No, my millionaire heroes aren’t computer whiz kids or international hedge fund managers.
These are my friends Cali and Lou. They’re my heroes and I model much of my life after them. Aside from being endlessly charming, patient, kind, and generous they’re also smart and industrious. Here’s a little back-story that helps explain why they’re my heroes when it comes to home economics and financial planning.
Lou’s parents were immigrants from Portugal. His dad was a janitor and maintenance man at a local university and his mom raised five kids. Back in Lou’s bachelor days he drove a bread delivery truck and carefully squirreled away his money until he could afford a crappy run down duplex in a questionable part of town. He rented out half the duplex and lived in the other half with a few room mates. This arrangement let him live rent/mortgage free while generating additional passive income. He used that money to pay off the modest mortgage as fast as he could while making incremental cost-effective improvements to the property. After several years he was able to buy the house next door. It was also in bad shape, but it was affordable. He fixed it up little by little doing most of the work himself. Then he rented that house as well.
Again, his goal was to get the mortgage paid off as quickly as possible while continuing with steady improvements. The better he maintained the two properties the better quality tenants he was able to attract. And because he lived on site his tenants understood the need to be good neighbors.
A funny thing happened as he put more time and effort into these two houses. Other people on his block began to fix their places up as well. Rents went up a bit and better quality people became interested in renting in the neighborhood. In fact, some homes in the area began to convert from rentals to owner occupied properties. This wasn’t entirely Lou’s doing, but he definitely contributed to the upswing.
Then Cali, a Louisiana transplant, came along. Cali is able to turn her hand to just about any productive activity from baking, to knitting, to furniture refinishing. Her frugality fit well with Lou’s DIY sensibilities. Lou’s bachelor room mates gradually moved on to make way for the couple. The neighborhood continued to improve and at a certain point they decided to sell both properties (remember, they were mortgage free at that point) and take their profits to a smaller town an hour and a half away in the countryside where they could enjoy a quiet life with more land and where their money would stretch much farther.
They paid cash for a home of their own and started buying fixer-uppers in the area with the remaining money. Cali found an office job in the area that provided them with health insurance and a base income while Lou set about renovating and managing the new rentals. Since they had no debt and because they had a modest steady income from Cali’s job as well as rental income they were able to save up and buy more fixers. When the real estate market heated up they sat back and waited. When the market cooled (as it always does) they bought at the bottom of a dip when homes were less expensive. They waited until the previous properties were paid off before they bought each additional property so they never carried more than one small mortgage at a time.
My favorite story regarding Lou’s renovation strategy concerns a three piece set of yellow bath fixtures for a small home they bought and improved on a tight cash budget. Lou found a yellow sink at the salvage yard. It was in perfect condition so he set it aside. A few months later at a different salvage yard he found a bath tub in exactly the same color – also in perfect shape. A few months after that a matching yellow toilet appeared at a third location. His guess is that a subdivision had been built decades ago and the contractor had fitted each home with the then-fashionable yellow bath fixtures. After fifty years the homes started to turn over and the new owners all began to renovate at the same time supplying Lou with a steady stream of matching parts. If you look at the finished room you should note that behind the new drywall is loads of fresh insulation, the new window is double glazed and made of safety glass, and instead of cheap fiberglass and vinyl he’s installed ceramic tiles. This is how you renovate an entire house to a good standard without debt.
Here’s their most recent fixer. It took four years to get this one paid off and mortgage free. Accountants will tell you that having mortgage-free property is a terrible idea. There are all sorts of tax advantages to carrying debt, especially at the current ridiculously low interest rates. And there’s the “opportunity cost” of tying up a lot of money in a fixed asset that could be earning a higher return in the stock market or some other investment vehicle. Cali and Lou shrug.
If you have a big mortgage to offset your income tax you might gain a little extra savings at the end of the year. But people occasionally become unemployed and lose their income. The tax code doesn’t do you much good if you have no taxable income, but still need to pay off a sizable mortgage. Being debt free is a form of insurance. Stocks have tended to go up over time, but the market also declines as we all discovered in 2008.
Another aspect of holding debt free real estate is that in a hard market crash when other highly leveraged people lose their homes to foreclosure the rental market only improves for people who have properties to offer. People have to live somewhere and if they can’t afford to own they need to rent. If I were a renter I would want to live in one of Cali and Lou’s places since they are very well maintained and properly managed. The alternative is generally a sterile apartment complex run by a distant corporation with no connection to the community.
I think it’s important to note that while Cali went to graduate school Lou has no college degree at all. Instead of getting a liberal arts education with all the associated debt he spent that portion of his youth learning practical skills that have served him well. He can re-roof a house, do plumbing and electrical work, negotiate the intricacies of the building code, and work with county inspectors. He can dismantle and reassemble just about anything. He appears to be in the minority in that regard and maybe the better for it. Cali and Lou are millionaires. They aren’t the rock star variety, of course. But if you add up what they own free and clear and look at their after tax income they are very comfortably well off. They don’t drive fancy cars or live extravagantly, but they do live well. They got rich slow. They took existing low value raw material and incrementally added value to it with their own effort. That’s why they’re my heroes.