Home ownership is a staple of the American Dream
— one that more people than ever before are realizing.
Analysts believe new home sales hit a
record high in 2004, and signs are good that 2005 will
be another banner year for the housing market.
What is fueling this incredible surge in home buying?
In large part, it is the incredibly low interest rates
we've seen over the past several years.
In 2003, the average rate on a benchmark 30-year
mortgage was 5.83%, the lowest in recorded history.
Home buyers in 2004 fared nearly as well, with that
average increasing to just 5.84%. To get a sense of just
how remarkable these rates are, compare 2004 with
1984, when the annual average rate of a fixed-rate
mortgage hovered around 13.75%.
Considering the fact that even the slightest change in
the interest rate translates into hundreds of dollars
monthly and tens of thousands of dollars over the life
of a mortgage, it is easy to see how people whose
incomes would have made real estate investing an
impossibility 20 or even 10 years ago have been able to
successfully embrace this dream. And considering all
the benefits of investing in real estate — from tangibles
such as tax incentives and equity buildup to intangibles
like security and a sense of pride and accomplishment
— it is also easy to see why.
But in spite of the rosy statistics, millions of financially
able Americans still haven't taken the profitable
plunge into the real estate market. Why not? Because of
uncertainty, outdated ideas, and a simple lack of knowledge
about what it takes — and doesn't take — to invest
in real estate.
To set the record straight, we called on speaker,
author, and world-renowned real estate expert Dr. Dolf
de Roos. Since the age of 17, while still a student, Dr. de
Roos began to build a real estate portfolio that today is
worth multiple millions of dollars. Through the hugely
popular public seminars he has conducted all over the
world and his many published works, including the
New York Times bestseller Real Estate Riches, he has
earned a worldwide reputation as a phenomenally
savvy real estate investor — one with the unique ability to communicate his knowledge and
insights to help others quickly and easily
build wealth through real estate.
Let's turn now to Dr. Dolf de Roos.
Dolf, could you share with us the
story of how you got started in the
business of investing in real estate?
My parents believed to do well
financially you had to study hard and
get a degree. It's not as if they purposely
tried to give me misleading advice
— that was true in their generation.
And it was so drummed into me that I
didn't even think about it; I just went
off to university.
But during my very first week there,
I looked around me at the people with
the degrees, the professors, the lecturers,
the tutors, and they seemed anything
but rich. And I thought, There is
something wrong with this notion that
I've been imbued with. So I took it
upon myself to study what the rich
had in common in hopes of emulating
it and becoming wealthy myself.
The interesting thing was I could
hardly find anything that they had in
common. It wasn't age, gender, or religious
belief. It didn't matter if you
were the first born or the last born in
the family, if you came from an immigrant
family, a rich family, or a poor
one, and it certainly had nothing to do
with education.
I found only two things that the rich
have in common. One is that almost
without exception the rich have
integrity. The second thing is that the
rich tend to either make their money
or hold their wealth in real estate.
Upon that realization, at the age of
17, I decided to get into real estate.
And by the time I earned my Ph.D., I
had a substantial real estate portfolio
and I almost didn't need a job.
What is it about real estate that
seems to make it such an attractive
investment?
Real estate is extremely forgiving of
mistakes. It's difficult to make a bad real
estate decision. Of course, it's possible,
but it's also rare. Now, consider the
stock market. Not only can most people
cite someone who did poorly; most people
have done poorly at some stage in
their lives with stocks. In the '87 stock
market crash I learned that no matter
how smart I thought I was with stocks,
market forces could override that.
Now it's possible that market forces
can override real estate decisions, but
in general, the real estate market tends
to be far less volatile than the stock
market (see graphs to left).
When most people think of investing
in real estate, they think of people
who have a lot of money to throw at a
deal, like a Donald Trump. What
about real estate for people who don't
have a lot of cash — the average
income earner or average household?
How does real estate work for them?
It's true that if you have a lot of cash
it is easier to buy real estate. Any fool
with $20 million in the bank can easily
buy a $10 million property. So the
challenge is what if you only have
$5,000 or $10,000? Can you still invest
in real estate? And the answer is "Yes,
easily."
I'm always astounded at the volume
of people who say, "But you need
money to get into real estate." And yet
those same people will invest in the
stock market, even though to buy
stocks you actually have to come up
with the cash!
If you want to buy $100,000 worth of
stocks you will need $100,000 cash to
give to the stock broker before he will
place the order. However, if you want
to buy a $100,000 property, you don't
need $100,000 cash. Banks and financial
institutions, lending institutions,
the insurance companies, and superannuation
funds are bending over backwards
to give you money to buy real
estate. There are even institutions that
will lend 100% of the purchase price.
What's more, if you bought $100,000 worth of stocks with
$100,000 cash, the unfortunate truth is
that when you bought that portfolio, it
would be worth exactly $100,000 —
no more, no less.
However, if you have a contract for
$100,000, that property may actually
be worth $120,000, $130,000, or
$140,000. There are many reasons for
such outstanding opportunities, and
they happen every day.
It might be they're in a divorce situation,
or they're moving town and they
have to sell quickly. Or they've signed
up to buy a new house; they need the
proceeds from their current house to
pay for the one they're buying, and
with three weeks left to go, the price
starts to drop.
There are literally 101 reasons why
people will sell a property at below its
value, allowing you to make a profit
with very little cash. And yet, if you
had that same small amount of cash,
how many stocks could you buy? Not
many. Yet, this is where most
Americans invest.
What about making money in real
estate? Is selling the only way to turn
a profit?
In my entire life I've only sold four
properties that I've owned, and I have
lost track of how many I've bought. You
don't need to sell to make your money.
For example, if you buy a rental property
for $100,000, even if it's fully
financed by the bank, and it doubles to
$200,000, you don't need to sell to get
your $100,000 profit. In fact, if you did
sell, you would have to pay capital
gains tax and depreciation recapture
tax, and you'd lose your income stream
and further capital growth.
Instead, hang on to that property and
refinance. Even if you get a modest
90% mortgage, you could pull out
$180,000, which is $80,000 more than
you had before. You don't have to pay
capital gains tax on the $80,000. You
don't have to pay depreciation recapture
tax. In fact, you don't have to pay
any kind of tax on it. The interest on
the $80,000 is tax deductible, and
you've got a property worth more that's
generating more in rent – and the rent
will keep on going up with inflation for
the rest of your life. You still own an
asset that's appreciating in value. Plus,
when it has doubled again and it's
worth $400,000, you refinance again.
So to clarify, Dolf, real estate is a
long term investing strategy?
You're right. It's not instantaneous.
You can't buy a property today and
then by Saturday night have $40,000.
But you can buy a property today and
have $40,000 of equity that you own
instantly because someone sold it to
you cheap. It is real; it's just not in
spendable cash at that point. Then as
the years roll by, you start to get
increases in rents, and the value of the
building goes up, the appraisal goes
up, your collateral goes up, your equity
goes up. And then slowly you refinance
and you start to pull money out.
People who need instant gratification
should seek it elsewhere. But as
far as building wealth is concerned, I
personally know of nothing that is
safer for the average person. I challenge anyone to take 100 people at random
and teach them his or her wealthbuilding
strategies, and I will take the
same number and teach them real
estate. It's my contention that the 100
people investing in real estate on average
will be better off than the 100 people
doing hedge funds, future contracts,
or anything else.
Now that's not to say that certain
people using hedge funds won't make
more than I'll ever make in real estate.
But I don't think it's as easy for the
average person to do. Real estate is
just so simple. The rules don't really
change. What worked 50 years ago
still works the same today. The words
are still the same; collateral still
means the same as it meant so many
years ago.
If you look at people who have
bought just 10 properties over 10 years
— that's one a year for 10 years — they
live a lifestyle of freedom. They can
take annual vacations and buy the luxury
items they desire. However, that is
not usually the case for people who
invested in most other things.
Dolf, what would be your final
word of advice for someone thinking
of investing in real estate?
The advice I'd give is, many things
seem overwhelming at the beginning,
and I often feel daunted by things I
take on. There's an old saying that
courage does not mean having no fear.
Courage means acting despite your
fear. And it's when you overcome
something that it feels really good.
When you sign your first contract on
a property, it's scary. You're signing
your name to more value of money
than your net worth might be right
now. And what if it all goes wrong,
what if you go bankrupt, what if the
place burns down, "what if" this, and
"what if" that? But when you muster
the courage, not only does it feel great
once you've done it, it continues to
feel great when it puts money in your
bank account.
I'll never forget my first deal. The
first rent check I received covered
more than the mortgage interest, mortgage
principal, property taxes, insurance,
and maintenance combined.
There was money left over, and I hadn't
worked for it. And all I could think
of was, I've got to do this again and
again and again. I challenge you to do
the same and live the lifestyle of
wealth and freedom that investing in
real estate can provide.
THE STEADY GROWTH OF REAL ESTATE
Stocks and Real Estate (Total Value, Trillions of Dollars)
Over the last three decades, prior to the 1990s stock market boom, the total
value of real estate owned by U.S. households was greater than the total value
of corporate equities. Between 1996 and 2000, this trend reversed, with the
value of equities growing to twice the value of real estate. However, during the
stock boom, real estate continued to grow steadily, and in the past few years
the real estate market has grown by nearly $2 trillion, while the stock market
has lost over $6 trillion during the same period.
Percent Change in Annual Average Value
Since 1953, stock values typically fell sharply every few years, while the real
estate market tends to change more gradually while always maintaining positive
growth. And even during periods when stock values fell sharply, the total
value of household real estate often increased.
Source: Research Reports, published by the American Institute for Economic Research
ARE YOU USING YOUR FINANCES WISELY?
Are you investing your money into things that make you feel wealthy — cars, boats, clothes, and kitchen
gadgets that inevitably decrease in value? Or are you investing your money into those things that increase in
value — such as property — that will lead to your financial independence and an early retirement?
Source: Building Wealth Through Investment Property by Jan Somers and Dolf de Roos
20-YEAR LOW MORTGAGE RATES
"Housing analysts expect rates on 30-year, fixed mortgages, now about 5.8%, to
remain under 7% through 2005 — with some expecting rates below 6.5%. Even if
rates rise faster, the market should remain solid because demand outstrips supply
in many areas."
Source: USA Today, "Forecast for 2005: Mostly clear skies," by Sue Kirchhoff and Barbara Hagenbaugh.
THE ECONOMIC CYCLE
Property values tend to increase in cycles. In some years growth is nothing, while
in others it may be as much as 40% or 50%. This diagram shows the sequence of
events in economic cycles. Short term investors must pay attention to the timing
of these cycles. Long term investors needn't worry. These fluctuations even out.
Source: Building Wealth Through Investment Property by Jan Somers and Dolf de Roos
Dolf de Roos, Ph.D., began investing
in property as an undergraduate and
quickly discovered that real estate was
better paying than any job he could get — and to this day he has never had a
job. A classic baby boomer, he has
made millions by building wealth
through sound and savvy real estate
investments. He leads public seminars
throughout North America, New
Zealand, Australia, Asia, and Europe,
has trained real estate agents, and has
written and published five bestselling
property books, including New York
Times bestseller, Real Estate Riches.
Dolf is also both founder and chairman
of Property Ventures Limited, an
innovative property investment company
with holdings ranging from highrise
apartment buildings to high-end
vineyards.
Learn more about Dolf de Roos and his
bestselling, Property Investor's School.
