Building Wealth One House at a Time

by John W. Schaub

Buying, renting, and selling houses is not only highly profitable but also helps people in your community.

Many ordinary people are now millionaires not by winning the lottery but by systematically buying houses.

In fact, too much education can cause you to overthink and develop analysis-paralysis. The one thing that keeps most people poor is the fear of buying that first house.

It’s not even important that your first house is a great deal.

It does require one thing—that you buy a house and hold it until it makes you some serious money.

Houses are not complicated, and they’re not scary. Their performance is predictable. They produce income when rented, and house rents have a long history of increasing.

In short, apartments and commercial property are not passive investments. They require hands-on management and an owner who is available 24/7 for problems.

Houses are unique investments. You can rent them to provide income, but their value does not depend on that income.

Apartment vacancies often run 10 to 20 percent, whereas house vacancies rarely exceed 5 percent.

Averages include houses that you don’t want to own. Track the prices of houses in neighborhoods that you do want to own. Research what a particular house sold for new and compare it with its resale price to get a real appreciation rate for a neighborhood that interests you.

If you borrow most of your purchase price, your rate of return could be 30 percent or more.

You can shorten the time it takes significantly by doing two things: 1. Learn how to buy a house for less than its retail price. The 5 percent average appreciation is based on retail prices. When you learn to buy below retail, your rate of return will be significantly higher. 2. Buy a house in an area with better than average appreciation. Some of my houses have averaged 12 percent a year appreciation. At that rate, they double about every six years. If I can buy a house at a below-market price that will double in value in six years, I can shorten the amount of time it takes me to turn my 10 percent down payment into $300,000 to four years or less. Look at these results.

Find an owner who has a big problem that he cannot solve, and you may have found an owner who will sell to you with nothing down.

Buy one, rent one, then—and only then—look for the next deal. By using this strategy, you will learn management at the same time you learn to buy.

Most people who buy real estate do not set out to buy a particular property. They just look at everything that is for sale and hope to find a good deal. You can do far better by targeting a house that will make you the most money.

Not all houses are created equal. Some houses will appreciate more; some will produce more cash flow because they will attract better tenants; and others will require more maintenance and have higher expenses.

Owning houses of different sizes, different ages, and different prices makes your “portfolio” safer than owning one larger property, because your income and expenses are spread over many properties.

High ground, the right exposure, and proximity to roads, rivers, lakes or oceans, hospitals, work, and schools are all factors that affect desirability—and therefore value.

Buy in the best neighborhood that you can afford. A house in a better neighborhood will make you more money. If you are beginning with little, then still buy in the best neighborhood that you can afford. As you build more cash and cash flow, you will be able to afford to move up a notch in location.

you want it to be attractive to good tenants—tenants who will stay a long time and take good care of your property. You want to rent to a tenant with long-term potential, not someone who is constantly on the move.

Buy houses that have three or more bedrooms.

A large yard may scare off tenants who see it as too big of a job. The lack of a back yard that kids can play in is a definite disadvantage. A nearby park can compensate for a small yard.

While you can argue that once you own the lot and the house, a few extra square feet costs little money to add, in reality, every square foot you add to a house does cost you. The fixed costs such as taxes and insurance increase with size and value, and so does the cost to maintain the house.

Buy a house that is functional and well located, and then keep it in good operating condition.

If there is a problem property or neighbor next door, learn about it before you buy. You can fix a house, but it’s a lot harder to fix a bad neighbor.

The cash flow a house produces depends on both its financing and its ability to produce income.

The other half of the challenge is buying a house that will attract long-term tenants and will have average or below-average operating expenses, such as taxes, insurance, and maintenance.

I learned that I wanted to own property that would attract tenants who felt that paying the rent on time was a good thing and would feel some remorse if they were late.

Their income should be close to three times the rent.

When you target an area close to where you live, you can spend time in that neighborhood and really learn the market. Walk the streets and talk to the neighbors. Tell them that you want to buy a house in their neighborhood and ask them if they know of anyone who wants to sell. You are complimenting them on living in a nice neighborhood. You will be surprised at how helpful they will be.

Limit your losses. If you own a losing property, the faster you sell it, the less you will lose. A property that costs you a lot to own each month and that is declining in value can consume all of your money and a lot of your time. Dump it fast, and you might have a chance to make your money back by buying a bargain.

Older neighborhoods where renters are being displaced by owner occupants who buy and fix up a well-located but older home will increase in value. Look for this trend and houses that you can rent for a few years while the neighborhood improves. They often are a better investment than new neighborhoods.

good tenants are assets.

When it’s easy to borrow, it’s typically easy to sell and harder to rent. When it’s hard to borrow, you get your best buys and often the rental market is stronger.

There Is Always Opportunity, Whatever Your Market Is Doing

Focusing on certain neighborhoods and specific types of properties in those neighborhoods will help you to identify the houses you want to research and then to make an offer.

Owning property close to you allows you to stay on top of the management or to manage it yourself. Even more important, you know your market and can buy when there are buying opportunities and sell when the market is hot.

The best opportunities are not on the market for sale. They are not listed, and there is no sign in the front yard.

When you can identify a house that an owner wants to sell and that is not listed, you have no co...

Empty houses. Not all empty houses are opportunities, but most opportunities are empty houses. An empty house is costing somebody money every day. In addition, it is a source of worry and work for someone.

Neighbors can be a valuable source of information.

Houses that need work—especially in nicer neighborhoods.

Out-of-town owners.

Landlords who are not maintaining their property.

Don’t waste your time and energy going to see a house until you are sure that it is an opportunity that you want to buy.

Letters to owners who may need to sell.

You don’t buy houses with letters, you generate leads.

Many good buys are made because the seller has a financial problem,

In a normal market, 90 percent of the houses for sale are not opportunities. You are trying to identify that one seller in ten who might have a reason to make you a good deal. After you find the right seller, you want to determine whether this house has the potential of making you money. Not all houses are opportunities.

Long-term owners often have larger profits and are easier to negotiate with.