also suggest you concentrate on metropolitan areas of 500,000 population or more. As a novice, when you resell, you'll want to have access to many possible buyers, to make resale easier, to get your profit out when you have it, intact. Also, should you have to sell in a hurry to generate cash for various reasons, you're better off in a big market with lots of potential buyers rather than a few who might meet some day in the local coffee shop and decide which one of them is going to buy your property at what price! Stick to bigger metro areas, preferably on the fringes.
Fourth, I suggest you buy within a 30-minute drive of where you now live. Properties, unlike other financial commitments, require attention, are affected by zoning developments, can be subjected to vandalism, need TLC on landscaping, etc. A hundred miles away or more is too far for you to pay close attention, dicker with contractors and repairmen, visit regularly, study local papers for developments, meet quickly and easily with interested buyers, etc. Take out a map of your area right now and draw a circle encompassing a 30-minute drive of your home. That is your territory. I suggest you get to know it well.
Fifth and last, but not least, examine the many sources of foreclosures and need-to-sell properties. These can be trustee sales, creditor sales, sheriff's sales, legal newspapers, estate sales, and REO's (Real-Estate-Owned by financial institutions). These techniques and sources are explained in detail in the 1977 edition of How to Make Money Fast Speculating in Distressed Property. Frankly, I wrote that book to help people who kept asking me the same questions over and over and over. It was written to be a tool kit. As a skilled craftsman, you need to know how to use the tools at your command. As a real estate buyer and seller, you need to know how to use the real estate tools at your command. Yes, a book or two could cost you a few bucks. However, most people will buy at least one property in their lifetime, and some will buy many, usually five figures or more. Therefore, the initial cost of a book is microscopic in relation to the dollars-at-risk in a real estate transaction of yours sooner or later!
Can the beginner, the little guy, still make a lot of money in real estate? It is my personal opinion that he can, that the opportunities are as great now or greater than ever. I bought one small tract house for $23,500 in 1972. That house is now rented pulling in over $4200 per year in rent, and would sell on today's market for $50,000 to $55,000. Further, I bought it with less than $3000 down and assumed monthly payments of $181. While prices have changed in the interim, chances are that there are still good buys in your particular area as well.
Obviously, this is one profitable (but typical) example out of several for myself, examples that are being repeated by many people. How did it happen? Did I just "luck into" finding that particular property, buying it right, getting the deal closed, getting it rented to generate over $4000 per year, buying in the right location so that it would quickly double in price? Of course not! Much preparatory work led up to that transaction. For six years prior to that particular transaction, I read everything I could get my hands on in real estate. Everything! Much of it was trash, much of it was worthless. Nevertheless, prior knowledge is necessary before you actually go out buying properties. It is an absolute necessity, not something to fumble into, something that repeatedly occurs by "luck". Profit requires sweat, effort, exercise. Profit requires knowledge, not "hot-tips" contained in one magazine article.
After reading and studying, what is the next absolute necessity? It is a plan of action. What do you want to buy? How much risk do you want to take? What territory do you want? What kind of houses are you going to look at, or commercial buildings? Frame? Brick? Block? High priced? Low priced? With lots of land? Or with minimal land? How old? Make a plan, make a list of precisely what you are looking for, lay out the parameters, and put them on a sheet of paper. Then go to a quick printer and have 100 copies of your specifics on a fact sheet printed up for brokers.
After reading the books, building some capital, and making your plan, you're now ready to start the next step—working with brokers. Again, was it an accident that your author selected the particular broker with that house? No, the broker who showed me that house and made a commission from the deal was only one of some 30 brokers I contacted. She knew what kind of property I was seeking at what price, because she got my fact sheet and tried to match it with her listings from the multiple listing service. In fact, of some 30 brokers I contacted those two months only about three really knew what I was talking about. She was one of them. Most of the brokers wasted lots of my time (and probably thought I was a waste of their time). Some brokers kept showing me prospective purchases that in no way even came close to what I told them I wanted, in terms of price, size, or location. They must have "figured" that I would see something I liked if they just showed me their favorite six properties and throw my list of needs and interests in the first wastebasket! Believe it or not!
So if you thought all you would have to do was clutch a few $1000 bills in your hot little fist and rush out after reading this article, to make a deal for $10,000 or $35,000 profit, forget it. That's not the way it works. What is contained here is a brief explanation of a tool kit. But it's up to you to learn what the tools are and proceed with a plan of action to use them skillfully. Yes, you can indeed make thousands in real estate. Further, you can do it part-time. It does not require you to quit your present occupation or employment. But the chances of your doing it very successfully, as I have outlined, are remote unless you are willing to put in some time and effort.
Before that scares you away, remember, it is being done. It is being done by regularly. It is being done by people without as many advantages as you have—in other words a broad spectrum of the populace. No one else may encourage you, but I encourage you to plunge ahead. Get on with the job at hand!
John Kamin is a consulting economist and editor of The Forecaster, a weekly economic newsletter. He has written several books and pamphlets on various investment topics.