If you answered ‘no’ to these questions, welcome to the masses. You are no different than most everyone us. In fact, you are probably no different than 99.99% of the population. Most people believe that these major corporations and mutual funds have extremely intelligent, efficient and industrious, high earning, prestigious college graduates, working on your behalf as a shareholder. We believe that these leaders will conduct sound business affairs, in the best interest of their shareholders, so that our investments continue to increase in value. Hopefully stock and bond values do increase and work out to our benefit over the long term. But, most of us really have no idea how a company is really performing, or which investments are heavily leveraged in your mutual fund.

 

This is the primary reason that I invest almost all of my time and money into multi-family homes. I focus on property in my ‘own backyard’, Phoenix, Arizona. I focus on this portfolio because I can analyze and understand the level of realistic returns that I can expect. I have simple formulas to review prior to investing. If the rent roll is over 1% of the asking price of the property I will start my due diligence. For example, if the total rent for all units is estimated $1,000, then I know that I will need to purchase the property for less than $100,000. I considered this the “1% RULE”, and believe in following this formula as I assess whether or not to buy my next multi-unit property. Generally speaking, the higher the percentage of total rent to total purchase price, the better the property value and long term investment.

 

Last week, I took a few of my wife’s friends that were interested in phoenix real estate to an area in which I own more than a few multi-family homes. We were going to look at some of the tri-plexes (three units housed in one building) currently listed for sale. We walked through a building that had rented for $1,650 a month and was listed for $55,500. To me, that is an amazing deal!! Remember, my “1% RULE” tells me that if a property rents for $1,650 a month, then a good purchase price will be under $165,000. This one was listed for only $55,500, and I knew I could probably buy it for less! This blew my “1% RULE” out of the water!

 

In this case, rent income was almost 3% of the purchase price. But my wife and her friends did not want anything to do with property in this area. It didn’t matter that they would make over a 15% rate of return on their money. They were too concerned about the neighborhood and condition of the property. They did not want to own anything they “would not live in”.  So I asked how many stocks they owned and if they have ever visited those company’s corporate offices. I also asked them what they thought about the neighborhoods those companies were based out of. To my surprise, they had no idea about the companies they invested their hard earned money in.