Our Dingbat Retirement Plan
Way back in 1983, after we closed our first few foreclosure deals, we knew we could do it forever. But several more years had to pass before it dawned on us that if we were really going to have it made, and be worry free, we'd have to create an estate as we went along; one that would provide us a solid, SUSTAINABLE, monthly income when we retired, and would be nearly bulletproof…no matter which way the economy or politics dipped and swayed.
We instinctively knew that we didn't dare be passive investors. Being at the mercy of any kind of professional manager who calls the shots, whether we held stocks, trust deeds, real estate, etc., was much too risky for us. An invariable element in every horror story we've ever read or heard about, where innocent investors got wiped out, was their dependency on some crook or incompetent who managed their retirement funds.
The amount of safety we required for our nest egg and the vigilance we’d be exercising over it ultimately forced us to take a very close look at income realty, even though we didn’t cotton to the idea of being property managers in our retirement years. What we wanted when we retired was freedom, and the guarantee that we'd have the money to enjoy it--not a ball and chain.
So, starting out with a bias against rental units (because of negative experiences managing apartment houses) we decided to see if there was any other kind of income property we could stomach. Since we weren't committed to any particular type we checked out the pluses and minuses of warehouses, storage units, office buildings, self-service car washes, RV parks, nursing homes, etc. But none of that more specialized real estate made us feel like we were really in control. We didn't want to deal with extensive overhead, employees, or be at the mercy of renting out special-use buildings or space to choosy tenants.
The turning point in our quest occurred when we discovered that we had been looking at the problem backwards by focusing on the different types of rental properties to invest in, rather than on the specific type of tenant we wanted to deal with! If we could define our ideal tenant then it would be a lot easier to see what kind of property we'd need to buy, to rent out to them. Wow, what a revealing process that turned out to be!
We discovered that what we wanted was a quiet, non-aggressive, non-demanding, STABLE, older person with a guaranteed income. We were surprised, for instance, to discover that the most volatile influences affecting tenant turnover are changes in either their family make-up or job situation.
It became clear that a retired pensioner was the epitome of our idealized tenant. No kids or teens tearing up the property, no changes in family size that would cause a move to some other larger or smaller place, and no layoffs or out-of-area promotions or other job-oriented complications to contend with.
A 65-year-old retiree treasures peace and quiet. They are most happy and comfortable occupying a one bedroom, detached house in a predominantly single-family house neighborhood. They don't need a big backyard to take care of and most don't require a garage, since they don't want to deal with the expense of a car that they no longer need.
Once we knew the type of tenant we wanted, and thus the kind of property they wanted to rent, we decided to buy one and try it. In the years since we've discovered that hardly any other landlord wants to buy a one-bedroom dingbat to rent out-- especially those without a backyard or a garage and located in a low-income neighborhood.
So over the years, with our foreclosure profits, we’ve been picking them up at bargain prices. We modernize the kitchen and bathroom, and paint and replace carpet with longer lasting laminate flooring. On the outside we install modern, dual-paned windows and spruce it up with vinyl siding or a new stucco color coat, newly painted trim, a cleaned up yard, a mended fence and a smooth working gate.
At one time we had sixteen true dingbats in our rental portfolio and then foolishly sold a bunch when the real estate market was booming. Now we’re working to get back to a total of twenty of these gems this time around.
One bedroom, stand-alone houses are the most trouble-free, dependable type of rental we've ever experienced. Our retirees are never late with their small portion of the monthly rent--and it seems that the only way they ever move out is feet first. Because of our exceptionally low tenant turnover, (about 16.2 years on average) our maintenance expense is quite low too.
We favor low-income tenants who receive a steady, monthly rent subsidy from the city or county (via HUD's Section 8 Program). That way we get about 90% of our rent via direct deposit from the government and the remaining 10% from the retiree. And most years the government allows us a rental increase that's pegged to the current cost-of-living index applicable to the area.
We get very few maintenance calls nowadays too, since we don’t provide refrigerators, garbage disposals, or dishwashers. In turn we install leak-free faucets (Moen), grab bars, laundry hookups, a whole house fan and security screen doors.
Our foreclosure profits are a key component in our ongoing effort to have all of our little houses completely paid off before we actually start our retirement lifestyle. That way, no matter what economic upheavals occur, we'll still be able to rent out our free and clear properties at a profit.
And whenever we want to scale down we can either hire a reliable property management company or sell the houses one-by-one.
We plan to get top price whenever we sell since we'll find and qualify the buyers and carry back all the financing, secured by our carry-back 1st trust deeds. In fact, the mortgage cash flow we'll receive should amount to much more than the rental income we'll be giving up by selling.
We used to think that we had to buy our properties within an hour’s drive from us so we could manage them ourselves. But in our hyper-inflated area (San Diego) even 90 year old dingbats, in lousy shape, are way overpriced.
So we branched out and started buying them in Phoenix, and are also looking for them in Bakersfield and Sacramento too. What we discovered is distance is no problem with dingbats since they are so “management free”. We handle our management chores just like we do close to home…by phone and email. Yes, on those rare occasions when we have a vacancy we drive or fly to meet our new pre-qualified tenant to do the rent-up (the walk-thru, the rental paperwork, security deposit, rent receipt and hand over the keys).
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InnoVest Resource Management, 4569-A Mission Gorge Place, San Diego CA 92120-4112
(619) 283-5444, Fax (619) 283-5455