For 40 years my wife and I have owned rental property. For 35 years I have been a San Diego apartment broker. I learned a lot, too much the hard way. Some of what I learned is summarized below.
Three kinds of people come to me. Few have inherited wealth. Many are successful entrepreneurs or high-income professionals who want to build wealth. And some are “regular folks” who work hard and live frugally and become millionaires.
Here’s how apartment investing works for them. He or she is married. Between them, they usually have one steady income. Many work for the government. They may be a teacher, a police officer, or a firefighter. I think of the history teacher as the prototype.
History teacher and spouse get married. They get pregnant. They have a kid or two or three. At some point, one of them says to the other “We’ve got too many kids and not enough bedrooms. Let’s not kill the teenager. Let’s get a bigger house.”
One says: “Honey, let’s not sell our home; let’s rent it out.” So, they use their savings to buy the new house and turn the former home into an income stream and source of wealth. That’s how they become landlords. They learn the basics of the landlord trade with that first rental.
In the beginning, it’s common for them to do most of the work themselves. That way they save money, add value to their property, and their wealth grows faster.
Five years after they rented the house they used to live in, they move equity to a rental duplex or fourplex. Five years after that, they upgrade to a bigger asset. And a few years after that, they upgrade again, this time even more. They keep this up until they start thinking about retirement.
They’re still living in that home they bought because of the kids, but the kids are gone. They live frugally. They’re the richest family in their census tract, and most of their neighbors don’t know it. They’re the millionaire next door.
Whether they earned high income or not, they became wealthy because of their rentals. That was their pension plan, although they may not have called it a pension plan.
They may choose to hire property management or they decide to sell their apartments. Perhaps they shifted their investment from apartments to a drugstore or bank building with a 15-year lease. They don’t have to take care of the roof, taxes, insurance, repairs, or the parking lot. The tenant does all that. The investors just get a check.
That’s a common story, but it doesn’t fit the myth of the super-smart investor or the quick million for a single deal. They’re of ordinary intelligence. They get rich slowly, over decades. Their financial life is steady, has little drama, and may seem dull.
Slow and steady works well. If you do have extra IQ, or marketing pizazz, or big income, all those things help. Yet only ordinary intelligence and some discipline are needed.
What do you think? Is there a millionaire next door in your neighborhood?
Are you the millionaire next door?
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Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”