6. What is the Best Buy in Real Estate and Why

Let us draw a sad, slow curtain over the bad choices I made in those days and begin to specify the right beginning for your guidance.

I will assume you are a small investor, and that you have only $1,000 to $1,500 to invest. If you have more you can speed the process and get started quicker, pyramid more quickly, and reach your goal sooner. But you cannot improve on the method unless you have phenomenal luck—and we're not planning on that. Our method is based on a universal public need for one of the essentials of life and our ability to supply it at a good profit. Luck has little to do with it.

Wherever you live in the United States, you are likely to have near you some rental units of the style of Aunt Toby or their equivalent in housing. This may take the form of du­plexes, row houses a la Philadelphia, or apartment buildings. Everything we say here about Aunt Tobys applies to class of rental and not a type of building.

Wherever you are, there are rental units for the average working-man. It is entirely unimportant that the FORM of the rental unit may be drastically different from the style of Aunt Toby that is commonly called a three-decker. In every part of the world I have seen that there are one or more forms of lower middle class or workingman's housing. They are Aunt Tobys. These buildings were built 30, 60 and even 90 years ago. Often the 90-year-olds are more profitable than the sparkling new apartment houses!

You may find worldngmen's housing in your area in any one of the dozen forms. But you can be sure it is there, and you will find that the directions here will guide you in appraising it and buying it.

In the Southwest Coastal cities, particularly Los Angeles, I have seen Aunt Tobys take several forms. Sometimes there is a four-family duplex. There are single lots on which four sep­arated single houses have been built, each "free-standing."

In San Francisco there are many row houses, with one or two units to each house.

All of New England generally has the type of Aunt Toby from which I drew its name, three-deckers and some joined to form six-family blocks, all on one lot.

In Montreal and Quebec, the frugal French have divided their own houses that front on the street, many even putting the staircases outdoors to utilize inside space more efficiently, and then they have built an additional house, and sometimes two, on the land in back of the house—for income.

In New Orleans there are other versions. A lot is split down the center with an alley, on which several units front. Thus four, eight and often 12 or more units may be rented out on the one lot.

New Mexico has the one-story Spanish-style three-to-six apartment rows, and some have added a second story for addi­tional units.

Baltimore and Philadelphia have the small single units, wall-to-wall, in rows, often divided into two units to a house. North Carolina has these too, and several other versions of working-men's housing. There are some row houses in New Jersey too, but many others take the form of free-standing three-family blocks.

In Oklahoma the owner often lives in the front house, and has divided his garage into two units. Some even add a second story to the garage for additional income.

Arizona has the adobe-type four-family arrangement, some­times remodelled from a large garage.

Detroit has the large multiple-unit apartment house in many sizes and varieties. In St. Louis two two-family units are paired. We are concerned with figures—income, not the form of the "building. Whatever shape or form the Aunt Tobys in your area take, the principle is the same and we need only treat here of the one type that is reasonably typical all over the country, in Canada and many foreign countries. Let us examine this unique piece of architecture. The ordinary three-family house has, let us say, 17 rooms. Five on the first floor and six each on the second and third floors. When it was built, probably in the 20's or before, it cost perhaps $12,000 or, as a general rule-of-thumb, $600 per room. Those were the days when carpenters got 75$ per hour or less, and the bricklayers approximately the same. Laborers who dig, tote, carry and clean, rated some 50$ per hour.

Today that same house would cost, as a general average, throughout the country, about $3,000 to $4,000 per room. That makes a total cost of $51,000 to $68,000 for the house. Today that same bricklayer or carpenter gets $40 per day and there are very heavy "pluses" above that. For example there is the item of insurance. The builder who employs roofers must sus­tain an insurance cost on each roofer of a very high percentage of the roofer's salary, which must be paid to the insurance com­pany for workmen's compensation insurance, over and above the salary to the roofer himself. What's more, the builder MUST carry this insurance in almost all states. And just as an added headache—it is very difficult for the builder to GET the insurance even though he wants to pay for it. The insurance companies simply do not want the business.

In addition, there are the modern building codes. These re­quire many expensive fire and other protections which old laws did not require- Hence it is easy to see why the building that cost $12,000 in 1922 would now cost four to six times as much, with little change as far as the rentable quality is affected.

Now when a piece of real estate (inclusive of land and buildings) costs $60,000 as the keys are handed over, ready for occupancy, there is a general rule of thumb as to what that building should produce as an income. This has long been established and is pretty broadly accepted. The accepted cus­tom is 15 per cent of the total cost, as rent, per year. That is another way of saying that when a builder invests in a piece of land and puts a building on it, he is generally entitled to get all his investment back in about six to seven years. That is gross income, of course, and does not take into account his necessary expenditures.

Following that rule of thumb, the three-decker of today would have to fetch some $9,000 per year as total income be­fore expenses to justify its cost of erection. That figures out to $3,000 per apartment or some $250 per month rent for each. Obviously, there would be little, if any, market for such flats as this at such a rental. That leads us to a conclusion. It is this: present replacement cost of a standard three-family house is so high that we can rely on this truism: no more will be built. This for the simple reason that it would be economically pre­posterous as an investment.

Having established this conclusion, let us examine the invest­ment of a three-family with an eye on the fact that those that now exist will be the last of their kind. That is very important. It means that we will never have competition from any new units of the type we have. Such competition for the consumer's shelter dollar as we will have will be limited to other fields, such as the desire to own a single house, the desire of the tenant to own his own three-decker and collect rent instead of paying it out, and such improvement in the tenant's circumstances as move him to raise his living quarters' standards as his economic status improves. We will see that all three are negligible.

For one thing, a half-century of broad experience shows clearly that as a class, the three-family tenant remains one for decades, until death or some other drastic family upheaval dislodges him. Even then, in most cases, the married son or daugh­ter, and in many cases the widow herself, continues on as a tenant indefinitely and the flow of income to the owner remains uninterrupted. If we were to attempt to analyze why this par­ticular genus of tenant, above all other types, seems to stay "forever" in one flat, we will find many reasons.

To begin with, let us not forget the automobile. To most people the car (as a status symbol, or for many other reasons) seems to require a larger and larger part of his paycheck. And he often becomes a two-car supporter, also. To these people, there is a secure feeling of snugness about living in the same old place for decades. It would take much to replace that. There are not the constant needlings of the competition in housing as there are in autos to buy the more expensive prod­uct, with the possible exception of the developer of the single-house community. To him we lose a few occasionally, but it is a negligible percentage. The tenant, if he does consider buying a single, soon starts to figure how demanding a monkey he would be putting on his back in undertaking the overhead of a single and usually drops the idea.

Then there are the ever-increasing costs of the schooling of the children. Colleges are expensive, today, and almost may be said to be a luxury only the rich can afford. Where we once con­sidered the boy who was going to college the exception, he is now the rule. And his sister usually expects a college educa­tion too. All on papa's pocketbook. This scotches any ideas about buying a house of their own.

Perhaps as powerful a "stay-put" factor is the item of the neighbors and friends he has come to enjoy around him in the same old place. The three-decker tenant is as comfortable with these as with an old shoe. He hates to change, perhaps secretly fearing the awkwardness of making new friends among other home-buyers in the development who "are maybe classier."

Add to the above the general inertia that pervades all human action, the tendency to procrastinate, and the fact that we are all perpetually a little behind the installment collector what with all the washers, freezers, and gadgets the average man is signed up for. You can readily see why he stays put. Even mov­ing, itself, costs money. Not to mention new rugs, drapes, furni­ture, more expensive shopping, living up to a new house, and perhaps a second car. The idea is tossed aside. "No new house for us right now, I guess." And so it goes. And the years pass and lo! they have "lived here for 37 years and—" Aunt Toby again.
Thus when we own the three decker—we have the thing that, once wisely rented (and note carefully I said wisely) usually establishes an unceasing income from the tenants and this income continues beyond the belief of those who have not ex­perienced it.

This does not obtain with any other type of rental, generally, with the possible exception of one other field, and that field is rapidly vanishing. That is the little neighborhood store. Twenty-five years ago we could say of the small store that was rented to a grocer or to a chain, this is permanent. The drug store and the tailor and shoemaker who occupied the other stores in the little local shoping center were steady tenants too. They were firmly fixed and they made a living. Thus they stayed on—for decades. But this was so only until the super­market came into the picture. Now all that has changed.

In the past quarter century, as each big chain opened its supermarkets in "decentralized shopping areas," that is, out of the congested districts, with the generous parking and the neon-lit bright shopping in a carnival atmosphere, the same chain gradually closed its local small stores. This spelled the doom of the whole little local neighborhood store block. The chain store had been the heart of the little block. Without the traffic that the chain store pulled, the shoemaker next door soon folded, and, in time, the other little stores that depended on the same traffic followed. This was hastened by two inter­vening causes. First, the parking curse that these small store blocks were never designed to care for. Perhaps the tailor or the druggist parked his own car (as did some of the other shop­keepers ) right in front of his store all day, "to have it handy for deliveries" and soon no customer could park in that area even if he wanted to. Second, the general rise that has occurred in salary levels and the drop in the storekeeper's income made him consider giving up the long hours of store-keeping in favor of the steady income and short hours of the job, working for an­other. And the salary was sure and dependable. So he closed up and took the job. That left another vacant store. The result was that soon the store blocks in local neighborhood areas stood empty. Investment-wise, its back was broken. Today this type of property makes a poor investment indeed.

But come decentralization or not, depression or inflation, come low priced housing developments and, in some cases, practically free housing in some governments, our business only grows better. That figures too. For we must remember that the population is constantly increasing. Thus the supply of our tenants is increasing. But the supply of our type of housing is, if anything decreasing.

The law of supply and demand has seen us through all these and we've made money steadily through it all. Of course it is not given to men to more than guess at the future, but based on what we see and what we have experienced it is a safe bet that the supply of our type of tenants will steadily increase and unless you think the bricklayers and carpenters are some day going to work for $5 per day instead of $40, it does not seem possible that the supply of housing for these tenants will ever increase in anything near the price range they want to pay.

Thus the Aunt Toby, whether in the form of a three-family or its equivalent in the various parts of the country, is unique in these regards. As such, we should set our sights to acquiring as many of them as possible, following only the strict rules that are here set out.

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