My MBA Prof Was Wrong
About Real Estat Investing
“Real estate just isn’t a good investment. It goes up with inflation but when you sell you just have to buy another house, so you aren’t ahead.” That was advice from a prof in my MBA program in 1978. It made sense to me. So, I spent money on my business and personal development.
I “knew” real estate wasn’t a good investment. (If you’ve read the article on programming, you’ll recognize that as a program in my brain.) My wife really wanted a home. So, good investment or not…
In 1994, we bought a home. We had four children. We bought a three-bed, two-bath home with a two-car garage for $110,000. I had a patient who was a home designer. He designed a garage conversion into two bedrooms, a laundry room and computer/game room. Another patient was a carpenter. He came out and followed the plan and had the entire framing done in a weekend. Another patient was an electrician. He helped with the wiring. My brother-in-law and father-in-law helped with the drywall. Soon we had a five-bed, two-bath home. Including our downpayment, we had about $6000 invested in the home and our payments were about what we were spending on rent.
Over the years, we did some landscaping. By 2002, a friend’s son, Matt, was building spec houses. A spec house is one that is built to sell. The builder is speculating on the market. That is different than a custom home that is built for an owner. Our second oldest son, Ben began working for Matt.
Matt wanted his mother to become a real estate agent. I agreed to take the coursework with her and we’d both get licenses. That was when I really learned the power of real estate investing. I couldn’t believe how ignorant I was. In fact, I wrote a book to help others. Real estate doesn’t just go up with inflation. It goes up because of added value.
I decided to sell our home. I added value by putting a new roof on it. I scraped the popcorn texture off the ceiling. I painted the house inside and out. I had new carpet installed throughout the house. During negotiation, we agreed to replace the furnace. We sold the home for $233,500 in 2005. Subtract our initial price of $110,000 and we have an increase in value of $123,500. The commission was 6%, which rounded off is $14,000. I don’t remember the exact numbers for the roof, carpet, paint and furnace. I believe it was under $8000, but I’ll just round it up to $9500 to keep the numbers easy.
Our $6000 investment had grown to $100,000 in eleven years. My MBA prof was right. I’d just have to pay the same amount for another house. But this time I had a $100,000 downpayment. Actually, a little more because the mortgage was paid down.
However, look at it a little differently. What if I had followed the prof’s advice. I would never have bought the house. We would have rented forever, and my rent would have increased. After we sold, we rented for three years. When we began renting again, we had $100,000+ in the bank because of our investment.
I had never thought about it like that. Now you know how my wife’s home investment was better than the advice my MBA prof gave me.
Action: Buy a home as soon as possible but be a savvy home investor. I’ll explain more in future articles.
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