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This is a book review that originally appeared in the 3/03 issue of John T. Reed’s Real Estate Investors Monthly.
Copyright 2003 by John T. Reed
In recent years, I have had great difficulty finding real estate books to recommend. They are either fantasyland and potentially harmful, get-rich-quick advertising pieces or they are innocuous, rehashes of obvious advice like check a prospective tenant’s credit before you rent to him. This book is a rare good one.
One of the things I like to do in book reviews is tell you what the more accurate title should have been. In this case, it is Streetwise Investing in Low-Income Housing. This book is really about the most marginal neighborhoods and tenants.
In fact, it turned me off and probably would turn off most landlords and would-be landlords. For example, one of his management tips is to hire an armed policeman to accompany you on your monthly, cash-only rent collections in bad neighborhoods. There are also decent ideas in the book for all residential landlords. Mainly, I like it because the author is real-world and has many ideas that are not in other books.
As is often the case, the author writes about a particular market and assumes that other markets are the same or very similar. In Neal’s case, it’s Columbus, OH. Furthermore, his book is almost entirely focused on his experience with what he calls “doubles.” These are what were called twins where I started in NJ, that is, two-family houses where the units were side by side and both had basements and two stories. He prefers three-bedroom apartments each side. That’s interesting. Most apartments are one or two bedrooms. It may be that the economics are better with three, although I once had a three-bedroom rental house and hated the fact that all applicants were groups of singles. Both I and Neal use the word “duplex” to refer to two flats in one building. He does not like duplexes. I think they are an excellent rental property.
One of my great coups when I was a real estate agent was to advise a client to subdivide her twin and sell it as two separate units. She did and got something like a 25% increase in sale price just as I had promised. Neal never mentions any such thing, but that was my first reaction to his “doubles.” If Columbus works like NJ, he should be splitting each of these for resale. Probably Columbus does not work like that or he would have done it.
With its focus on “doubles,” Neal’s book reminds me of one of the first books I ever read on real estate: How to Get Rich in Real Estate by Robert Warren Kent (1961). That book focused on “Aunt Toby’s” a triple-decker, three-flat common in the author’s native Boston area. I suspect Neal is manifesting what I call the “grass is always inedible on the other side of the fence syndrome.” That is, he likes his property type and thinks other approaches do not work. From my perspective talking to investors daily, I can see that everything works if you do it right.
Neal is refreshingly disdainful of the get-rich-quick gurus and warns readers not to listen to them. He says your primary goal should be to generate income. I think that’s a far better goal than the just-get-your-name-on-a-deed stuff preached by most gurus, but I really don’t think rental property ownership lends itself to cash flow. The only way to get it is extremely low loan-to-value ratios.
Indeed, Neal urges exactly that. He is paying slum prices like $20,000 for his “doubles.” And he says to get eight-year, seller, self-amortizing loans. If so, you will have significant positive cash flow early and will own the properties free and clear after eight years.
I think real estate is more of a net worth play. Only in bad neighborhoods can you emphasize cash flow like Neal does.
Much of Neal’s book is about Section 8 tenants and rules. Apparently, he gets his best rents from Section 8 tenants and seeks them out. However, I would hate all the bureaucratic B.S. that goes along with it. Unlike me, Neal is one of those guys who takes pride in his knowledge of how to deal with bureaucratic B.S. If you are, too, you will probably want to get Neal’s book and follow his advice.
An old rule of thumb said you got a good deal if you paid 100 times monthly gross for a residential rental. Actually, I think that was back in the days of 4% mortgages. In my investing life time1969 to presentYou needed to be down around 50 times gross to get positive cash flow. And most investors seem to be up around 150 to 250 times monthly grosswhich is negative cash flow. Neal pays 28.5 times monthly grossor at least that was the ratio in an example on page 41. Will you get positive cash flow if you buy for 28.5 times monthly gross? Oh, yeah! Can you buy for 28.5 times gross? In the inner-city slums, maybe. That would be very hard elsewhere.
Neal says your operating expenses will be 30% of the gross not counting taxes and insurance. Taxes and insurance range from about 6% to about 15% of the gross, so he is close to my standard figure of 45% of the gross for all operating expenses. He may be a little light. But once again, he is a breath of fresh air compared to the get-rich-quick guys. Russ Whitney has operating-expense ratios of 14% in some examples.
Neal recites a lot of the old chestnuts about looking for neglected properties and such, but I think in this case, he’s right. These marginal properties are really quite challenging management-wise so there probably really are the “motivated sellers” I have dismissed as deus ex machina in other contexts.
He also has some decent suggestions like cultivating Realtors®, following investment club members, and such. Neal himself is an officer of the Columbus Real Estate Investors Association. I spoke at their state convention once and may have met him.
Neal speaks often of housing inspectors and code violations. I never encountered any such thing in 23 years of investing. But in Neal’s marginal neighborhoods, they are apparently a constant plague because of his heavy reliance on government programs and poor tenants who deliberately sabotage the units for various reasons. The building inspectors and their threats to jail you are apparently also a source of “motivated sellers.” I believe that!
Neal offers various practical tips for dealing with building inspectors and vandal tenants. It’s probably good advice, but it just motivates me to find another way to earn my living. He says to avoid land contracts and details his own bad experience with them. Good advice.
He talks a lot about assuming mortgages. Although he has an accurate discussion of the inability to assume FHA and VA without qualifying since the late eighties, he nevertheless continues to talk about assumptions. Seems like pre-eighties stuff to me.
Oddly, the book, which is published by Panoply Press (Oregon), has a number of egregious misspellings like “preventative” (“preventive” will do), “sceptical,” and “defence.”
The great strength of the bookwhich would probably benefit all residential investorsis Neal’s “how to be a cheapskate” advice on improvements and repairs. Holding down costs is essential to business success. But most real estate renovators cannot refrain from gold plating their properties to show off their great taste. Neal has no problem resisting that temptation. He comes across as a totally pragmatic, skinflint landlord.
He opposes neglecting the properties. He probably has no choice with the inspectors who are constantly all over his buildings. But he also generally says to just meet, not exceed, the requirements of the building code and the Section 8 inspectors. He’s right from a strictly investment point of view. But even I would probably have to do better than that to maintain my self respect.
Neal is very shrewd about hiring help and outside contractors, about how to design repairs and improvements to be done as cheaply as possible, and about how to get materials as cheaply as possible. His is a world of out-of-work roofers, quasi-jury rigging, close-outs, and remnants. He tells how to repair a zillion things that others would replace.
In some respects, I strongly disagree with him. He replaces roofs that are not yet leaking. He also replaces old “octopus” furnaces. In my experience, the only things that ever went wrong with furnaces were the things the oil dealers excluded in their maintenance agreements: the combustion chamber and the blower motor. The rest of it lasts forever.
He hates a number of common building features and abolishes them from his buildingslike bathroom vanities, pocket doors, screen doors, outside faucets, clothing rods in closets. Some of these policies may just reflect the neighborhoods and tenants he has, but others should probably be considered by those with more normal properties and tenants.
I like his policies on screening and managing tenants for the most part, but because he operates at the very bottom of the socioeconomic range, he has to put up with a lot of nonsense I would never tolerate. Maybe this explains why I agreed to rent to Section 8 but never did. I asked my managers why once and they said, “Every section 8 applicant we get is the kind of person you taught us never to rent to.” Neal rents to them.
I must comment on my annoyance with H. Roger Neal’s name. He is entitled to use his middle name rather than his first name. But I do not know why we have to be told his first initial if he chooses to go by his middle name. It sounds affected like old-time Wall Street magnate J. Pierpoint Morgan. I had supper with Ross Perot in 1977. At the time, he was the only billionaire. He complained when I used the name “H. Ross Perot.” He said his enemies created that when they learned he went by his middle name. He, himself, had never told anyone his name was “H. Ross Perot.” His enemies used that to make him sound like some fuddy duddy, imperious, Wall Street magnate. Which raises the question of why H. Roger Neal wants to sound like some fuddy duddy, imperious, Wall Street magnate.
That also may beg the question of why I call myself “John T. Reed” instead of just “John Reed.” I was going to call myself John Reed when I wrote my first book, but my wife insisted on John T. Reed. She said John Reed sounded too much like John Doe. Indeed, when I was a kid, I remember reading a story about common names. At that time, John was the most common first name in America and Reed was the 63rd most common last name. A reader once sent me an IRS publication that used the name John Reed as a generic John Doe sort of name in an example of how to do your taxes on a particular issue.
When I was in the Army, they required me to sign my name John T. Reed. They called it my “payroll signature.”
There are some other technical reasons. John Reed is the name of a fellow Harvard graduate who like me, also was a writer and went by the nickname Jack. He is the only American buried inside the Kremlin. The 1981 movie Reds starring Warren Beatty was about that John Reed who wrote the book Ten Days That Shook the World about the Russian Bolshevik revolution. Also, the Lone Ranger was supposedly named John Reid before he became the Lone Ranger. His nephew Dan Reid appeared in many Lone Ranger stories.
I was watching TV one evening when the announcer said in one of those raspy announcer voices, “Brian Dennehy IS Jack Reed.” Dennehy did a series of made-for-TV movies in which he played the character Jack Reed. One write-up described the character as, “dogged, thoroughly incorruptible Cook County deputy sheriff Jack Reed.” Dennehy was elected captain of the Columbia football team once upon a time. My son Dan played taliback there from 1999 to 2003 and got to meet him.
I used to call my publishing company Reed Publishing. Then a huge Brisitsh firm by that name entered the U.S. market and the confusion between us cost both of us money. I changed to John T. Reed Publishing to avoid that confusion.
If you do a Google search for just John Reed, you get me, but also many other John Reeds including the Kremlin guy, a La Jolla, CA doctor; a British actor, the one-time head of Citicorp, an SEC executive, etc. So I had to put in the T. to make the name reasonably unique.