Managing Your Money

Renovate, rent, and grow rich

Purchase and rehab rental units to live the way you want.
Scott Graham didn’t know he had a knack for renovating. In 1994 he and his wife, Susan Davis, bought a rental property in order to live in a nice Minneapolis neighborhood they otherwise couldn’t afford.

“I started at a small, unambitious level,” he says. “I had to do rehab because of the condition of the property.”

He sold that first property in 1996 and used the money to buy several other rental units. In that same year, Graham got his real estate license so that he could get more property leads.

Since then, Graham, a real estate professional with Coldwell Banker Burnet, has purchased and renovated nine properties. Some he has sold; others he continues to rent. Becoming active in real estate sales has been a boon to his income, too.

“The first year, I had $3 million in gross sales volume,” he says, “and the second year, I had about $5 million.”

That income didn’t exactly come easy. “I work 65–70 hours a week. About 60 percent of my time goes to real estate sales, and 40 percent is spent on property management,” he says.

Graham learned to renovate by asking a lot of questions and reading a lot of books. “I invested in good tools,” he says, “and now I’d say my work is the equivalent of a low- to mid-level professional.”

Graham says his investments generate a better return than the stock market, even during the best of times. “I maximize my investment by doing the renovation work myself,” he says. “When you compare the amount of money put into my real estate with an investment in the stock market, there’s no comparison, because you have no control over the stock market.”

Furthermore, Graham expenses a lot of renovation costs on his taxes. “Every two-by-four, my tools, and my pickup truck are all tax deductible,” he says.

In addition, Graham says, the rents offset the cost of rehabbing a building.

Graham says he controls his investments by carefully selecting buildings--derelict properties in prime neighborhoods--and knowing what renovation they’ll need.

When buying a rental building, Graham looks for a location with a high average sales price, rents that will generate a positive cash flow, and a fundamental soundness of the building.

“I like to see 700 square feet for a one bedroom and 950 square feet for a two bedroom,” he says. “I also want the units to have separate utilities.”

Once he finds a property, Graham makes sure the leases are in order and the tenants are renters he wants to keep. Sometimes a property is low priced because of tenants who are causing problems or behind on payments he says. “If there are problem tenants, I put in the contract that that apartment has to be vacated. Make the sellers the bad guys, because they’ll be out of the picture anyway.”

Once he’s ready to buy, Graham turns to loan officers he trusts to help him make downpayments as low as 5 percent for non-owner-occupied buildings.

“It’s really important to have a good credit score, about 700, to qualify for those low downpayments,” he says.

His last bit of advice: Buy as much property as you can.

“The depreciation is based on the sales price and is tax deductible,” he says.

If you own properties worth $1 million and your income is $100,000, you can deduct about $36,000 off your income in addition to your renovation expenses.

“I like what I do,” Graham says, “because it gives me freedom to retire when I want and to live as I want.”
—Leslie Cummings

Investment strategy

Renovate and sell or rent units in prime neighborhoods

Time

Nine properties rehabbed in six years

BOTTOM LINE

$680,000 investment now worth about $1.1 million; renovations have been funded entirely by rents

SUCCESS SECRETS

Know the neighborhood; ask sellers to vacate problem units; maintain a spotless credit rating