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OT - A Long Post About a Very Successful RE investor I used to work with as a banker. I am writing a book on investing for my son and am including this story about "Rick" in the book as an example to learn from


I had the pleasure of knowing, watching, and to a small extent helping a very nice guy named “Rick” turn $100,000 into over $10,000,000 in under 20 years.

Now before you think this guy was Warren Buffet or George Soros he did save and put $10,000 or so a year from his job, his wife’s job and his military retirement into his real estate endeavor or the stock market each year. That is in addition to what they put into their 403(b) or Thrift Savings Plan each year and he also put considerable “sweat equity” into his properties.

When Rick’s loan officer left the bank that I worked at he was initially assigned to the bank’s senior lender. Although I had never talked to Rick, he went to the bank’s President and asked that I would be given his line. I think that the reason Rick asked for me was that we both were retired Army.

When Rick retired from the Army in 1998, he started with a $100,000 nest egg invested he had put away in the Vanguard S&P 500 index fund during his 20 year Army career. By late 1998, he thought that the stock market was getting fairly overvalued so he liquidated half that year and the other half in early 1999.

Rick had only retired as an E-6. He had been a 51H30, vertical construction supervisor. When the Army drew down after Dessert Storm in the early-to-mid 1990’s, construction units were mostly eliminated from the active Army. The construction mission was moved to reserve units and the LOGCAP Contract, i.e. Brown & Root. This pretty much eliminated any chance of promotion for Rick late in his career.

After Rick moved to town he thought that the stock market was getting awfully high and thought that rental real estate would provide some tax benefits as well, so in late 1998 he bought his first rental house in addition to his own house that he had bought with his VA benefit. Over the next year, he would take the last of $100,000 from his index fund and buy a total of six rent houses, he borrowed on four of them and bought two of them for cash. It was the two least expensive rent houses that he paid cash for. Rick said that the loan fees on a less expensive house were really expensive in relation to the house’s value so he preferred to pay cash for the low priced rental properties.

I once asked Rick how he was smart enough to get out of the stock market in the late 1990’s. His reply was that if he was so smart he wouldn’t have left his retirement accounts in the stock market. He then added that since the stock market had gone up so much and the valuation was so high in terms of the PE ratio, he thought that it might be a good time to diversify into real estate. He also liked the tax benefits of real estate and thought that he could profit from his construction skills. He then added that he had kept his retirement accounts in the stock market because he figured having his money invested in two distinct and different type assets could be beneficial and he thought maybe he was wrong on the stock market as many professional money investors were still largely in the stock market, so who was he as a high school graduate to be 100% certain and get totally out of the stock market.

Rick and his wife had always contributed the maximum to IRAs every year, put into Vanguard’s S&P 500 fund. Back then the Army didn’t have anything like an IRA, but when he got out he always put at least enough into his TSP (federal 401(k)) from his job at the post office to get the full match. His wife also put enough into her 403(b) to get the full match. In 2001, Rick actually put some money into the stock market in a taxable account and after the Bush tax cuts they maxed out their retirement contributions so that they could benefit more from the lower rate on capital gains and qualified dividends. From sometime in late 2001 to 2003, they were actually taking cash flow from their real estate operations and putting it into the stock market.

In 2003, my area went through its very own real estate housing crisis. A long period of 10-15 years of above normal growth, led to a handful of builders just simply overbuilding. By this time Rick had sold one of the six rent houses that he had purchased, his renter had come to him asking to buy. Since his tenant would move out to buy elsewhere, leaving him with an empty house for a few weeks to a few months, and there was no realtor’s commission, Rick sold. This left him with five rent houses with only one with existing debt.

He did have one other loan that did not show up on credit reports. An older lady owned a 24 unit apartment complex that her son that had helped her with. After the son moved, the apartment started to decline. The property was reasonably well built, but was not being adequately maintained. In fact some of the units were empty because they could not be rented due to their condition and others were rented for less than they should have been due to the units condition.

Considering the properties condition and cash flows at the time of purchase, he did not get a great bargain, but he did on its financing. He paid no fees, Rick had already learned to hate loan fees, and he and the lady set the rate half-way in between what she could get for a CD and what he would pay on a loan. This lowered Rick’s interest rate by 1.5-2.0%. The catch was that it was amortized over only 12 years – this experience taught Rick to hate monthly payments.

Anyway this purchase really gave Rick the opportunity to benefit from his construction skills. He also got his teenage kids involved in the renovation and maintaining of the apartments as they cleaned and painted apartments as well as mowed the grass in the summer. By the time his kids graduated from high school, they had Roth IRAs with values over $10,000.

Within a year all the units were rentable/livable and he had raised the rents on new tenants by 15-20% and the existing tenants by a lesser amount. It was a cash machine, but Rick did mention that early on the apartment complex was a strain on his cash flows from not only the initial low rental revenues, but from the high monthly payment and the cost of the repairs and renovation.

Also in 2004 and 2005, Rick bought 5 uncompleted spec houses that builders had tossed back to their bankers. Uncompleted homes are often a nightmare to bankers and Rick got both good prices and good loan terms. Rick also picked up a third bank as a lender during this time. With him, and his family, doing the majority of the work to complete the houses Rick was able to get the banks selling him the properties to fund the majority of the material and outside labor costs, but between the apartments and the houses, Rick was working a full work week at the post office and almost as much after hours and on weekends.

It was about this time, that his wife quit her job at the school and became a Realtor. When Rick finished the first spec house, they put both it and the house he was living in on the market. Did the same thing when he finished the second, and the one he had lived in for six years sold – totally tax free.

Lived in the second house he finished for about four years and sold it tax-free also.

By the beginning of 2006, he had 15 houses, the 24 unit apartment complex and a dental clinic. The dental clinic is another example of how Rick often operated. Over a decade ago a dentist moved into our community to get his kids in better public schools. He bought the dental practice of an older retiring dentist, while keeping his old practice in a town 60-70 miles to the south. When he bought the new practice, he elected not to buy the building, first from the retired dentist then from the dentist’s widow.

Well when the widow died, the son serving as executor wanted to get the estate settled, normally the sale of the real estate is that last thing in wrapping up an estate. The son, tried to get the tenant to buy it, but that dentist was planning to back down where he came from, and where he had kept an active 2-3 day a week practice, when his youngest son graduated in 3 or 4 years. The executor son listed the dental building and the residence with the same realtor – a very good residential realtor. Within six months later, house sold, but dental building still on the market.

While interviewing potential new realtors to list the dental building, the executor interviewed Rick’s wife. She said she had someone who could buy it within the week, if they could agree on the price. Rick called me to get him a rate and if there would be any break on the fees. I got a reasonably good rate for him and a little break on the fees, when he said that we did better last time, I reminded him that our last couple of loans to him were to buy repo properties from us. This was different I explained. He accepted and priced his offer so that his cash flows would equal twice the loan payment.

That was Rick’s hurdle, the unlevered cash return on a property had to be twice his borrowing costs or he just didn’t buy – or at least he wouldn’t borrow to buy. Rick said that you had to be able to buy at a sufficiently low price to make it worth the risk of taking on debt.

He had a similar approach on when to sell. When property values were high enough that the cash flows from a property divided by what he thought he could sell it for net of all selling costs, was two percent or less above his borrowing costs, he sold and paid down his debt. Two percent he said was not enough to compensate for the risk of debt. He also added that when prices got high like that, future appreciation was less certain, would certainly be lower than normal and might even be negative for a year or two into the future.

Rick was a disciplined buyer and seller and kept both his transaction fees and borrowing costs low. After his first few years, he did most of his buying when the market or the seller was distressed. As interest rates rose in 2005 and 2006 so did home prices in my area, and Rick sold a lot of houses from late 2005 to mid-2007. He eliminated the great majority of his debt.

In the later half of 2008, near the during the middle of the Great Recession, Rick came in and pitched us doing a $600,000 line of credit (LOC) putting up $1,000,000 in real estate as collateral. For collateral, he would use the dental clinic that he had paid off all except $50k and his 24 unit apartment complex which he owed $75k. He stated that he wanted $400k of the LOC for general purposes, $200k for improvements to properties we had as collateral with us, to buy properties from us and/or to make payments on loans to our bank.

He did a similar loan at a second bank and was turned down by his third bank.

The first draw on his LOC at our bank was to pay off the existing apartment loan and put us in first position which was requirement of our bank. The second draw was to payoff our loan on the dental clinic and the third draw was to payoff his single loan to the bank that turned him down. He had just eliminated three monthly debt payments.

He now owned over twenty properties and had only one monthly payment on the home he lived in. All this put his LOC balance at a little under $200,000. His next draw of $100,000 was put into the stock market in early 2009.

He initially was paying about $10,000 per month down on the LOC from his real estate operations and at times he paid $1-2K from his job/Army retirement and many months paid $1-2K from his brokerage account from dividends I think. As he added properties the amount that he was paying down each month rose, peaking at almost $15,000 a month from his real estate operations.

In 2009, he only bought two properties. The first was a house that I repossessed. The lady that owned the bank where I worked was giving me a very hard time over the repossession. To end the pain, the day after we got ownership of the property, and just after a heated butt chewing session, I called Rick and he bought it four hours later. We, the bank, made an $8,000 profit and less than two years later, during the first time homeowners tax credit, Rick sold it for more than twice what he paid for it.

Another time, during a collection call (when I would go knock on the door of someone avoiding my calls) I noticed a house across the street with yellow tape all around it. Discovered that it had been a rent house where the renter had run a meth lab. Now basically condemned. Rick bought it for about a third of what the previous owner had paid and put about that much into cleaning it up and renovating it. In the end he had a nicer property for about two-thirds of what the previous owner paid. He sold it about a year later for a nice profit when the first time homeowner tax credit drove up prices for lower valued homes.

In fact when the tax credit for first time home buyers came into existence, after about a year there was a shortage of houses in my area selling for $100,000 or less, especially under $80,000. During this time Rick sold almost all of his single family rental homes and paid his LOC down to near zero. He outright sold seven of the rental units and sold five on contract – or where he held the note. Most of the ones he held the note on were in a flood plain, we had a major revision in our town of the flood maps after serious flooding in 2003 and Rick had picked up a lot of cheap houses there because he could pay cash and avoid the very high priced flood insurance.

In the first year of the LOC Rick did six draws, initially paying off three of his existing loans and leaving him with only one property with a monthly payment which was on the house that he lived in. He then drew $100k to put into the stock market, bought the repo from me, and bought the condemned former meth lab.

In the second year, he bought a gas station anchored strip mall. The property had lost its gas station tenant twice in the previous two years. It took Rick 2-3 months to find another gas station operator and that operator folded within three months. Rick found another operator within a couple of months and that operator ended up buying the property in mid-2011 for about 15% more than Rick paid. A rare single for Rick.

After the gas station, Rick bought a 4,500 square foot house that had been built by a couple that could never get financing to take out their construction loan – the result of first the total inability to get jumbo mortgages in Arkansas for a year or two and then one of the couple losing their job. The end result was that the bank that did the construction loan got the house back and sold it to Rick cheap. However, it took Rick 7 months to sell his previous house and he told me that he netted $20,000 less than he had expected – a rare setback for Rick.

Rick kept the big house for five years and sold it for more than 50% more than he paid for it, after spending $25,000 to repaint some rooms more neutral colors and refresh the landscaping. His timing on the sale for this one was near per perfect. He sold it about 45 days before he completed building his dream home. He moved his stuff into an already completed shop building and he and his wife moved into a condo they had bought near the Univ of Arkansas and was empty during the summer.

Rick’s final draw on the line of credit was to build his dream house on about 20 acres on a mountain overlooking a lake, about half-way between Ft Smith and Fayetteville, Arkansas.

He kept the line of credit going for almost six years, but only bought five properties with his LOC with us – a gas station strip mall ($495k), a very small rent house ($22k), a very very big house ($400k), another rent house ($25k), and 20 acres on a nice hill overlooking a lake 25 miles to the north ($27k). In addition he drew out about $200k for the stock market, and the last draw of $250k to build his home on the 20 acres he had bought 3 years earlier. His loan fees would have been 3 times higher if he had borrowed the money individually for all those draws.

The LOC was closed out when he sold the dental clinic when the existing tenant sold his practice to a young dentist who bought the building from Rick. He sold the dental clinic for 75% more than he paid for it after owning it for almost eleven years. Pretty good factoring in the two real estate busts he endured in those eleven years, the first bust local and the second national if not global. He also didn’t pay a realtor’s commission. More often than not Rick didn’t pay a realtor commission when he sold.

Rick was even more active with the other bank. In Northwest Arkansas (NWA), where the Great Recession hit real estate especially hard, Rick bought a gas station on a great corner, a strip mall with a gas station, a medical building, an office building that had belonged to a developer that went bust and a condo near the University of Arkansas. He added some of the above properties as collateral to his LOC with the other bank and increased the size of the other LOC.

As of a couple of years ago, Rick had sold nothing up there. His daughter has graduated from college, so I expect the condo may go on the market soon. The condo was from one of the areas premier developments of the mid-2000’s in NWA. The simplest 2 Bdr condos, which is what Rick bought, were advertised for $250k initially and a few sold for almost that early on. After real estate hit a brick wall in NWA their listing price fell to $149,900 and I am sure that Rick bought his for a little less than that. Today they are typically listed for about $300,000, but probably most sell for a little less than that.

I don’t know what Rick is doing with his cash flow these days, he may have debt with the other bank that his rental cash flows are going towards. As far as down here where he started he still has the apartment complex and last I heard still held four mortgages on properties he sold about 7 years earlier. He would like to sell the apartment complex, he often offered to sell it to me and offered attractive financing – which indicates that Rick does not really want a lot of cash right now as nothing is that cheap for him to reinvest the money into.

The last time I saw a financial statement on Rick was May 2014 and he owned $9.5 million worth of real estate, had $1.8 million in the stock market, $1.2 million in retirement accounts, and held mortgages worth over $200,000 while owing about $1.2 million. The sale of his big house reduced the debt by over $600,000 along with one less property, but the appreciation in the other properties over the last four years has probably kept the value of the properties owned near $10 million.

Lessons From Rick

1. Live Below Your Means
2. Hard Work Pays Off - Normally
3. Be Disciplined in both Buying and Selling – like in the short story, “Mr Womack Makes A Killing.”
4. Use Debt Effectively
5. Being involved in a variety of asset classes and markets gives you more opportunities to buy into bargain markets and sell into richly priced markets.
6. Holding significant cash is a drag on building wealth.
7. Having diverse sources of cash flows that greatly reduces the need to hold considerable cash.
8. The ability to borrow funds, especially through an available Line of Credit, reduces the need to hold significant cash and paying off debt is a good use for excess cash flows when you have no suitable investments.
9. A good strategy in lieu of holding cash is to ensure being able to borrow when most beneficial is to keep beneficial (TO BOTH PARTIES) relationship to multiple lenders, coupled with the financial strength of excellent collateral and excellent cash flows.
10. Keep frictional costs like taxes and fees low.
11. If you have a specific skill set, find someway to benefit from it.
12. The best holding period may not be “forever”, but it isn’t measured in hours or days either.
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