David Crook - The Wall Street Journal. Complete Real-Estate Investing Guidebook

CONTENTS

Introduction:
So You Want to Be a Millionaire?

Glossary
Talking the Talk: Some Real-Estate Terms and Concepts

INTRODUCTION
SO YOU WANT TO BE A
MILLIONAIRE?

This land is your land and this land is my landsurebut the world is run by those that never listen to music anyway.

BOB DYLAN

T his book is for people who want to make money investing in real estate.

Hucksters and schemers use dubious investment books and middle-of-the-night TV shows to peddle hundreds of real-estate schemes to a gullible public. They promise no-work shortcuts to wealth and financial freedom as they reveal the moneymaking secrets that real-estate professionals keep from you and everyone else. They say they'll show you how to flip your way to financial success or renovate for riches. Some claim they'll show you how to build multimillion-dollar empires with no money, no experience and no skills.

Enough already. These are the fantasies of losers. And if that is what you expect from a book about real-estate investing, here is the best advice you will get from this one: Don't buy it. You don't need to waste any more of your money.

If, however, you recognize that real-estate investing, like all investing, is more marathon than sprint and that the only person to get rich quickly in a get-rich-quick scheme is the other guy, then by all means buy this book. It's not the only real-estate investing book you'll ever need, it's the first one.

And let's start by exploring the uncertain but promising future for today's new real-estate investors.

Real estate has demonstrated itself time after time to be a proven path to building and preserving wealth. The first multimillionaire in U.S. history, John Jacob Astor, built a fortune that survived 200 years by reinvesting his fur-trading profits in New York City real estate. Today, real estate and real-estate-related businesses are major components in the portfolios of nearly a quarter of the men and women on the Forbes 400 list of the wealthiest Americans.

No one's suggesting here that you can join the billionaire's club with a few rental properties. But even a modestly successful real-estate investor should be able to amass a seven-figure fortune. You can have a good home, educate your children, contribute to the community, live a comfortable retirement and pass along a substantial estate.

That's how real-estate investing has worked for most of the last seven decades. Since the end of World War II, the United States has enjoyed a remarkable run-up in the value of housing and other real estate. Firm numbers don't exist, but various sources suggest that the total value of U.S. real estate could approach an unfathomable $45 trillion, roughly half in the hands of private individuals and families.

Such a vast, democratic accumulation of wealth would be beyond the dreams of the GIs, the small landlords and the shopkeepers who launched the United States on its broad path of property ownership. They probably didn't look much farther than their own property lines as they slowly built the bases of their family fortunes.

The population grew, the number of households grew, family income grew, all fueling the historic shift of homes, offices and factories from the cities to the suburbs. A generous national government subsidized the acquisition of real estate as it encouraged development of cheap land and assured a plentiful supply of cheap gasoline. The nation was transformed, for good and bad. It became a place quite different from where our grandparents and great-grandparents grew up.

Throughout this period of remarkably sustained prosperity, property and home valuesreflecting most families principal assetsrose just enough ahead of inflation to defy financial history and gravity. Indeed, for the half century that preceded the postWorld War II boom, the trend in home prices was just as predictably downward. Housing, compared to the cost of living, was cheaper in 1940 than in 1900.

Such a decline was unimaginable through the postwar run-up, however. Prices skyrocketed right after the war and then maintained their steady inflation-plus ride for decades. Parts of the country experienced periodic real-estate manias, most notably in the late 1970s, again in the late 1980s and the early 2000s.

Real-estate prices rose so much that houses became essential components of the middle-class's wealth-building, college-funding and retirement plans.

Modestly well-to-do home sellers who bought and held could count on sending their children to elite private universities and funding their own carefree 30-year retirements in the gated golf-and-tennis communities of the Sunbelt. They'd sell their Bethesda, Lake Forest, Mineola, Palo Alto or Garden Grove houses to panicky buyers convinced that they, too, had to get into the real-estate market before prices rose even more, before their dreams of home ownership and their own comfortable 30-year retirements would pass forever beyond their means.

These manias were usually followed by eras, well, less manic. Prices rarely declinedthough they did in Texas in the 1980s and in New England and Southern California in the 1990sbut instead settled down for a while. There were fewer frantic buyers, and sellers stopped asking for ever higher prices.

But long-term homeowners always seemed to muddle through unscathed. And before you knew it, something clicked in the country, and buyers real-estate passions were fired anew.

We are now coming to the end of the greatest mania of the era. In the big metropolitan areas on the coasts, house prices rose far faster than inflation and, even more significantly for real-estate investors, faster than rents. In his widely read and debated book Irrational Exuberance, Yale University economist Robert J. Shiller demonstrated that in the years after the bursting of the Internet stock bubble in 2000, home prices rose dangerously fast and high, mimicking the sharp run-up of NASDAQ technology stocks in the late 1990s.

By the summer of 2006, it was clear that the great boom was coming to an end. Rising interest rates, outlandish prices and escalating energy costs were coming together to thwart property investors. We can only hope that the inevitable come-down of prices doesn't mimic the NASDAQ, too.

Whatever the coming year or two may bringwhether a soft landing for real-estate prices, a crash or even the start of a long, relentless Japan-style declinereal-estate investors face a challenging financial environment. The quick money's been made. The future is most likely going to belong to the well-financed buy-and-hold crowd, either those who had acquired their properties by the mid-1990s, before the prices started accelerating, or those who have picked up distressed properties as the bubble has deflated. In a long, slow decline, however, even properties bought for just 70 percent or 60 percent of their previous high values could end up looking expensive as selling prices fall even further.