I know the price of success: dedication, hard work, and an unremitting devotion to the things you want to see happen. Frank Lloyd Wright, American Architect (b. 1867)

In Lesson One, You Will Learn:

• More money has been made in real estate than in all other investments combined.
• Real estate deals involve tens and hundreds of thousands of dollars, which means that even small percentage gains when buying or selling can yield substantial profits.
• You don't have to own a lot of real estate to become financially secure.
• There is a lot of real estate and that means a lot of opportunities.
• Prices are very subjective.
• You can control large investments with small percentage downpayments.
• Simple research can make you a pricing expert in a short period of time.

   In the last two chapters, you learned the style and attitudes best suited to making a living. Now, let’s go to a whole different level. In the next few pages, you are going to learn how to make money in real estate. For most people, this means buying a home and waiting for it to appreciate. That’s OK. However, the information in this chapter can be much more useful. This information can be your bridge to early retirement or to realize many personal dreams.

   The real estate investment system described in this chapter will work anywhere. It works in Boston, Houston, Santiago, Chile or a small village in France. With patience, it works all the time. You can start the system with a few thousand dollars or a million. Your research will limit your risk. Your profits will continue to grow as you continue to use the system and inflation raises values. The system works if you buy one house in your life or six houses every year. Some people may even choose to make real estate investing their careers.

   Understanding the real estate market is a must for anyone seeking financial independence. Residential real estate transactions in the United States represent a $1 trillion business or 15% of the country’s total gross national product. The Internet as a real estate investing tool is becoming increasingly useful. Presently, there are over a quarter of a million real estate websites.


Price, Price, Price

   What’s the most important rule to follow when making money in real estate? The standard answer is location, location, location.

   This is the wrong answer.

   The correct answer is price, price, price.

   If you are willing to think unconventionally for the next hour as you read and digest the information in this lesson, you will begin to see how the world of real estate actually works. You will see that the real estate business works just like any other business. To make a profit, you must buy low and sell high.

   The conventional wisdom espoused by many in the real estate profession is that you can’t do this. Because they haven’t done it, they want you to believe that making money in real estate is somehow different from making money in other kinds of businesses.

   This is wrong.

   You can buy and sell and buy and sell over and over again. You can make a profit on each transaction. The system couldn’t be more logical or uncomplicated. The ease of the system makes you wonder why more people aren’t real estate investors.

   Let’s begin.

   You buy a mansion in a fantastic location for a million dollars. If the mansion is worth a million dollars, you make no money. It’s worth a million and you pay a million. So, instead of buying the mansion you buy a rundown two-family house in a bad location. This property is actually worth $60,000 but you buy it for $40,000. How do you know that the property is worth $60,000? Because you have made the effort to research prices. Why did you get such a deal? There could be many many possible reasons. One of these reasons will simply be that you made an offer and that offer was accepted. You made an offer to an owner who wanted to sell and no one else made an acceptable offer before you did.

   This is very straightforward.

   If you told your friends about buying the mansion, they would ooh and ah in admiration and offer their congratulations. If you told them about buying the dilapidated two-family — well, they might be very happy to recite every horror story and bad problem that they ever had with real estate. If they haven’t had any, they will repeat every bad experience that they’ve ever heard of — the pipes leaking, the tenants from hell, the junk cars, the vacancies, etc., etc. Of course, all of these bad things could be among the good reasons why you were able to buy the property for $40,000. For the $20,000 profit, you’d have to be willing to correct the problem and call a plumber, a lawyer, a tow truck or a rental agent. In the final analysis, you may never find out the seller’s exact motivation in accepting your offer. The reasons could be business or personal. You offered $35,000 and then $38,000 and then your $40,000 offer was accepted. Does the reason the seller decided to accept your offer really matter?

Exercise    Name five reasons that a person might consider selling a home for less than market value.

Buy. Sell. Profit.

   What if you don’t want to own the two-family? You sell it. You take your profit and you buy something that you do want to own. Don’t allow the details to obscure the larger picture. Is there a guarantee that you can sell the house for $60,000 that you buy for $40,000? Of course not. The $60,000 price is your best estimate after you buy it, maybe clean it up and resell. There are no guarantees and that is the main reason that most people don’t have the courage to take a risk. They would prefer a guarantee. You can find investments that are guaranteed but the investment returns are minimal. The Master Success System is giving you the courage to do more, to build confidence. You research. You make offers. You buy. You sell. You profit.

   What happens if after you buy the property that you decide to rent it rather than sell it? Sure, why not?

   Is the point to buy junk property? No, the point to is buy real estate for less than what it is worth. You buy real estate for less than what it’s worth by researching and becoming an expert at value and by making offers. The examples of the run down property and the mansion are illustrative of the concept. The location doesn’t matter. The type of property doesn’t matter. The price matters. The price allows you the leeway to buy, hold and resell at a net profit after expenses including capital gains taxes.

   Beware of fixer-uppers. Fixer-uppers are houses in need of repair. Fixer-uppers are not automatically good deals. In fact, if you aren’t a professional contractor, they can be money pits and very bad deals. Stick to making a reasonable profit based on your research, your negotiating skills and your willingness to make offers.

Real Estate And Pencils

   Let’s compare real estate to the pencil business. You are in the pencil business and your standard pencil sells for an average price of $0.10. Some fancy stores sell the pencil for $0.12 and some discounters sell it for $0.08. You are the pencil manufacturer. To make a profit of $0.02 per pencil, you must get a wholesale price of $0.06 per pencil.

   Who cares if one guy makes one cent on a pencil and another guy makes three cents on a pencil and someone makes two cents on a pencil? Who cares about pencils? The point of the pencil analogy is to help you to gain insight into the real estate investment business. You can do the same thing with real estate that the pencil guy does with his pencils. The difference is that his pencil may cost $0.10 and your real estate may cost $100,000. He makes a couple of pennies and you make thousands. If someone can make 10%- 20% margins buying and selling pencils, you can make 10% -20% margins buying and selling real estate. The business principles of buying at wholesale prices and selling at retail prices are the same.

   Actually this isn’t totally correct because investing and making money in residential real estate can be a lot easier than being in the pencil business. In the pencil business, all of the parties involved: the manufacturer, the wholesaler and the retailer are certainly very knowledgeable about pencil values. In contrast, in residential real estate, you may be dealing with a seller who has little personal knowledge of value who is being advised by an agent who may not know much more. In many residential transactions, your specialized knowledge of value will give you a clear advantage when you negotiate.

   If you were buying stocks, would you ever invest through a stockbroker who never bought stocks for himself? Of course not. Then, why would you choose to work with a real estate agent who never bought investment real estate? In fact, very few real estate agents own investment real estate. It may be difficult for you to find a residential investment agent in your community. The obvious reason is that the agents who buy investment real estate make enough money that they don’t have to be real estate agents any more. Being a real estate broker can be a tough job.

The Residential Real Estate Marketing Process

   The average piece of residential real estate is sold every seven years. This means that in their lifetimes, most sellers will be involved in fewer than ten transactions. This is a minimal amount of real estate activity with most transactions spaced years apart.

   The purchase and sale of a home are usually the largest financial transactions in which anyone is ever involved. You would think that any rational person would seek expert assistance to protect their most valuable asset. The person called is a real estate agent.

   The next step in our system is to understand the role of real estate agents: what they do and how they do it.

   Where do homeowners select a real estate agent? Did they see a yard sign? Is it the agent that they used seven years ago? Is it their niece? Did they see a warm and fuzzy TV commercial? Did they simply walk into an office nearest their home?

   After twenty years or more of study, all brain surgeons are probably pretty good brain surgeons. If you meet someone who is a board certified brain surgeon, she is probably a pretty good brain surgeon.

   If you meet someone and they tell you that they are a board-certified real estate agent, there is less certainty that they are good real estate agents. In many places, becoming a real estate agent is not exactly the result of rigorous study. If you are a high school graduate, haven’t been convicted of a felony, take a few classes and pass a simple test, you are in the business.

   Again, there are smart agents. The smartest real estate agents are those who quickly figure out that the best reason to be in the real estate business is to scoop up the best bargains for themselves before the general public can get to them. The smart real estate agent quickly becomes the smart real estate investor.

   There are also superstar real estate agents who make six figure incomes. With a little research, you can find and cultivate these agents. They will understand your system. They will not be offended by your fondness for making offers because they will be smart enough to see beyond a single transaction to you as a client who will generate multiple commissions.

   Average real estate agents, many of whom are part-timers, are the guiding forces behind most residential real estate transactions in America.

The secret to investing in real estate is to invest in real estate. Don’t wait. Do it. Then, wait. The biggest mistake you can make is nothing.

The High Cost Of Free

   In a typical transaction, the residential sales process begins with a homeowner requesting a "Free Market Analysis." It is hard to imagine that a homeowner who is about to enter into a financial transaction involving hundreds of thousands of dollars would opt to let the appraisal rest on a "Free Market Analysis." Incomprehensibly, it seems that most homeowners rationalize that it would be foolish to spend a few hundred dollars on an independent professional appraisal when the local real estate agent is willing to do the job for nothing.

   This is a big mistake. However, it is a mistake that only creates more opportunities for you.

   The real estate agent answering the phone is always highly motivated. She is motivated to get the listing. The homeowner who calls a real estate agent is not speaking to an independent consultant who will objectively offer advice. Instead, the homeowner is speaking with a commissioned salesperson who needs listings to survive.

   Here is a typical house listing scenario.

   The agent tours the house while complimenting the homeowners on their decorating expertise. The agent wants to be-friend the homeowners and gain their confidence. At this time, the agent will also help the homeowners alleviate any fears they may have about the pending sale. If the homeowners are concerned about the leaking cesspool or the cracked foundation or lead paint, the agent offers comfort. Don’t worry. Don’t worry. The agent thinks to herself that she will deal with any house problems after she has gotten the listing. Her job is focused on getting the listing. Without the listing, there is nothing.

   After the house tour, the agent and homeowners sit down to begin a cat and mouse quiz. The aim of the agent is to try and figure out if the homeowner has a value figure in mind or what number is going to make the homeowner pleasantly surprised. The agent doesn’t dare risk insulting the homeowner with a low number. "Free Market Analysis" evaluations always start high. If the house doesn’t sell, there will be plenty of time to knock the price down at a later date. The agent tells the owner what the owner wants to hear in order to get the listing. The agent needs to get the listing before leaving the house. The agent doesn’t want the homeowner to seek a second opinion and run the risk that the second opinion comes in even higher than her inflated figure.

   The agent gives the homeowner a value for the house, which ensures that the homeowner gives the agent the listing.

   You can hire trained professional independent appraisers who will research sales and give you a detailed analysis of value. This takes some time and costs hundreds of dollars.

   Realistically, how much work can a real estate agent offering a "Free Market Analysis" afford to do? Maybe she spends a few minutes looking for other similar houses on the market or comparable recent sales. Maybe. The object of the real estate agent is to get the listing and get the house on the market and allow the market, through the eventual buyer, to set the true value. The incentive of the agent is not to establish value. It is to get the listing.

   This is the way most residential real estate transactions work. Are there fantastic real estate agents, knowledgeable sellers and savvy buyers who are exceptions to the above? Of course, there will always be exceptions. Is the point to ridicule real estate agents? Of course not. This system is not about real estate agents. It is about making money in real estate. To make money in real estate, you often have to work with, around, over or under one or two real estate agents.

   Every offer you make on a property will not be accepted. In fact, most offers that you make on property will not be accepted. It is only necessary to know that some offers will be accepted and from those accepted offers you will profit handsomely.

   You are going to make money in the real estate business because you will be more knowledgeable than the other parties to the transaction. You are going to make money because your expectations are reasonable which may be 10% -20% margins when you are buying or selling.

   Let’s say that you buy a very ordinary condo that your research tells you is worth $100,000. Every time one of these units comes on the market, you offer $80,000. Sometimes these offers will be rejected outright. Sometimes there will be counter offers. Perhaps, after one of your offers, the real estate agent tells you that the seller has been transferred out of state and is interested in a speedy transaction. This presents a win-win situation for both you and the seller. Since you have your financing pre-arranged, you offer to close in 30 days. You negotiate a deal at $85,000. You just made $15,000. This is just like the $15,000 you may have worked months to earn at another job. You earned a paper profit of $15,000 without any risk or real upfront money. It happened in the flash of a real estate deal. There are transaction costs and holding costs involved in buying real estate and a real estate commission and taxes to pay when you sell. These expenses will impact your net profit. These will be part of your cost of doing business.

There are always opportunities for those willing to research and find them.

Deal Only In A Specific Area

   To make offers and make money, you must research values. Knowledge is the next step. To become an expert at real estate values, you must limit your real estate activities to a specifically defined investment area. This area should contain approximately 25,000 people. If you live in a city, your investment area may be one neighborhood. If you live in a rural area, it can be an entire county. As you will find, real estate agents may not be as knowledgeable about values as you will be for the simple reason that their sales area will usually be much larger than your investment area. Your area may have 5,000 to 10,000 properties. Their areas may have many times as many houses.

   Your objective is to become an expert in value in your specific investment area. You should begin to feel confident about your research in two months and you’ll probably be one of the few area experts on prices in six months. Knowledge will be your power to make money. Others simply do not have your incentive to learn values.

   Real estate is a local business. Prices can vary from one neighborhood to another, from one street to another and from one end of a street to the other. You deal in a small specialized investment area because you must become sensitive to these differences. These differences can spell profit for you. How much does a garage, a basement, a second bathroom, or backyard decks add to a house’s value? Is off-street parking or walking to public transportation or proximity to shopping, a highway or a park important? In some areas, each of these variables can be significant. In other areas, they may not significantly affect value. You must know the variables, which ones are important in your area and be able to put a price on them. An extra 1,000 square feet in lot size in the middle of South Dakota may not be significant while 1,000 square feet in the middle of Manhattan may be worth millions. In Manhattan, even the air over a building, called air rights, can be worth millions.

   You may find in your area that a garage is worth an extra $10,000, a half bath $5,000, or having a Main Street address $25,000. What about the zoning? What about the lot size? What about the assessment? What about a finished basement? Are there properties with scenic views? What are the variables and what are they worth? This is the research that you are doing. The more you can isolate and identify specific factors affecting property values in your specific area, the more money you’ll make.

   This system is not just about making low offers on property. It is not simply about seeing a house listed for $150,000 and offering $130,000, although you may make such offers. As you start to work this system, you will begin to find houses listed for less than what they are worth. For example, you may find a $150,000 house listed for $130,000. You could buy the house for the full listed price and still be getting a great deal.

   In many parts of the country, there are services, which for a reasonable monthly fee will mail you information on all of the real estate transactions that take place within your investment area. This is public information. You may find the same information recorded at the town hall if you’d like to do the legwork yourself. Increasingly, you will find prior sale information on the Internet. Research may lead you to a great deal of information on property sales including: the names of the buyers and sellers, the sale price, the amount of the mortgage, the name of the lender giving the loan, the lot size, the size of the house, etc.

   Research services make the gathering of raw data easy. You’ll be able to make databases and charts galore. However, don’t be lulled into complacency. To become an expert on real estate values, you’ve got to get out of your chair and into your car. There is a lot of potential profit at stake. This is not the time to take shortcuts. You can’t see beautiful room colors, shoddy construction, a great tiled bathroom, wet basement problems or attic expansion possibilities from a listing sheet or a newspaper ad. Your goal will be to inspect each and every property that comes on the market in your area. Yes, some properties will be out of your price range but you still want to see many of them. Even if your target buys are in the $100,000 to $200,000 price ranges, you still will want to see and understand why some properties sell for $300,000, $400,000 or more. Inspecting properties will become your part-time job. Generally, making an appointment and seeing a property will take less than 30 minutes.

   For each property in your investment area, you will want to record the original asking price and the final sale price. What was your initial reaction to the original asking price? You are now the appraiser. Do you feel that the asking price and sale prices were high, low or average? In your opinion, did the new buyer pay too much, get a good deal or an average deal? Most properties sell in 60 days. How long did this property stay on the market? Were you able to glean any special information, such as the size of the downpayment or the name of the lender?

   As you go through this fairly simple recording and self-questioning process with each new property on the market, your understanding of values will deepen. At first, you may have few opinions. Later, you will be able readily to differentiate the good buys from the bad deals.

   When most residential buyers make offers on property, they are thinking about more than money. They are going to live in the house. They have to like the kitchen and the neighborhood and the schools and local government. When you make offers, you only have to like the price.

   When most homeowners are selling property, they are thinking about more than money. They are leaving many memories behind. This house represents their past. They must simultaneously think about leaving and moving to a new kitchen and new neighborhood and new schools. For many people, the home selling process can be quite unpleasant. Many sellers wish to sell as quickly as possible. The seller must keep the house perfect at all times because agents may call at any hour of any day. The entire sales process can be traumatic with strangers of all types milling about the house and a few making rude comments. And consider that you may make an offer of $120,000 for a property that the seller had bought years ago for $20,000. The sellers may be only too happy to take this substantial appreciation and run.

   As a novice investor, when you decide to make an offer, don’t be intimidated. If your research tells you to offer 20% below the asking price, then hold firm and make this your offer. The agent may balk while the homeowner gladly accepts. You won’t know until you make the offer. If the listing term on the house is nearing an end and the agent hasn’t sold the house and is in danger of being replaced, the agent can quickly become your ally.

   There are many many reasons why people sell houses. Maybe there has been a death in the family and the survivors want out of the house because of memories. Maybe there is a new baby and a larger house is needed. Maybe there is a new job. Perhaps the owners don’t want to do any more maintenance. The owner could have had a fight with the neighbors. Sellers can have many reasons to sell which are not your business or concern. Your single motivation will be price and terms. If you don’t get what you want, you move on to the next deal. For you, there will always be a next deal. It is not necessary for you to love a home to profit from it. This is now your business. What happens if the sellers don’t like your offer? They can reject it. The sellers are holding the cards and you are not. When it becomes your turn to be the seller, you can decide to accept or reject offers.

Be Rip Van Winkle. Look at not what is but at what will be. The difference is opportunity and wealth.

Holding and Managing Investment Real Estate

   The object of buying and selling property is to make enough money so that you can invest in solid income properties. You will want to make a sufficient downpayment so that the rental income will at least cover your expenses with some surplus. This surplus is called your cash flow. Your cash flow may be small during your early years of ownership and should increase each year, especially if you opt for a fixed rate mortgage.

   Many people shy away from the real estate investment business because of a fear of dealing with tenants. However, most successful real estate investors love their tenants. When you buy a property, you will be borrowing many tens of thousands of dollars. You borrow money but you don’t really use your own money to pay the loan back. You have these wonderful people called tenants who every month give you the money to pay back your loans. What a great business! You borrow money and someone else pays that money back for you. For example, you might buy a $240,000 six-family apartment building. Your downpayment may be $40,000 and you arrange a $200,000 mortgage for 20 years. Each month, your tenants give you the money to repay your loan. In 20 years, the loan is repaid and you have the $200,000. This is called amortization. In 20 years, the $240,000 property may be worth $400,000. This is called appreciation. Your $40,000 becomes $400,000. This is not somebody getting lucky and hitting the lottery. This is a typical real estate investment transaction. In every community there are a few people who have figured this out and own the investment real estate. Join them!

   Don’t be afraid of tenants. Your investment is their home and the vast majority of people treat their homes with the utmost respect. Love your tenants for what they can do for you. They can help make your financial goals a reality.

   Managing small investment properties is not particularly difficult or time consuming. If you maintain your properties properly, the time commitment will be in the one hour to two-hour range per property per week. When you have a problem, you react as if you had that problem at home; you call a plumber, electrician or carpenter for help. If you are not skilled yourself, you will be able to find a local general contractor willing to do small jobs.

   One of the big advantages to investing in real estate is that you don’t have to own much real estate to be wealthy. If you own six small investment properties in your community, you are probably well on your way to an early comfortable retirement. Even one good rental property in addition to your own house can make a significant difference in your retirement.

Action Challenge Donate Action Principles Books    Working together we can give many others the opportunity to consider the importance of improving themselves and helping others. Become an Action Principles Champion by distributing copies of OUR Action Principles books in your community. The cost of $1 per book in sets of 10 covers our printing and distribution costs. The book serves as an introduction to who we are and what we do. Everyone does not have access to the Internet which makes book distribution important.

Mistakes to avoid

   This system does not work for everyone for a number of reasons:

1. The geographical area is too large. A smaller area is better than a larger area.
2. The investor becomes impatient. There may be two opportunities in one month and none for four months. Persistence and good research are keys to the system.
3. The research gets stale. The market is constantly changing. Knowledge is power.
4. The investor gets lazy or overconfident. Physically viewing properties and keeping an accurate database of activity is important.
5. The investor lacks confidence. He misses opportunities because of indecision. He is too timid to make offers. Or, he's pressured by the real estate agent to make offers higher than their research suggests is warranted.
6. The investor gets greedy. She makes unrealistic demands of the agent or seller. She loses a deal with thousands in potential profit waiting for interest rates to drop a fraction. She forever worries about capital gains taxes before they make any capital gains.
7. The investor gets emotional. The investor allows his or her personal preferences for living spaces that he or she aren't going to live in to cloud the financial aspects of the transaction. New owners can make new rules and do any renovations that they choose to do after they acquire the property.

Many people can tell you within a few thousand dollars how much they have saved in the bank and the value of their securities. Often, these same people would be tens of thousands of dollars off in estimating the market value of their homes.

The Home Reinvestment Method

   A modified approach to this real estate system is called the home reinvestment method. You search for a good home value. You buy and move into the home. You decorate and improve. You add a hefty profit onto your costs while keeping the property continually on the market. You remain in the house until you sell. You take your profit and find another house. Buying and selling your own house minimizes the holding and security costs of purchasing a vacant house. Holding costs during buying and selling can also be minimized by having a tenant in the property who knows that the property is being marketed. To secure the tenant’s cooperation in the marketing process, you may offer them a small percentage of the profit when the property sells.

   This chapter is only a mere hint of an idea to motivate you toward self-education in the field of real estate investing. In real estate as in any other business, you want to be informed and stay informed. Keep looking at houses. Keep talking to brokers and other investors. Keep talking to your tenants. Keep reading real estate books. Keep up on prices by reading your Sunday newspaper and local real estate magazines. Keep returning to Success.org for articles and courses on real estate. You can become a real estate investor. There are opportunities to suit most starting budgets and most schedules. You may begin with a small condominium or a large apartment building. If you do your research, you can raise investment capital or make a career out of buying and selling properties. If you own well maintained properties and treat your tenants with respect, with time you should find the real estate investment business to be both lucrative and rewarding.

Key Concepts

   Everyone should invest in real estate. Real estate deals involve tens and hundreds of thousands of dollars. It doesn’t take many real estate investments to become financially secure. Small percentage gains when buying or selling add up to large profits. You can control large investments with small percentage downpayments. The object of buying and selling property is to make enough money so that you can invest in solid income properties. You will want the rental income at least to cover your expenses with some surplus.

   The most important factor to consider in real estate investing is not location. It is price. Just like any other investment you must buy low and sell high. It is better to buy a $60,000 condo for $40,000 than it is to buy a million-dollar mansion for a million dollars.

   In real estate, knowledge is power. Through research it is possible to gain a competitive edge in the marketplace. Real estate is a local business. To become an expert in real estate values, limit your real estate activities to an area containing approximately 25,000 people. In a city, this will be a small neighborhood whereas in the country it might be an entire county. By limiting the area you will be able to learn about every transaction within its boundaries. You’ll record the asking and sales prices. You’ll observe how long the property was on the market. Then armed with this information you will make offers at a price and on terms where you will profit.

   Many people avoid the real estate investment business because they fear dealing with tenants. Real estate investors should love their tenants. You borrow money and your tenants pay that money back for you. In general, managing smaller investment properties requires only about an hour or two per property per week. This is very reasonable when you consider that it only takes owning six small investment properties to have a comfortable retirement.

Your Assignment    Your assignment for this chapter is to become familiar with real estate values in your area. What is the price range for condos, single-family houses, two-family houses and larger investment properties? Use the Internet, free local real estate magazines or the Sunday newspaper. If you know someone in the real estate business, ask him or her. Knowing prices is the first step. Then you can begin to design a realistic real estate investment program and start to figure out downpayment requirements and financing options. Remember that even if you end up with only your own home and one additional piece of investment property, you will be miles ahead of most people. You will be at the "A" level for retirement security.

Extra Curricular    Investigate the ownership of the income property in your specific investment area. Men or women? Young or old? Professional or blue collar? Companies or individuals? Who owns two or more properties?    When you reach Level Four, you will learn much more about the advantages of investing in real estate.

Go to Lesson 7