GULFPORT — The stock market is volatile. Rates for CDs are dismal. So, where is a wise investor to go?
Real estate is increasingly attractive. As Baby Boomers eye the future, many are investing in a second home or two to help diversify their retirement income sources. To avoid pitfalls that can face not just first-time home buyers, but those looking for rental home properties, check out the latest book by Gulfport author Andrew “Andy” James McLean.
McLean’s “The Home Buyer’s Advisor: A Guide for First-Time Buyers and Second Home Investors” was recently released by John Wiley and Sons, a national publisher specializing in business and investment titles. Over the past 25 years McLean has sold more than 500,000 copies of his books, which include his most popular book, “Investing in Real Estate,” published by John Wiley and Sons. Two of his other best-known books are “Making a Fortune Quickly in Fix Up Properties” and “Buying and Managing Real Estate,” both published by McGraw Hill.
Investing in rental homes has seen a big spike as a result of low interest rates.
“Especially with interest rates as low as they are, it is a great place to put your money,” McLean said. “You have not only the interest deduction, but property taxes are also a great deduction. And, you can expect a good amount of appreciation especially in areas where there is a shortage of land. I have four houses in Las Vegas, and there just isn’t any more land available. Las Vegas is situated in a valley surrounded by mountains.”
Generally, McLean doesn’t advocate being an absentee landowner by living far from the properties you own. In his case, he visits Las Vegas often, so it isn’t difficult to continue managing his properties there.
Attractive interest rates
Low interest rates have made a real difference in the bottom line for investing in rental homes. McLean refinanced his homes in Las Vegas from 10% down to 5.5%, which improved the cash flow per month by several hundred dollars per property.
“These low interest rates have been a real boon to the real estate economy,” McLean said.
One of the best deals out there is investing in a multi-unit property. For example, someone who is going to live in one unit of a four-plex can get FHA financing with only 3% down, while getting lower interest rates, too.
“You pay a financing rate similar to a homeowner’s rate versus an investment rate, which is usually a point higher,” McLean said. “It is just a wonderful way to go.”
The advantage of investing in real estate might not seem that significant the first few years. When someone starts out, they may be clearing only $100 per month. But McLean said after several years, rents will go up and expenses will primarily remain fixed (except perhaps for property taxes and insurance). After a few years, the profit might be in the range of $200 to $300 per month on the property.
Screen those tenants
McLean recommends screening potential renters carefully to avoid deadbeats, people with a history of trashing out houses and leaving in the middle of the night owing several months rent.
“You have to screen tenants properly,” McLean said. “Pay the money and go through the elaborate details of finding out who these people are. Otherwise, you are in for a lot of hell.”
Before buying McLean recommends hiring a professional home inspector. That usually costs in the neighborhood of $250 to $350, and is especially a good investment when buying one more than five years old.
“You have to find out what you are buying, and if there are any structural or electrical problems, I would stay away from it,” McLean said. “Also consider factors such as insurance rates. Insurance rates in Gulfport north of I-10 are half of what they are south of I-10. I purposefully bought here north of I-10 for that reason. I don’t even need flood insurance here.”
McLean thinks Mississippi overall is a good place for home real estate investments. On the Coast, he favors Woolmarket as one of the best buys around, especially buying a couple of acres with an existing home with the possibility of building an additional home on the property.
“Not only can you have a new home built, and come out with some added value when it is completed, but you can rent it out, and be able to keep an eye on it. And if you go out of town, your tenants can keep an eye on your property while you are gone.”
An option to buy?
McLean recommends giving tenants an option to buy. Instead of just renting out a house for $1,200 month, add an extra $150 that the tenant can apply towards the purchase price. Advantages include generating more income, locking in a buyer and having a potential buyer renting the home usually means it is taken care of better.
“Then if the tenant doesn’t exercise the option, you have made extra money and the tenant has added quite a few things to the property,” he said. “Whether the tenant exercises the option or not, you come out ahead.”
Optional fees can apply to the down payment or purchase price. Option agreements are a separate part of the lease.
For investors with more money-millionaire types — McLean recommends what is known as “land banking.” For example, a land banker might purchase a corner house on a main highway located in the direction of growth for a city. The house would be rented to a family with the future hope of turning it into commercial property.
“Land banking is keeping it rented in lower use with hopes to convert to higher use down the road,” McLean said. “If you see storage units built along a major thoroughfare, that is a temporary use. Later they will be torn down and converted into a higher use like a gas station or some kind of mini mall. The location of property purchased for land banking has to be strategic.”
A start in writing
McLean got his start as an author while living in Los Angeles and working as a real estate appraiser. A neighbor had self-published a book on how to make money writing information. Intrigued, McLean wrote and self-published his first book, “How to Make Money in Real Estate in Your Spare Time.” He took it to a local Waldenbooks where the manager suggested the book looked more like a pamphlet, and that a better title was needed.
The revamped “The Power of Real Estate and How to Acquire It In Your Spare Time” was printed up, and 20 copies were put on consignment at the local Waldenbooks. The 20 books sold out in a week, and McLean ended up getting a national order for all 1,000 Waldenbooks.
“I was having a lot of success with it,” McLean said. “But I knew I needed another book. I had managed a lot of real estate for people, so the next book I wrote was, ‘How to Manage Real Estate Profitably.’ Between the two of them, I sold a lot. I traveled around the country in a converted van selling to bookstores. Then a company, Delphi Publications, bought me out, and finally McGraw Hill published one book and the other was published by John Wiley.”
One thing that helped him on the road to success was doing a television show in Los Angeles.
“You get some kind of notoriety, and book sales just take off,” McLean said. “It is just incredible what the media does for books.”
McLean’s career evolved from writing about his personal real estate experiences. He started investing in real estate while a senior at Michigan State in 1972. He had inherited $11,000 and invested it in the stock market. After six months he had lost half of it.
“Since I was a finance major, that concerned me,” McLean said. “So, I decided to do something else with it. I bought a house with what was left, rented it out, and cleared about $200 per month. Then I bought a second house with six bedrooms with a $1,500 down payment. I rented out all the bedrooms except the one I used. Between the two houses, I lived rent free and cleared $400 per month. That is what got me started.”
After graduating from college, he moved to California where he worked as a property manager for all kinds of real estate, including managing a 363-unit apartment complex and $4 million in foreclosure property. He also worked as a loan officer. McLean later went to work for the casino industry in Las Vegas, and over the years continued to invest in real estate. He also, by the way, put his casino experience to work in penning books such as “The Casino Players Handbook” and “How to Get a Casino Job.”
Over the years McLean has purchased more than 20 homes, and only once lost money. He relocated to New Orleans to work for Harrah’s, and the company went out of business the month after he purchased the house.
“That was the only house I lost money on,” McLean said. “If I had kept it and rented it out, it would have done really well. For people who are willing to stay put for three years or more, real estate is a real solid investment. It isn’t for people who are going to move around a lot like military people.”
Contact MBJ contributing writer Becky Gillette at email@example.com.