BOOK REVIEW: Crash Boom! Rx for Real Estate Wealth

I’M NORMALLY EXTREMELY SUSPICIOUS of financial ‘gurus’ and of people who have their heads swayed by their often-dubious advice. But a new book by Greg Rand, a real estate entrepreneur who contributes to Fox News (maybe that’s why I hadn’t heard of him) and has a radio show on WABC, has come to my attention. Crash Boom! Make a Fortune in Today’s Volatile Real Estate Market speaks to me. Naturally I like what Rand has to say: he validates my own experience and makes me think I’ve been on the right track by investing in rental property and clinging to it for dear life.

I’ve bought six properties, but never sold one. I’m an accidental real-estate investor. It started in 1979 with a Brooklyn row house that has three units, then a re-finance and the purchase of another Brooklyn townhouse in the mid-’80s, with two units. Both were bought primarily as homes; they just happened to have these extra apartments, which we rented out. We then let years go by — years when we could have swept up brownstones for a song — without investing in any other NYC property. But let’s not go there; my blood pressure numbers have been good lately.

It wasn’t until 2005, when my son went to college in Philly, that my attention turned purposefully toward investing in rental real estate, and I bought two early 19th century Philadelphia row houses with a total of five rental units. One is in a solidly upscale area (Queen Village), the other in a fringe neighborhood (Old Kensington) that nevertheless seems to be improving at breakneck speed. Both buildings have had positive cash flow from the beginning — not hugely so, but most definitely in the black, while I build equity month by month. Perhaps most important, I enjoy owning them. For me, it’s like collecting antiques — very large ones.

Buy, Improve, Hold is Rand’s prescription for building real estate wealth. Of all types of investment properties, he’s most partial to two-to-four family homes. “An incredibly appealing property type,” he says, and I concur. More tenants paying rent. And desirable: people want a backyard, Rand points out (most of my tenants have them, either shared or private). Though Rand doesn’t specifically mention vintage properties, many of the examples he gives, including a Victorian mansion in Tarrytown, N.Y., with commercial space on the ground floor and residential units above, resonate with me much more than if he was solely discussing condos or suburban homes.

Almost everything Rand says rings true to my ears. Here are some of his main points:

• It’s a great time to be a landlord. The current economic climate is providing investors with the opportunity to get a ‘deeply corrected’ price, and it also comes with a wave of new renters (800,000 new rental households in 2009 alone).
• The ‘technical drivers’ of real estate wealth — appreciation, leverage, amortization and income — do not exist together in any other form of investment. He likens these elements to a mixing board in a sound studio, calling them ‘the four dials.’ “As you push each of them up a little bit, the volume gets exponentially louder. You don’t need any of them to perform off the charts to get off-the-charts results.”
• Re appreciation, Rand points out that home prices are still above where they were ten years ago and the market is almost done ‘correcting.’ “In other words, the entire bubble has been erased. Poof! Gone.” In the long view, the historical upward trajectory is intact.
• Leverage steepens the return as a percentage of investment. Because most people buy real estate by taking out a mortgage, the cash invested initially is smaller in real estate than in the financial markets, compared to the eventual return.
• Amortization (paying off a mortgage) lowers the amount you owe as time passes.
• Rental income is icing on the cake.

The book also delves into what, for me, is the most seductive, creative aspect of the whole real-estate game: fixing up an ‘ugly duckling.’ Rand advocates finding properties in need of upgrading, not turn-key ones. He loves long-languishing properties that have become stigmatized, as in “Something must be wrong with it if it’s been on the market so long.” Let others pass it up. That’s where you can often find bargains, he says — something I’ve intuitively understood for a long time, but am still heartened to see in black and white.

Mind you, Rand’s book doesn’t say you’ll get rich quick. “A good buy on a house means you set yourself up for even greater returns as you ride the cycle forward and mature the investment over time.” The biggest mistake people make in real estate, he says, is selling in order to realize the profit, adding “Don’t do that!” He views equity in real estate as liquid, which is refreshing. True, it takes a few months to get to it, but it’s still a good place for your money. Let it stay where it is “until you have another real estate play to make or your objective has been met” (say, when it’s time to send a child to college).

There’s lots more — from how to find a neighborhood on the upswing (“Home Depot and Lowes don’t open stores on a whim”), to owning near where you live and work, to buying distressed and foreclosed property. And there are quite a few surprises (Rand thinks Florida is still a great place to invest, for instance).

My one disappointment is that Rand is not terribly helpful when it comes to how to get the money for a down payment in the first place. I hope that’s the subject of his next book.

To see my archive of blog posts on Rental Property Management, go here.

Classic Clinton Hill Brownstone Under 1M

I COULD TOTALLY WORK THIS BUILDING. If I could scare up 200K for a down payment, that is.

First off, I think the ask is very reasonable (it’s newly reduced to 995K from 1.15M). The building is utterly classic, a magnificent brownstone on a fine block (St. James Place between DeKalb and Lafayette), a stone’s throw from Pratt Institute and the Brooklyn Flea. Granted, we don’t know what the inside looks like, but if the realtor’s description (“charm,” “all detail”) is to be believed – duh, I know – it has potential. A legal 6-family, with four apartments delivered vacant, of average size (20’x45′), you just don’t see them any more for under $1million.

Recent sales in Boerum Hill and Park Slope have been soaring toward and above $2million, and Clinton Hill is no less convenient or architecturally distinguished. Probably the fact that two of the six apartments are rent stabilized is what’s keeping the asking price low, though another vacancy is said to be pending. That would leave just one apartment un-rentable for market value, and that tenant can’t live forever. (Unless I’m mistaken – and someone please correct me if I’m wrong – NYC rent stabilization is like rent control in that, once a tenant moves or dies, the apartment reverts to market value.)

So: figure a $795,000 mortgage (putting 200K down and paying the asking price) at the now standard interest rate of around 5%. That’s a monthly mortgage payment under $4,300. Taxes add $650 month, utilities and insurance another $900 or so. How can you not realize $6,000/month out of this building right away, with more to come?

Of course, you have to have the cash down, and for all I know there could be structural issues, roof leaks, and maybe the boiler’s on its last legs. Nevertheless, it’s an opportunity well worth checking out.

Go here for the listing.

A Landlady’s Woes

LEST YOU THINK it’s all done with smoke and mirrors, let me re-cap some of the things I’ve had to deal with in the past two months as the owner of four very old houses (two in Brooklyn, two in Philly) and a landlady with 10 rental units:

• Finding tenants for a very special four-story, 6-bedroom townhouse in Cobble Hill. (Actually, they found me, via this blog.)
• Painting the interior of that house ($6,000), removing several years’ growth of ivy from the back wall ($1,400), and otherwise getting the place spiffed up and ready for the incoming family.
• A punch list of additional repairs with which my new tenants very politely presented me, requiring the services of plumbers, appliance guys, and a handyman.
• A late-night call from tenants in Boerum Hill who’d blown a fuse while trying to air-condition and microwave at the same time. (Yes, a fuse — the only apartment in the building that doesn’t have circuit breakers.)
• Next door neighbors in Boerum Hill who are convinced their basement floods in heavy rain because of the placement of my drain pipe. (Unresolved.)
• A notice from the City of Philadelphia telling me of a leak in the water main from the street in front of my South Kensington house to the building’s water meters. Cost of repair, which is my responsibility (as it would be in New York): $2,800.
• Vacancy in rear unit of the Philadelphia double-trinity house, but not for long: it’s on the verge of being rented to someone who lived in that very unit years ago, when the building was owned by the woman who sold it to me. He saw my listing on Craigslist, recognized it immediately, and is excited about moving back to the same space, renovated and under more responsive management.
• Persistent roof leak at my 1810 Queen Village building, now reaching down past the top floor apartment to the apartment on the floor below. Tenants tired of catching rainwater in pots. $4,000 estimate from the roofer.

It seems that a lot of old-house maintenance issues occur in high summer and the dead of winter, when extreme weather causes flooding, freezing, and so on.

Then there are the problems brought about by extreme economic conditions, or perceived such conditions. The latest doozy is tenants in Brooklyn asking for a 20% rent reduction in mid-lease because they’ve heard there’s been a softening of the rental market. (Would a landlord ask a tenant for a rent hike in mid-lease because of a bullish rental market?) No doubt there’s a glut of product in some parts of town: mostly unsold, newly built condos now being marketed as rentals. There’s no glut of unique 4 BR brownstone duplexes.

I said an unequivocal ‘No.’

So Ya Wanna Be a Landlady?

SOMETIMES IT’S GOOD. When all the rent checks roll in promptly on the first of the month, and there’s a long spell without broken appliances or electrical issues or, God forbid, rats.

Sometimes it sucks. I must make it look easy, because recently someone said to me, don’t you ever have plumbing problems or roof leaks?

Of course. All the time. And worse. Old buildings need frequent maintenance and repair. We’ve had flooded basements and frozen pipes. A few years ago, we rebuilt the entire back wall of our 180-year-old building in Boerum Hill, Brooklyn. The rear facade was peeling away, chunks of brick and window lintel falling into the backyard. We took out a home equity line of credit and hired an engineer and a contractor, who set up scaffolding, draped the building in blue tarp, and rebuilt the back wall brick by brick, replacing all the windows. All the tenants lived through it, by their choice (crazy!)

Mostly I love being a landlady, though the word suggests fuzzy slippers, hair rollers, and a feather duster. Things happen, and I address them. Quickly. I want my tenants to pay the rent lickety-split, so I fix things lickety-split. I’m getting better at it as I get older, partly out of a kind of maternal instinct. I have mostly youngish tenants, and I want them to have a nice place to live. So I try to take good care of them.

Right now the flagship of my real estate empire, a four-story 1850s mews house in Cobble Hill, Brooklyn, is vacant. The last tenants, a Hollywood screenwriter who set up shop there with his family while working on a TV show, decamped last week, leaving behind a lot of garbage and dog damage, along with unopened bottles of very good vodka and wine and an array of cooking pots better than the ones I have. (Departing tenants leave very strange things. One woman left her parents’ wedding album and some gold jewelry.)

I spent all day yesterday, from 8:30AM to 5PM, taming the jungle that is the back garden in Cobble Hill and getting the place ready for the painters, who started today, and the housecleaner, who will follow the painters. I have the place listed with six real-estate brokers.

It makes me sad to see that house, where we lived for 20 years and raised our kids, empty. Soon it will be another family’s temporary home. They’ll live in it for a while and then move on.

I may not live there any more, but it’s still my house. I can’t imagine anyone loving it as much as I do.

 

Contract Remorse

THIS WEEK I went to contract on a 1940s shingled cottage in Springs (or is it “the” Springs? I guess I’ll find out). It’s a hamlet a few miles north of East Hampton, on Long Island’s South Fork. I should be celebrating, right? Instead I’m worrying.

The seller took two weeks to return the contracts with her signature, after I had scraped together my down payment and sent my signed contracts to her attorney. As the days passed, I began to think she had changed her mind about selling (even though the house was on the market for almost a year before I came along), or had gotten a better offer. I decided that wouldn’t be so terrible, and began to feel relieved.

—————————————————————-  Then yesterday I got word that the seller’s contracts were signed. Now I have to start worrying in earnest. Not about getting a mortgage. That’s looking good at 5.375%.

 

 

Here’s a sampling of things I’m worried about:

• The location. Will I like Springs? I’d never even been there before the January day I saw this house. I wasn’t even looking on the South Fork. I was on my way to the North Fork.
• The garden. It’s neglected and overgrown. The garage was smashed to bits by an errant branch of a giant cherry tree and needs to be hauled away. There are lots of broken trees that need to be professionally dealt with. How bad will the deer be?
• The money. Will it over-stretch me? Will I be able to rent it this summer? Will I be able to rent it in the off-season if I need to? Will I ever be able to use it myself?

Now you’re thinking, Fool! Why did she sign that contract?!

OK. Here’s what’s good about it:

• The house itself. Of all the houses I looked at, and I had been ISO my next property for about a year, it felt the most “right.” Something I could handle, space with good feng shui, a potentially wonderful gardening property
• The location. Despite the busy-ish road, the property has a feeling of seclusion. It’s backed by undeveloped Town land, virgin Long Island oak forest. It feels very country, yet it’s a short walk to a gorgeous bay beach (Maidstone, bottom) and a 10 minute drive to the ocean. It’s near Jackson Pollock’s and Lee Krasner’s home and studio, which is cool.
• The property. Nothing compared to the mountainside you could get in the Catskills for the same money, but in terms of 20’x100′ Brooklyn brownstone lots: more than EIGHT of ’em.
• The money. Having done all that house-hunting, I think I’m getting a good deal at 320K (the house appraised at 400K; does that count as equity yet?)

Beyond all that, I’ll have fun fixing the place up, and it doesn’t really require that much. And I’m gonna LOVE the garden – working in it, sitting in it, looking at it.

At this point, I don’t have much choice except to close my eyes and jump, and hope everything turns out all right.