And so do we all. Anyone with a mortgage took out that loan in the expectation of building wealth. Like Trump, you’re using “leverage”–putting up a little cash to control a truly major investment.
But loans have to be serviced, and that’s what this ’90s morality play is all about. Merv Griffin’s Resorts International went bankrupt because he couldn’t make his payments. Robert Campeau lies under the ruins of Allied and Federated stores. In March, William Farley defaulted on loans he amassed while trying to swallow West Point-Pepperell. They broke all the rules and didn’t get away with it.
Deathwatch: The finger pointers crow that consumers are next as the deathwatch proceeds on the decade of debt. Individuals’ indebtedness now stands around its record high as a percentage of disposable income. Overall, employment is holding up. But the slowing economy has cut into overtime and moonlighting, says Irwin Kellner of Manufacturers Hanover Trust. A recent study of married couples by Purdue University found 42 percent dependent on income from extra-hours work–against which bankers often lend.
Another recession would devastate consumers because, like Trump and the other princelings of leverage, they have cut themselves no slack. But if the economy slinks successfully into the ’90s, families are likely to pull through by adding to savings and borrowing less.
Just don’t swear off borrowing for good. The way to get rich is still to use other people’s money. First mortgages are a wealth-building loan. Many home-improvement loans also add value. The rule: an improvement makes sense if it adds $2 of value for every $1 you spend. Loans against stocks will buy you more stocks (although the interest will kill you if you hold on too long). Even a car loan can makes sense, if you take it in place of raiding cash that is earning more interest than the loan costs.
When you borrow money to make an investment, you can afford:
Any debt that (unlike Trump’s Taj Mahal) will support itself. Can you rent out a two-family house for enough to cover all its costs, plus a cushion for contingencies? Can you borrow against your life insurance and earn more than it costs to carry the loan? If so, do it.
Any debt that is matched by ready savings or investments. Say, for example, that you borrow money for some land that you plan to subdivide into building lots. Then you lose your job and the land isn’t instantly salable. No sweat, as long as you have cash and stocks to fall back on.
Any debt you can cover, reliably, out of your personal earnings, with this caveat: all your monthly payments (including the mortgage) shouldn’t top 40 percent of your gross monthly income.
For wanna-be Trumps, money waits to be made in the kinds of properties that best suit small investors: single-family homes and duplexes. But it may no longer pay to take losses each year, on a bet that you’ll sell at a jackpot price. We’re back to the pre-inflation, pre-tax-shelter game: buy income properties where rents will cover all the costs.
Finding such properties is a job in itself. In most cities, prices are still being set by the jackpot creed. That means, says John Reed, publisher of the Real Estate Investor’s Monthly in Danville, Calif., that you have to be a niche investor, seeing value where other buyers don’t. Some good ideas:
Buy one-bedroom homes. They sell cheap but rent dear, because tenants love them. If you can turn an enclosed space into a second bedroom for $2,000 or less, you’ll really have a winner.
Buy a house or duplex that is going to be torn down. Pay $1,000 or less. Hire a professional to move it to another lot. It’s a good deal if it costs about half of what the new property is worth.
Buy a house with a problem that traumatizes the seller–like asbestos or a bad foundation. You’ll buy so cheaply that even with fix-ups it’ll be a bargain.
Find a person who’s renting a house with an option to buy at a low price, but won’t. Buy the option, take the house and resell at the full market price.
Sell off excess land. Your property might have an extra quarter of an acre that a neighbor would like for a garage or tennis court.
Write to everyone who owns land in your county but lives somewhere else. Ask what they’d sell for. Maybe one out of 200 will name a price that’s half the real value. That one, you buy.
Raw land is another story. It eats money rather than yields it–and the risks are huge. Maybe the town will zone it from commercial down to residential, reducing its value. Maybe someone will discover buried oil drums there that will cost a fortune to clean up. Raw-land expert Ralph Pisani loves the investment because, done right, the dollars are big. But in Reed’s opinion, raw land is not something you own, it’s something you flip. Take an option to buy, subdivide it, exercise the option and resell.
Most condominiums are poor investments, says author and real-estate professional Andrew McLean. They are chronically overbuilt, and your profits are hostage to how well the building is run.
As for vacation homes, they’re subject to energy crises, recessions, bad publicity, even demographics. All the to rent condos in Vail are now playing ball with their kids at the beach. If you buy a classy house (because you use it, too), tenants’ rents won’t cover costs.
The best real-estate investments with the highest yields are in working-class neighborhoods, because fancy properties are overpriced. So much for the Trump philosophy of paying any tag for “trophy buildings” because you can always sell for more. To Donald, to whom?
