Real Estate Christmas Story

The landlord, Mike, was a friendly man of about 68 years. We had a great time talking about real estate. In 1965, Mike took a job as a school janitor and he worked at the same job his entire career. Mike bought four single family homes over a period of 45 years and is now a multimillionaire with a $75,000 / year passive income from real estate. His passive real estate income is more than double what he earns from his janitor’s pension and social security.

What astounds me is the simplicity of Mike’s success. Mike purchased four “bread and butter” single family homes over 45 years. He always bought new properties, he always paid retail, and his cash flow was break even with 20% down and 30 year fixed fully amortized mortgages.  Mike never refinanced, never prepaid his mortgage, and he never sold. While this plan may not have yielded the highest return, it was powerful none the less. The fact that the plan was so simple is one of the reasons Mike was successful with it.

Mike purchased his first house in 1965. He paid $18,000 using 20% down ($3,600) and an 80% mortgage ($14,400). His mortgage payment was $86/month. That was a lot of money when Mike was a 23 year old school janitor earning $350/month. Today, this Northern California house is worth $575,000 and rents for $2,200/month.

Mike purchased this $18,000 house with only $3,600 down and his mortgage was paid off by his tenant 15 years ago. His $3,600 investment is now worth $575,000. Mike’s annualized non-compounded return on investment has averaged 350% per year for each of the past 45 years. What investment vehicle other than real estate can do that?

In 1970, Mike bought a second house. In 1975 he bought a third house and, in 1980, Mike bought his fourth and final house. All four houses are now owned free and clear with $2.3 million of equity and positive cash flow of $75,000 year. Mike spent his career as a janitor and retired a multi-millionaire because he had the foresight to acquire four pieces of real estate over 45 years.

Inflation seems small because it is reported as a year over year number. However, inflation (and real estate prices) actually move as a compounding force.  Below is a chart of a basket of goods with prices from 1965 and 2010. I created a chart to illustrate the annualized compounding rate of increase for this basket of goods. Mike’s houses increased in price just slightly faster than the overall rate of inflation over the same period.

Mike was the happiest guy at the party. He has the most abundant retirement plan of any of his peers, and he spent his entire career as a janitor not worrying about money or inflation.  He always knew that when he retired he would have four houses that were completely paid for by his tenants, and these houses would take care of him and his children forever.

It is nice when real estate investing has had such a positive impact on someone’s life. I asked Mike what he would have done differently 45 years ago and he said, “I wish I would have bought more houses.”

Merry Christmas and Happy New Year,