How do you spell relief for the cash-poor investor? Forget about commodity futures, stock options, blackjack, and the lottery. For someone who has very little ready cash, the fastest way to make a fortune in today's uncertain market is real estate.
Consider the case of Jeff Rickerson, an unemployed student in his twenties whom I met on a Caribbean cruise last year. Jeff made $10,000 on his first real-estate deal, using only $2 out of his own pocket!
Here's how he did it: After being fired from his job as a bank intern in Jefferson City, Missouri, he became interested in real estate by attending Bob Allen's "Nothing Down" seminar. He discovered a house that was furnished but unoccupied. He contacted the owner by spending $2 at the county courthouse for ownership records and inquiring at the post office for a forwarding address. The owner had lost his job and had gone back home to Mississippi. He was still making payments on the house, but he desperately wanted to sell it.
Jeff offered to take over his mortgage payments and handle all the paperwork by mail so the owner wouldn't have to return. The owner agreed to the proposal. "He was really grateful," Jeff said.
Because Jeff was broke, he went into partnership with a qualified person who could cosign the deal. That way he could qualify for taking over the $43,000 mortgage at the bank. He and his partner agreed to split any future profits on the house when it sold.
But before Jeff even took over the mortgage, he advertised for a buyer. He and his partner had to fix up the house some, but they didn't pay anyone until the closing. Jeff found someone willing to buy the property for $69,000.
Both the purchase and sale of the house were closed on the same day. Jeff walked away with $10,000 in his pocket!
Now, I know what you skeptics are thinking—the chances of duplicating his feat are as likely as winning the million-dollar lottery. Not so! I've met dozens of people who have made spectacular profits practically overnight—not only in single-family homes but in apartment buildings and commercial properties.
Admittedly, success stories like Jeff's don't happen every day, but his demonstrates the unique aspects of real-estate investing:
• You don't need a college education to become a successful investor.
• You can control large assets with little or none of your own money.
• You can be broke, or even heavily in debt, and buy real estate (banks won't allow it, but through "seller financing," anything is possible).
• Below-market bargains are available in real estate, because property is not a liquid investment and people face financial problems from time to time.
• Real estate has tremendous tax advantages and can be a good inflation hedge.
That's not to say that real estate isn't without its disadvantages. It frequently involves a high debt exposure, negative cash flow, tenant complaints, and a lot of paperwork.
It's not as easy to make money in real estate as it was in the 1970s. Taking inflation into account, many properties have dropped 30 percent or more in the last four years. But prices have bottomed out and are starting to recover.
Another threat is the possible reduction of tax benefits in the near future. President Reagan's "modified" flat tax proposal would cap net interest deductions at $5,000, extend depreciation schedules to 28 years (from the current 18 years), and impose a minimum tax on real-estate investors. The days of "zeroing out" your taxes through real estate are about to end, it seems.
Negative cash flow is the most serious problem facing the long-term real-estate investor. The tax advantages and the expectation of appreciated property values are the only reasons investors endure constant losses every month.
I've only scratched the surface when it comes to the incredible opportunities in real-estate investing. For free information on real-estate books, cassette tapes, and course material, write or call toll-free the Allen Group (145 East Center St., Provo, UT 84601; 800/521-2273). I strongly urge you to attend one of Bob Allen's "Nothing Down" seminars with over a dozen experts offering some extremely valuable tips.
If you are interested in buying single-family houses, John Schaub offers the best approach for most people. He shows you how to buy houses with only 10 percent down, at 10 percent below the market price, and with a mortgage at no more than 10 percent interest—and you still get positive cash flow! His 10-10-10 plan requires hard work, but he showed me two deals in California where his plan paid off. He looks for homes that (1) have been held for many years, (2) have an assumable mortgage at below-market rates, and (3) the owner is hungry to sell and can take back a 10 percent mortgage. Schaub's basic program is explained very simply on a one-hour cassette tape, available for $5 from Dominion Tapes (P.O. Box 8175, Tyler, TX 75711).
Finally, the time-honored approach of fixing up a house in need of repair and selling it for a profit still makes a lot of sense to me. Bill Nickerson popularized this approach in his classic book, How I Turned $1,000 into Five Million in Real Estate—in My Spare Time! (available for $18.95 from the Allen Group). This is capitalism at its best—it enhances the beauty of the community and still provides a handsome profit for the entrepreneur. Who needs government reclamation projects and subsidized housing?
Part-time real-estate investor Mark Skousen is editor of Forecasts & Strategies. He lives with his family in the Bahamas.
This article originally appeared in print under the headline "Investment: Real Riches".