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Sleepless in Seattle by Steve Abramowitz

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AUTHOR: steve abramowitz on 7/01/2024

IN YIDDISH, CHUTZPAH  means audacity. Larry Ellison, the flamboyant founder and ex-CEO of Oracle, is the embodiment of chutzpah. I want to share a real estate caper that took place during my making-it stage when the river of my ambition was flowing swiftly and perhaps recklessly. The gambit called upon all the chutzpah I could muster. It worked famously, a highlight of family lore and my ambivalent career as a small residential property investor. Yet once past the bravado of youth, I could never again summon the daring required to re-enact the plan. I certainly don’t recommend it to folks just starting out or short on their Xanax. But maybe you’re an intrepid breed.

The strategy. In the early 1980s, I read a book about how to invest creatively in small residential income property. I was titillated by a chapter that sketched out how to buy out-of- state duplexes and 4-plexes without ever seeing them. The approach worked best for investors whose strengths were in buying and obtaining financing, but not necessarily property maintenance. Conveniently, that was my MO. Young and impressionable, I soon set out on my newest real estate adventure.

Although at 38 I was already attentive to the need for asset allocation in retirement planning, I could not have foreseen the introduction of mutual funds of international real estate investment trusts for global diversification in property ownership. Back then, it was enough that investing outside your home state provides variation from a rental market subject to the local economy and vulnerable to natural disasters like floods and earthquakes.

The method. All this came together when in 1983—the year Alberta and I married—I set out to put the strategy into action. I honed in Seattle, fast becoming an international destination for corporate executives and a university population. At my county library, I scanned the real estate section of the city newspaper. I soon struck pay dirt. A seller placed a prominent ad explaining how he was up against the time deadline of a reverse 1031 exchange whose fulfillment would grant a monstrous tax break. During the dog days of the 13% mortgage, he could not attract buyers. Here was the poster child for the motivated seller.

Excitedly, I tracked down a map of the city to pinpoint the street location. Again, I was in luck. The duplex was situated on the rim of a large public university whose students and junior faculty would provide a continuous stream of potential renters. And although always a long shot, the university might eventually need to acquire adjacent property for expansion.

Next destination was the city telephone book (remember those guys?). I jotted down the names of three property management firms and settled on one that specialized in the university area and whose representative sounded knowledgeable about the neighborhood.  She also estimated the rent range.

Now it was time to contact the seller’s agent, who would be highly motivated to snare a commission on both sides of the transaction. We were told that, crucially, the seller owned the property free and clear and would consider carrying a first mortgage. The duplex was rented to an individual and a couple who had occupied the premises for several years. The rent was a little below market, all of which was consistent with our policy of retaining reliable tenants by charging a reasonable rent and limiting increases. The agent soon sent along a picture and income and expense figures. The photo was reassuring but I largely ignored the statement, which I generally consider bogus sales literature.

The offer. I then contacted two resources recommended by my new property manager, a real estate attorney and the all-important person who would conduct a thorough inspection of the duplex. Fortunately, it was pronounced in very good condition and requiring only minimal fix-up. With all the stars aligned, my wife Alberta and I put our plan into action.

Remember, the seller was squeezed by the time requirements of the 1031 exchange and a prohibitive interest rate that dissuaded buyers. We would offer only slightly under the selling price and a 25% down payment as incentives in return for a financing plum—a 1% mortgage. He countered with the full asking price but, voila, he agreed to the deal. Ecstatic, we immediately accepted and launched into a hug. In a matter of days, our attorney sent along a contract marked with the requisite red arrows pointing to where we should sign.

Selling scared. My father was the brains and force behind my family’s real estate holdings. Several years after our purchase of the duplex, he suffered a disabling stroke that impaired his judgment and sapped his will. Frightened by the loss of his encouragement and wisdom, Alberta and I impulsively sold our only out-of-state investment. We received $153,000 for our sight-unseen duplex only eight years after purchasing it for $79,000. The $74,000 gain represents a compounded rate of appreciation of 8%, plus 5% annual net income and generous tax deductions. Not quite a coup, but a very satisfactory outcome.

Hypothetically speaking. But what if we had held? What if we had amassed over 41 uninterrupted years of capital appreciation? Zillow, the leading resource for estimates of small residential property values, pegs the current worth of our duplex at a staggering $1,406,000, even in today’s dubious market.

Wow, you say, incredible. Not really—remember the investment would have capitalized on the power of compounding and the inevitable march of inflation for four decades. Those two forces are likewise partly responsible for the often eye-popping long-term returns of your fund retirement portfolios. Holding on to the duplex through today would have earned us a solid if unremarkable rate of appreciation of 7% with, of course, about 5% yearly net income and robust tax benefits exclusive to privately held real estate. Only by adding in those factors to arrive at total return is the often beleaguered property owner likely to overcome the broad stock market’s average annual 10% gain.

 

 

 

 

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