“Chance favors the prepared mind.” – Louis Pasteur
Gene’s been a full-time real-estate investor for the last nine years. Because of real estate, he has never really had to get a regular job.
After graduating from Brown University, Gene went to the University of Florida for a master’s degree. But a funny thing happened on the way … he discovered that he could probably make more money as a real-estate investor than he could ever possibly make in his chosen field. In fact, when he finished his master’s, he didn’t even bother getting a job in his field.
You see, while in school, Gene bought up a few tiny little properties in Gainesville (where the University of Florida is) in what he thought were good deals. He spruced them up himself. And he either sold them or rented them out — for truly extraordinary profits.
At that time, it seemed easy — too easy. He felt that he must have been lucky. So he started ordering every course out there on real estate to find out what works. He tried foreclosures, auctions, high-end properties, and low-end properties. He tried them all. But none of them worked nearly as well as his initial instinct. Nine years later, he’s learned a lot on the way and is still learning. But he’s sticking with his core premise.
Here’s what he does: He buys middle- to lower-class properties on the fringe of good neighborhoods. He only buys at what he considers to be a 20% discount or more to the market value of the property. And he only buys when he can net at least 8% a year in rent. That’s it. After trying all the hype, that is what works for him.
I asked, “Why middle- to lower-class properties?” He said, “Look, the lower-class rents are nearly as high as the middle-class rents [I don’t remember exactly what Gene said — let’s say $600 a month vs. $750 a month]. But the middle-class properties generally sell for twice what the lower-class properties sell for or more. So by buying middle- to lower-class properties, right on the fringe of good neighborhoods, I earn twice the income.”
Makes good sense.
He buys right on the fringe of good neighborhoods, where his properties can potentially get swallowed up by expansion of the good neighborhoods and potentially earn him a large profit. But he doesn’t count on that. The rents have to be there first.
There’s a difference between speculating and investing in real estate. Speculation is buying a chunk of earth and hoping it goes up in value — without considering the rental income. Investing is making sure you get a nice return on your money. Gene only invests in real estate — he only buys properties that will give him a great return on his money now, through rent.
He says a lot of sensible things. For example, when I asked him about economic downturns, he said, “There will always be a demand for the properties I buy. In an economic downturn, middle-class folks move down to these so they can pay less rent. And in an economic upturn, lower-class folks will move up with these.”
I asked him about rent collection and property destruction, both of which might be issues in a lower-class neighborhood. He says he gets a huge security deposit and his leases are written such that the residents know that if they screw up, they lose their deposits. Also, Gene makes sure that every deal he does makes sense even if up to 40% of the rent he collects goes away due to expenses or bad tenants.
Gene told me he tried more expensive homes but the return wasn’t there. He said that many “investors” own such homes just to say that they own them. But the real money to be made is in properties that nobody else is willing to take a chance on. He quotes Warren Buffett’s margin-of-safety concept, figuring that if you can make a sound-enough investment at a low-enough discount to the property’s underlying value, and get paid handsomely, there’s enough margin of safety that you should be fine regardless of what happens. After listening to Gene, I started looking at rental properties myself.