One of the all time real estate investing classics is How I Turned $1,000 into a Million in Real Estate in My Spare Time (later revised to $5 million) by William Nickerson. The book was originally published in 1959 and not only shows how real investment has been a great business for a long time, but provides a model for how real estate investors can grow a small nest egg into a giant business with a little hard work and some patience.
It also shows the, well, anti-miracle of inflation as the following passages highlights:
“In this case, discounting our target figure by about 5 per cent to $8,200 would represent a bargain. Increasing the $8,625 about 5 per cent to $9,000, the figure we arrived at when making our appraisal, would give us a good buy. To the target price about 10 percent might be added, making $9,500 our top price. If the offer is too low, the seller might shy off completely and refuse to negotiate without a higher starting offer. If the offer is too high, negotiations will be difficult to complete within the boundaries set. The first offer should probably be about 10 per cent less than the $8,625 we aim for, rounded to $7,750” (Nickerson 75).
Good advice for sure. But those prices just sound utterly ridiculous, even for a Midwest investor like myself. And then, of course, there’s the rehab:
- “Front porch modernization and repair: 270.00
- Garden Transformation: 110.00
- Painting Exterior: 500.00
- Plumbing and heating modernization: 220.00
- Electrical modernization: 42.00
- Carpentry additions: 83.00
- Tile and linoleum rejuvenation: 170.00
- Painting and decorating interior: 375.00
- Furniture and furnishings: 27.50
- Plumbing Repairs: 27.60
- TOTAL FOR REJUVENATION AND REPAIRS: $1,826.10″ (127-128)
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The Ultimate Get-Rich-Slow Scheme
Anyway, while some of his advice — such as how to scroll through classified ads in the newspaper for deals or valuing single family rentals on their net income instead of their comparable sales (it was a bit harder to run comps back in the day) — is a bit antiquated, his overall recommendation is still very relevant.
I’ve said real estate investing is the ultimate get-rich-slow scheme, and nothing could highlight that more than William Nickerson’s career. Indeed, my dad once mentioned that in real estate, at least buy and hold real estate, “if you can just hold on long enough, all of a sudden you’re rich.”
William Nickerson’s strategy was essentially to pyramid from a small property into a larger one and then to an even larger one and so on using the built up appreciation, principal pay down and cash flow. Here’s how he describes a path similar to what made him a millionaire (back when that meant a lot more than today):
“ZERO DAY… You take the $2,500 nest egg from your savings account. Then you borrow three times as much, $7,500, making a total of $10,000. With the $10,000 you buy a rental house in need of renovation…
“…TWO YEARS… You sell the improved house for $14,000 [receiving $5,800 back]… You take the $5,800 and again borrow three times as much, $17,400… With this you buy a 4-unit rental-income building…
“…FOUR YEARS… You sell the improved 4-unit building… this leaves you a profit of $11,575…[Then invest that] in an 8-unit income-producing property…” (25-26)
And so on and so forth. While these numbers might sound small, by compounding it in this way, by the twentieth year, your total net worth would be $1,187,195. Wasn’t it Albert Einstein who described compound interest as the “eight wonder of the world”?
Scaling Up You Real Estate Business
Nickerson then illustrates this process by describing the purchase of a single family house and then moving up to a five-unit and then a 24-unit and so on. Back then, trades were quite common, even complicated three-way trades that remind me of trades between NBA teams. For example, he describes trading the house and some money for the five-unit apartment. Nowadays, such trades are rare, especially for houses. But what it does remind me of is the BRRRR method made famous by BiggerPockets’ own Brandon Turner. Namely, buy, rehab, rent, refinance and repeat. Sure, you can sell (or even trade) your properties to move up, but why not simply refinance them, continue to hold them, and then buy another?
The important thing that William Nickerson’s story shows (as well as Brandon’s, by the way) is to keep the long-term perspective in mind. Buy and hold can often feel like a slow, never-ending grind to simply scrape by. In the beginning, there’s a lot of work for just a little cash flow. Indeed, one metric we use is that any house we buy must cash flow at least $100 a month while fully financed. But if you think about that, $100 a month doesn’t go very far. Even with 10 such properties, you’re only making $1,000 a month, which is nowhere near enough to live off of. (Of course, that’s fully financed; they cash flow much better with less or no financing.)
But the cash flow itself is just one of the many advantages of real estate. Cash flow only covers the “I” of the IDEAL acroymn that highlights the advantages of buy and hold real estate investment:
E: Equity Buildup
These various advantages begin to compound on themselves, and your growth slowly but surely becomes exponential. Sooner or later, it just hits you that you’ve made it and that you’ve built a great portfolio of cash flowing assets and a sizable income to boot. Many years after he started in Oregon, my dad had this very epiphany, and later in Kansas City, my brother and I had the same one. But it certainly doesn’t happen overnight.
In the end, the lesson is to remember and beat into your mind that real estate investment, particularly buy and hold, is a get-rich-slow scheme. It may feel like a long, arduous climb. But trust the numbers and the system that those who came before us, such as William Nickerson, used. You will get there. It just takes hard work, time, and a bit of patience.
Investors: Have you read this book? If so, what did YOU learn from it?
Let me know with a comment!