Building Wealth One House at a Time: Reviewing a Classic Real Estate Investment Book
Real estate is a very attractive investment to those in the Financial Independence (FI) community, primarily because of the huge potential cash flow that real estate provides. Given the whole premise of “FI” is income from investments > life expenses, real estate can put you on the fasttrack to FI, if you know what you are doing. If you don’t know what you are doing it can drain you of your money, time and energy, the exact opposite of what FI is supposed to be about.
“The theme throughout this book is common sense. “
I’m happy to recommend today’s “FI book of the week”, Building Wealth One House at a Time by John W. Schaub. I would consider this mandatory reading to anyone before they are thinking of getting into real estate, including purchasing their primary residence.
The theme throughout this book is common sense. I had the same feeling reading this book as I do watching a great observational comedian, I constantly found myself saying “wow I can’t believe I didn’t think of that”. Schaub starts the book. Schaub walks you through a ton of pretty in the weeds investment topics in a very easy to read way. Here are the titles of some of my favorite chapters.
· How buying one house at a time can make you rich
· Buying a house that will make you the most money
· Finding Oppurtunities that others miss
· What makes some debt dangerous, and how to borrow safely
· Buying and selling pre-closures and foreclosures
· Knowing when to sell and how to sell
The Schaub 10–10–10 Rule of Real Estate Investing
A lot of the book is spent walking you through helpful hints and tips at each stage of the researching, buying, holding and selling of real estate process. The only formula for success that Schaub provides is the “10–10–10 rule”, which states:
- Never put down more than 10% of the purchase price
- Pay no more than 10% interest
- Buy at least 10% under market.
#2 is a dead give away that this book was originally published a long time ago, if you are paying 10% interest on a mortgage in 2018 something has gone very, very wrong.
The Power of leverage
rule #1, never put down more than 10% of the purchase price. This speaks to the biggest advantage that real estate has over investing in stocks, “The power of leverage”. Consider the following example to understand the power of leverage. Say you buy a house worth $100,000 and put down $10,000 of your own money and borrow $90,000 in the form of a mortgage for the remainder. After 1 year the price of that home has increased to $105,000. What is your profit after the first year?
At first glance you might think its 5% (5,000/100,000), that would be incorrect. The total asset has increased in value by 5%, but your profit o is 50%. Remember you only put down $10,000 to buy this property, that is all the skin you have in the game. The bank provided the other $90,000. The bank does not share in any of the gains on the property, so that increase of $5,000 is all profit to you and since you only put $10,000 down your one year return is 50% (5,000/10,000). A classic example of the potential power of leverage and why real estate is such a popular investment.
Lock in Your profits before you buy.
part #3 of the 10–10–10 rule “buy at least 10% under market” is so valuable as it can help guarantee a profit on the very first day you buy the house. Schaub walks through some practical advice on exactly how to find the house that is at least 10% undervalued, but I want to focus on how this can supercharge your profits.
So let's refer back to our previous example of the $100,000 house you bought. you followed Schaub’s advice and bought a house 10% under market value, so while you bought it for $100,000 it is really worth $110,000. In this example you have made back all the money you put as a down payment on day 1. You put down $10,000 as a downpayment, and got a house worth $110K for $100K meaning you could turn around and sell it on day 2 and make back all your initial investment. I know there are tons of fees involved with real estate but this is just for simple math to illustrate the concept.
When you combine rule #1 (never put down more than 10%) and rule #3 (buy at least 10% under market) you begin to understand the whole premise of the book “building wealth 1 house at a time”. Let's go back one last time to our example, you bought the house worth $110,000 for $100,000 and put down $10,000 of your own money (rule #1). After 1 year, the value of that $110,000 house has increased by 5% to $115,500. Using the Schaub 10–10–10 rule, in 1 year you will have made nearly 65% profit on that $10,000 investment. If the price of that house eventually doubles to $200,000 well, you get the picture.
In summary Building Wealth One House at a Time, is a timeless book that any real estate investor should pick up. It has countless bits of very useful and instructional information and I could not recommend it highly enough, so you should pick up your copy today.
Have you read this book or are you invested in real estate right now? Let me know in the comments below.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.