Just buy a series of principal residences if you want to get rich

Posted by John T. Reed on Aug 08, 2017

I was asked to talk about regrets in my real estate investing career at FreedomFest last month.

One big one is thinking I ever needed tenants and employees. I could have and should have just aggressively bought principal residences.

My first property bought 4/15/1969 was a duplex I did not live in because I was a new Army officer and moved seven times in four years including to Vietnam. I did well on that property, but I probably would have done better and spent less time on a non-fixer.

After I got out of the Army, I probably just should have bought a home to live in and aggressively moved up to a more valuable one whenever I could. That would have spared me dealing with tenants and resident managers and the Tax Reform Act of 1986 and the overbuilding of apartment buildings in the S&L Debacle. Actually, it would have spared me from losing $750,000 in the S&L Debacle.

I was trying to be the rabbit in the hare-tortoise race. It you back test that theory buying a new house about every seven years, you win in every seven-year period going back to 1968 except one, and assuming you moved to more expensive parts of the US like CA—which I did—you end up living in about a $10 million condo or super well-located detached home.

I live in a $1.8 million dollar home, which is quite nice and adequate, but I could have done better if I had been less “big-time,” wanting to own apartment complexes with pools—which I did. The plain old principal residence turned out to do better and to be much safer, more liquid, protected from creditors and the tax man.

Homeowners are lauded; landlords, hated. Consequently, homeownership is safer and pays more. Your real estate investing career should start with a principal residence. Many a real estate mogul started with a VA, no-money-down home. I bought a VA no-down duplex in 1973.

Do not buy a BIG house. 3,000 square feet is about all anyone needs. And no gold faucets or five ovens (“for entertaining”). Just keep trading up to better and better LOCATIONS. Do that for 30 or 40 years and you would have ended up in one of the premier rich people communities in the U.S.: Malibu, Manhattan, Newport Beach, Honolulu, San Francisco, Palm Beach. I ended up in the San Francisco suburbs. (We lived on Russian Hill on the cable car line in the city from 1977 to 1980—but as tenants.)

You should also lower your loan-to-value ratio as you go. When you start collecting social security, your home would be mostly paid off.

One of the salient features of a principal residence compared to other real estate and other investments is homes are extremely politically favored. Much better financing terms, creditor protection, zoning and other land use restrictions that increase property value, tax laws, special deals for seniors, first-time home buyers, on and on. In contrast, other major asset category owners are regarded the evil rich landlords, Wall Street, greedy, big corporations. No contest.

And even if the house does not outperform other investments, you can still live in it. You can’t live in or eat gold or the S&P 500 or Treasurys. Even when houses go down in value, they still provide the same shelter and school district and so on as when the sale price was higher. If you just use it for living, the market value of the moment is irrelevant.

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