How to invest without a financial adviser

I’m not a big fan of financial advisers. Their job is to sell you financial products, not to look out for your own best interests. I learned that the hard way, after sending most of what I made in my early 20s to one. He doubled my money in a year or two, but erased the gain and then some just as quickly. So I had motivation to learn how to invest without a financial adviser.

There’s a pretty easy formula you can use to outperform 90-95% of financial advisers.
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And… bailing out.

Scratch one investment property.

Running the numbers, it might have still been possible to make it work. But a lot would have to go right, and this particular property didn’t have an especially good track record.We had a plumber come out and look over the biggest problem. He came back with a best case scenario of $5,000. He called this morning with what he thought was a more realistic figure: an eye-popping 15 grand.

Well, there’s a problem. The property easily needs another 15 grand worth of work. And most of it isn’t stuff that a do-it-yourselfer ought to be doing. It was overzealous DIY work that got the house in this mess in the first place.

According to the books we’re reading, we could afford to put $33,000 worth of work into the house, based on what it should rent for. But it’s easy to see how one project going over budget could blow the whole thing out of the water.

And, frankly, doing that much work would cause more debt than I’m comfortable carrying.

We’ll lose some earnest money. But the risks are starting to outweigh the benefits.

We’ve learned some expensive lessons. But at least we’ve learned. We’ve gone and looked at a couple of other houses already. And we noticed things we hadn’t noticed before.

Not only that, in one case we liked what we saw. The question is, how many other people have seen it and liked it too?

End of the innocence

Honeymoon’s over. The purchase is getting rocky. I’ll tell you about my troubles so you hopefully don’t repeat them.Mistake: We used the mortgage broker our realtor recommended. She got us preapproved quickly enough for us to get our bid in… barely. The rest of the process to get approval went at a sloth’s pace. And then? She slapped us with a 5.625% interest rate and $2,600 in closing costs. She had a vaguely plausible explanation for both, but the closing costs were highway robbery and the interest rate was half a percent higher than it could have been.<p>

Having been lectured by my accountant once about closing costs, I tried to negotiate. Everything’s negotiable, he said. Nothing’s negotiable, she said.

"So I really should just pay cash for this house?" I asked.

She laughed. "If you can." She thought she had me over a barrel and she was going to take advantage of me.

Hopefully she learned a lesson, but I doubt it. Don’t give a Scotsman reason to reconsider parting with money, because once you do, you’ve lost him.

I was out of fight at that point, but my wife called the bank we use most of the time. She told the agent about our 5.625% interest rate and $2,600 closing costs, and asked if she could beat that, and if she could, how we get out of the bad deal.

She talked to us about our goals and our finances and suggested a Home Equity loan. The rate would be low, the payments would be flexible, we could get approved quickly, and there would be no closing costs.

It’s an unconventional answer to the problem. But for a first property, with uncertain expenses, it gives some flexibility. Let things stabilize for a year or two, then get a conventional mortgage if need be. The conventional mortgage gives long-term flexibility, but a HELOC gives short-term flexibility.

So it pays to call around until you find a loan officer with some creativity.

And true to her word, we had approval on the HELOC in three days. That’s how long it took sloth lady to get us just a preapproval.

The house: Now I know why the house was cheap. Superficially, it looked good. But when we started poking around with an inspector, we found out the house was an Uncle Louie Special. Uncle Louie re-did the wiring, the siding, the plumbing, and almost everything else in sight. Uncle Louie did a reasonably good job of laying tile and painting, but when it came to anything else… Well, the inspector said, "He sure didn’t let not knowing what he was doing get in the way of him finishing a project."

He said a few other things too, but it’s probably best not to repeat them.

Unfortunately, it’s going to take professionals to fix most of Uncle Louie’s work. And it won’t be cheap.

The inspector’s advice: Make the decision with the numbers, not with your heart. Which is good advice. The realtor’s job is to make you fall in love with the property. The inspector’s job is to bring you back to reality.

Sometimes the reality isn’t what it first seems. But sometimes you can still make it work anyway.

That’s what we have to learn next.

Diving into real estate

You’re not going to believe this. This week my wife and I applied for a mortgage.

Not on our primary house. We’re buying an investment property. I’m still struggling with the mortgage bit.The greatest real estate investment books of all time (for mere mortal working class people, at least) were written by a man named William Nickerson, starting in the 1950s. Nickerson took one and only one shortcut in his investing. He saved up 25% for a solid downpayment, and bought property. Usually property with something wrong with it. He liked small apartment buildings and humble single-family houses.

Then he fixed the property up. Depending on the situation, he’d sell it if it made sense, or more likely, he’d rent it out, then sell when the right opportunity arose.

And when he had enough money to buy another property, he’d buy another one. An outright sale usually would yield enough to buy multiple properties. Or if he could make a trade that made sense, he’d trade properties.

His initial $1,000 investment (which would be more like $10,000 in today’s dollars) grew to $1 million in property by the time he wrote his first book, to $3 million by his second edition in the late 1960s, and $5 million by his final edition in the mid 1980s.

Nickerson argued that his method was the safest investment in existence. He had a point. Land is the one thing God isn’t making any more of, but God is still making new people. People who need land to live on.

But how do you find tenants? What if the house sits empty for a long time? After all, my Dad rented out a property for several years and it was a nightmare. It sat empty a lot, and his tenants trashed the place.

A couple of months ago, I saw a house for rent two miles from me. The asking price was $900. Two days later the sign was gone. Now there are cars in the driveway. So someone rented it. I looked up the house on Zillow. You could buy the house for less than that, if it were available at current market value.

I kept watching. Rentals in my zip code don’t stay vacant long. So when a HUD-owned home a couple of miles away came up at a price we could afford (my wife found it), we went and looked at it. We liked it. It needs work, but that’s why it was cheap. We made an offer, and now we’re a few steps away from buying.

We have some luxuries Dad didn’t have. We’re in a hot market, so we don’t have to rent to the first guy who asks. We can get a family with references. We live close, so we can keep an eye on the place. We can use a management company to help keep everything smooth. We’ll pay more for that privilege but it’s probably worth it. And the mortgage payment is low enough that if it sits for a few months here and there, it won’t break us.

Where house flippers–at least the ones you see on TV–seem to get into trouble is dealing in big, expensive homes and being too leveraged. If the market for $200,000-$500,000 houses goes south, they’re stuck.

This house will never be on TV. Well, the Extreme Makeover guys would love to tear it down and build a sprawling, awkward castle on its L-shaped lot. It’s a low-end house, the kind of place a young family would buy or rent, live in for a few years, and then probably vacate once the kids are done with grade school–if not a bit sooner.

People want large houses in outer-ring suburbs, but they don’t need them. But a young couple that’s outgrowing an apartment does need an affordable house for a few years, and when they outgrow that, there’ll always be another family in the same situation, ready to move in.

So why don’t they just buy the house we had our eye on instead of us? I’m sure some do. But not all of them can afford the downpayment and the money it will take to fix it up.

A friend and I discussed the ethics of buying a down-and-out person’s house, back when Robert Kiyosaki was at his peak in popularity. Kiyosaki appears to have no qualms about it. We were less comfortable about that.

As far as I can tell from the records easily available, this house finished up the foreclosure process in May. A bank somewhere in New York had it for a couple of months. Then HUD ended up with it. I don’t completely understand the process yet.

As it stands now, the house is no good to anybody. HUD’s doing the bare minimum to keep it from getting much worse. It’s eating up taxpayer dollars and making the neighborhood look worse.

The best thing for the house and the neighborhood is for someone with money and who knows what he or she is doing to come in, make it inhabitable again, hopefully make it look a little better, and get someone living there just as quickly as possible.

In my wife and me, they got someone with a little money. We’ll have to learn what we’re doing on the fly.

We’re taking advantage of the former owners who got in over their heads, but when I go to work every day, I’m taking advantage of whoever made the decision to replace a working, reliable computer system based on VMS and Unix with a sprawling monstrosity based on Windows. And my wife would argue that they take advantage of me.

By buying a fixer-upper below market value, fixing it, and renting it at market value, we’re taking advantage of the house’s situation and the future tenants. But the future tenants are taking advantage of us, because they get to live in a house they couldn’t otherwise afford.

I’m not crazy about all aspects of the situation but I’m comfortable that I’m doing more good than harm.

Now, back to that mortgage question. I’m still arguing how quickly and how to pay that off. The math suggests I could ultimately pyramid at least seven properties, using rents from the first two to pay the mortgages on all of the others. And a few short years ago, a bank would have been more than happy to lend me the money it would take to do that.

One latter-day follower of Nickerson makes it his goal to pay off one of his properties per year.

I like the idea of fixing a property, holding it for as long as the tax code encourages you to hold it, then selling and using the proceeds to pay cash for more than one property to replace it. The growth is theoretically smaller, but I really don’t like debt.

But that’s really a question for another year.