Recently, my father told me about a great conversation he had with a very nice couple from his church. (I’ll call them the Smiths to generecize the fictitious name beyond recognition.) The Smiths are 65, and both are retired. They have been married for about 40 years, raised a family, and generally lived middle-class lives. And they are real estate investors. Knowing my father is a real estate agent, the Smiths happened to strike up a conversation one day after church about their real estate investments and how those investments have provided them with a sizeable retirement income. I thought I’d outline some important points in real estate investing, and what the Smiths had to say on the subject.
1. Leverage Your Investments to Maximize Growth
The Smiths bought their first rental property, a relatively modest single-family home, when they were in their 30s. Over the years, they bought five more. In buying properties, Mrs. Smith had this rule: “We never bought another property until the last one was paid off. When one was paid off, then we started looking for another.”
2. Always Make Sure You Have Well-Drafted Leases with Tenants
The Smiths don’t use leases. None. Nada. “We just don’t use leases,” Mrs. Smith said. “All of our properties are month-to-month. We have one property where one family has lived there for 20 years. One would rent for awhile, and then they would purchase a home. Then they would move their brother in who would rent for a few years while he saved up to buy a home.”
3. Maximize Rental Income
The Smiths told my father how much they were charging monthly for a couple of their properties that are in the same neighborhood. My father and I are both pretty familiar with the area. Our estimation was that the Smiths were charging right around 30% less than market.
4. In Your Lease, Make Sure that You Contain Appropriate Restrictions on Tenant Alterations to the Property
I truly loved this part of the conversation. Mrs. Smith recounted when she was driving with her husband around a neighborhood where the Smiths owned a rental property. They drove past their rental and almost missed it. At first glance, Mrs. Smith pointed to a house and asked her husband, “Is that one ours?” Mr. Smith replied, “I think so.” It seems their long-time tenants had repainted the exterior.
Although I doubt I’ll implement the Smith’s REI strategy, the Smiths remind me of a few important lessons. First, the Smiths reinforce my belief that real estate investing, particularly in the residential REI realm, is accessible. The Smiths were smart (smarter than most, I would argue) in having an investment plan and sticking to it. But the Smiths undoubtedly didn’t have particular real estate or financial expertise. They’re regular folk who achieved their goals with a simple approach.
Second, I think investors sometimes lose sight of the point to investing. That is, that there is a point–a life goal or purpose that we want to achieve. The Smiths seemed to have succeeded in getting to where they wanted to go. I’ve been writing about measuring returns with real estate investing recently, and paying attention to returns is important to getting to a destination quicker. But it’s easy in the process to forget the part about where we’re going and how we’re getting there. Recently, in the personal finance-o-sphere, I’ve read some great articles about some important life choices that remind me of this point, such as this one and this one.
Third, there’s more than one way to skin a cat. Investors, whether in real estate, stocks, or gold bouillon arbitrage, can have a tendency to declare the universal solution to the investing equation. I have to say, this seems even more so at times in the REI world. Rob and I have chosen residential real estate as an investment vehicle. In our choices of a type of investment, as well as what we buy, how we rent, and when we sell, we have reasons that are in part return-driven, but some aren’t. Many of our decisions also reflect choices about our time, our perception of risk, and even our interests. This is not to say that it doesn’t matter what you invest in. Rather, finding the right way is less important than finding a right way. A right way, combined with a disciplined approach, will likely get you there. Because at the end of the day, it doesn’t really matter how you skinned it, as long as you end up with a naked cat.
Image Credit: by scladesma
{ 7 comments… read them below or add one }
Good article. This kind of goes in line with the old investors who like to take things “slow and steady” and end up being much richer than their more aggressive counterparts.
Mike
Mike at Four Pillars, I couldn’t agree more.
Mike at TWA, would you please listen to Mike at Four Pillars!
Hello. Actually, they broke some rules to follow some other basic business rules (click name link if interested).
Thanks for the link! I always love hearing about people who break the basic rules of something and are still successful (it reassures me that things should work out).
I scratch me head often at some of the bonehead things seemingly successful businesses do, and wonder how much better off they might be if they just fixed a few glaring problems (sadly entrepreneurs don’t seem to be good at acknowledging their “glaring problems” and tend to just keep doing what they’re doing).
Mr. Cheap, I would take credit for that link, but truth be told, we have a plug-in that just automatically inserts a link to any PF article that has a Bowie reference.
But you know, by not following the rules they wound up with properties they could afford, financed in ways that wouldn’t go upside-down on them, full of stable, long term tenants who looked after their properties and passed them on to family members or friends when they left them. Simple, relatively labor-free income properties.
That’s a pretty good investment.
jrochest,
I couldn’t agree more. But it all really comes down to personal goals, so in my case I’ll probably trade some risk and some labor for a little more speed. But over time, my goals and my methods might gravitate a little more toward the Smith plan, more equity, slower acquisition and lower management.