I once accused Curtis of going "where white men fear to tread." He laughed out loud and said, "That's true." He went on to say, "I have basketball star Magic Johnson's philosophy of going into urban areas and bringing in development and businesses that lift the area up." Curtis then added, "Regardless of race, too many investors just suck the cash out of a neighborhood but never reinvest to improve it. I invest to reinvest and improve a neighborhood." This is why Curtis and his wife, Diana, are respected friends as well as fellow real estate investors.
Today, some of the most beautiful real estate is being boarded up as casualties of economic decline. It takes a special kind of investor to invest not only to make money, but to also bring an area in decline back up. I tried it once and did okay but not great. Truthfully, I was an outsider coming in, hoping to make a quick buck from a bad situation. Now personally wiser, I have a better appreciation for what Curtis does. It takes more than knowing about real estate. It takes knowing the people and the psychology of the neighborhood, and, most importantly, having a desire to be a part of the community. This is what I have learned about real estate from Curtis and Diana.
As a successful real estate agent, investor, and developer, I've shared a stage as a presenter with Robert Kiyosaki, who is a personal mentor to me. His ideas and guidance have been instrumental in much of my success. I have presented seminars with Donald Trump, as well as coauthored with him an audio CD entitled Three Master Secrets of Real Estate Success. At this writing, my wife and I are renovating a multimillion-dollar home in an exclusive San Francisco neighborhood. To boil it all down, I have achieved all of this by following a simple mantra, one that anyone can understand and apply to achieve similar real estate successes: Profit from problems. There are two foundational things that have been a constant for my wife, Diana, and I throughout our process: knowledge and faith.
"My people shall be destroyed because of a lack of knowledge," Hosea 4:6.
"Faith is the confidence that what we hope for will actually happen. It gives us assurance about things we cannot see," Hebrews 11:1.
Your mantra should be this: Profit from problems.
A pristine property with affluent tenants sounds wonderful, doesn't it? No huge maintenance issues, little problem collecting rents, and so on. Yes, these types of properties are easy on the mind, but they also have a significant cost and little chance to appreciate.
A problem property, on the other hand, has an amazing, and fast, upside potential. For example, let's say that the going rate for a building in a certain area is $200,000. The problem property might be worth $140,000. Once the problems are fixed, however, its value will zoom to the going rate for similar properties: $200,000. Likewise, rents in a problem building might be low. After you improve the property, however, you can raise rents—increasing your amount of income.
This is the concept of "forced appreciation," which occurs when an investor purchases a property that's less than the going market value (usually due to inherent problems, such as high vacancy rates, severely deteriorated buildings, environmental problems, etc.), then fixes the problems that "force" substantial appreciation in value back up to the current market value. I also call this the value-added approach, where you take an asset, make various improvements, and have the asset increase in value. Forced appreciation provides you with a short-term paper profit, which you can then use to your advantage in a variety of ways. This value-added approach has helped many, many real estate investors build everything from small nest eggs to multibillion-dollar fortunes.
TIP I never focus on or count on appreciation when analyzing whether or not to purchase a property. To me, market appreciation is always a bonus: if it happens, great, but if the property doesn't go up in value based on the market, that's okay, too, because I know that I am making what I need to make on the property in terms of cash flow and depreciation. Likewise, when someone says that they have an investment that will provide capital gains, thank them, then turn and run in the other direction! Why? Capital gains are based on the speculation that something "might" happen in the future to drive up the value of that investment. The key word here is speculation; something might happen. By focusing on a value-added approach to real estate investing, you have much greater control over a property's ultimate value.
If you resolve to become a problem solver—someone who embraces rather than runs away from problems—your chances of achieving success in real estate investing will dramatically increase. The next step becomes finding appropriate problem properties.
I purchased my first home in Philadelphia, Pennsylvania, in 1979 for $27,800. I used the G.I. Bill, which meant I had 100 percent financing. I had an adjustable rate loan with an interest rate of 17.5 percent. That's obscene by today's standards, but at the time I didn't care. I was thrilled to be a new homeowner, period. This also was my introduction to leverage, which is using a small amount of money to purchase a large amount of something else (in this case, real estate). I began to buy properties as long as I didn't have to put much money down. I didn't care what the interest rate was; as long as I had a positive cash flow, I bought.
My life as a real estate entrepreneur took another big leap in 1982 when I resigned from my government job for the Naval Aviation Supply Office. From the beginning, I specialized in value-added properties. In Philadelphia, boarded-up houses were practically everywhere, and that's what I looked for. Buying and then turning was easy because I could buy a property for between $5,000 and $30,000 and then decide to either rent or sell.
I had an uncle who came to visit me from San Francisco, California. Every time he came to visit, he would go on and on about the San Francisco real estate market. In 1985 he finally convinced me to move to San Francisco to invest in value-added real estate. However, little did I know that my Philadelphia success in renting and flipping houses couldn't be duplicated in San Francisco. Why? Simply because property was so much more expensive. The average duplex at the time was $250,000. These prices sent my nervous system into shock and fear. While I had accumulated some funds to invest, I needed a lot more information about California real estate before I could begin.
TIP I've had my share of challenges and problems. But with patience and the right approach, value-added real estate investing can work for you, too.
In the meantime, the cost of living and real estate school was beginning to deplete my investment nest egg. What's more, this fear of potentially losing everything held me captive. I wouldn't do a deal if I saw one! I finally got my real estate license and immediately went to work in an area in San Francisco to duplicate my success in Philadelphia. However, in Philadelphia it was relatively easy to identify value-added real estate. Just find a boarded-up house at a cheap price, fix it up, and sell it. In San Francisco, however, there were no boarded-up houses. I had to figure out how to add value in other ways. I finally found the area and the niche. The area was called Bayview Hunter's Point, and the niche was called "in-law apartments." So I went to work buying single-family homes (which were selling, at the time, for $50,000 to $75,000) and adding in-law apartments in the rear of the garages for rental units. Once construction was completed, I could sell the house for between $175,000 and $199,000. I had a full-time construction crew, and we were rehabbing and flipping, and life was good. Now, there are potential pitfalls—I've had my share of challenges and problems. But with patience and the right approach, value-added real estate investing can work for you, too.
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