Home Investor's Heyday

Home Investor's Heyday

By Sean Roth

Real Estate Editor

John Schaub owes a lot of his current success to Arthur Lipper III. Schaub, a student attending the University of Florida, was in New York City applying for a job with the brokerage of Arthur Lipper Corp., when the father of modern stock indexes gave him some advice. Lipper told the barely 22-year-old Schaub that the stock market wasn't the career opportunity it used to be.

"Maybe it was just me," Schaub says half jokingly. "Maybe he was just trying to scare me off."

Either way that advice made an impact and has proved life changing. Schaub has since established himself as Sarasota's financial expert in a different type of asset.

Today Schaub, 57, spends part of his time looking for single-family homes to buy and rent out as long-term investments and the remainder counseling thousands of other people through seminars, a weekly newsletter, books and online/home-study courses on that same style of investing. With 35 years of real estate investing, Schaub provides advice on everything from nuts-and-bolts financing to market and tenant research on the cheap to rules for price haggling and good tenant selection.

While not exactly a household name, in the realm of real estate investment Schaub is very well known. Schaub is most often linked with his one-time seminar partner Jack Miller, of Tampa, along with author Jack Reed, Jimmy Napier and Bob Bruss. Many of Schaub's students have also turned to the workshop and book circuit themselves, notably Robert Allen, author of "Nothing Down," and David Tilney. Schaub has authored three books including most recently "Building Wealth One House at a Time."

One of Schaub's signature rules is 10/10/10: no more than 10% down payment, no more than 10% interest on the loan and a price 10% under the market. Schaub is also well known for recommending the 10-year retirement plan, which suggests buying one income generating home a year.

So with a residential sales slowdown underway in his own backyard, is Schaub worried? Not a bit. In fact after a period of consolidation, Schaub is looking to buy.

"It's been hard to buy the past few years; there were just too many buyers," Schaub says. "Everybody and their brother were bidding prices up. I pretty much haven't bought anything the past three years. [But now] I think the speculators are going to sell out. It's going to get flat here for a few years. We didn't have much appreciation from 82 to 90, but [investors] were collecting rents, so we didn't care."

Schaub expects a lot of below market sales in the immediate future, particularly in the middle range of about $600,000 and above $1 million. Schaub anticipates that the lower appreciation will also fuel a number of fire sales.

"The trend in Sarasota right now is that folks have third mortgages on their houses," Schaub says. "The foreclosures in Sarasota County are pretty small right now, but if you look in Pinellas or some of the bigger counties you will see that they have picked up pretty dramatically. Not because real estate has stopped going up, but because people have borrowed more money than they can afford to pay back. The plan was to refinance and borrow more money, and they can't do that now."

With the growth in the market slowing, Schaub, who says he never uses bank financing, expects more sellers to be open to financing the deal.

"People that own investment property are willing to sell and finance that property, because if they just sell and take cash and put it in the bank they are not going to get much return on their money and they have to pay taxes," Schaub says. "If they finance it to me they can collect interest on the full amount. That's a pretty easy thing to sell to someone who has a nice profit. That is certainly my favorite source of borrowing."

Learning the game

Growing up in Sarasota, Schaub knows the market. His father worked as a manager for the Maas Brothers department store. "He saw it was becoming more of a seven-day-a-week business, and made it clear he didn't want me to follow him into the business."

It was while he was at school in Gainesville that Schaub managed his first real estate property - an apartment building that he lived in with many of his college friends. He had his real estate license and actually helped broker the sale of the complex. He used those earnings to pay for flying lessons.

As Schaub approached graduation, Lipper's advice convinced him to give up his stock-market ambitions.

"At one time, I thought about creating a mutual fund, which would have been pretty silly because I had no idea what I was doing," Schaub says. "I wanted to be a principal; and I couldn't figure out how to do it with how little money I had [to invest in the stock market]. If you have $3,000, which is what I had; I don't care if you make 30% you still starve to death."

After moving back to Sarasota, Schaub took a job as a real estate agent. In 1973, he purchased the real estate firm of Prew and Ludden and renamed it Florida Coast Realty. That same year, with a $7,000 investment from a friend and a salesman, Schaub purchased a $33,000 waterfront home on Siesta Key. Schaub still has that house today; the rent payments from his tenant, has allowed him to pay the mortgage and now own the more than $300,000 home is free and clear.

That early effort convinced Schaub to acquire steadily more rental properties. What appealed to him he says was direct control of his future and the ability to produce an almost unlimited upside with very little investment.

"Real estate is still the opportunity to take a very small amount of money and leverage the tar out of it," Schaub says. "I could take you out here right now and buy a home for $1,000 down. Do it well and you could make a lot of money on that $1,000. Take $1,000 put in the stock market or bond market or buy an insurance product your returns are pretty predictable. You aren't going to make $1 million off that $1,000."

As Schaub's investment portfolio grew, he was eventually asked to teach a class on real estate law for St. Leo University in Sarasota. Schaub enjoyed the teaching so much that in 1975 he created Proserve Corporation of Sarasota Inc. and started offering investment seminars and newsletters. Later in the 1980s, Schaub added a home-study course. As his teaching and investment commitments grew, Schaub stopped running Florida Coast Realty as a brokerage.

In 1980, he had another bit of good luck - he married a real estate attorney. "Does it give me an edge? Sure. But I had been in business for 10 years before I knew her."

At the peak of his real estate holdings, Schaub owned about 70 houses in a total of 10 states. Schaub now counsels his students against owning rental property away from their home areas.

"Sure I've broken my own rules," Schaub says. "I've chased hot markets. The farther away you are from your property the more difficult it is. I was awarded a plaque from an organization for having rental property in 10 states. I figured out later that it sure would have been smarter and cheaper to just pay for the plaque."

California future

Another way Schaub is able to predict the future of the Sarasota-Manatee counties real estate market is by looking west. Since Schaub started teaching, he has held one of his seminars in New Port Beach, Calif., which he describes as a remarkably similar town to Sarasota. The biggest difference Schaub says is that New Port Beach's real estate market is 10 years ahead.

"The house I buy here in town for $350,000 sells for $800,000 out there," Schaub says. "The house I rent for $1,200 to $1,400 a month, rents for $3,000 a month out there. They're market leads our market; not that we are connected in any direct way. But the people who live in that $800,000 house out there do the same work that the people in our $300,000 house do here. They're not doctors or lawyers. They have good jobs, but they're not professional jobs."

New Port Beach's current rental market and Schaub's own local historical research indicates significant changes are likely coming to the rental rates in the Sarasota-Manatee market.

"There are still a lot of empty houses in this town," Schaub says. "Properties that we were renting for $895 in 1999 worth between $120,000 and 140,000 are now worth $360,000. The same house rents for $1,250 today. Houses have tripled in value, but rents have only gone up maybe 30% to 40%. I don't think prices are going to jump up the next four or five years; they might creep up. But I think rents are going to jump up. I think we will come back in four or five years and see rents of $2,000."

So Schaub says if a good buy is available now that provides enough rental to cover the mortgage, it is probably well situated for the future.

"There are going to be properties that sell for $100,000 less than what people are trying to get them for today," he says. "I've been doing this for 35 years and this is still some of the cheapest [interest] rates I've seen. So if you can buy a good property, especially at a good price, and if they'll finance it at 6.5% to 7% that's a heck of a deal. If you can make it work with today's rents; you'll be in really good shape."

Unlike a more stock-driven money manager, John Schaub's performance is much more difficult to judge. Here are the top five properties he owns in Sarasota and Manatee counties. Worth noting: This does not take into account rent payments, insurance or tax bills. Total Just Value is the current appraised property value and is usually significantly lower than actual market value.

Address Sale Amount Date Bed/Bath Living Area Just Value

791 St. Judes Drive N., Longboat Key $148,900 April 1999 2/2 1,443 $507,902

727 Tuxford Drive $55,000 October 1999 3/2 1,716 $167,200

1934 Rolling Green Circle $51,000 May 2000 3/2 1,621 $194,800

4028 Teakwood Lane $43,500 September 1977 3/2 1,440 $140,300

500 Canal Way $55,286 September 1991 2/2 984 $287,200

Total $353,686 $1,297,402

Total growth over sales price compared to current taxable value $943,716

Source: Manatee and Sarasota counties Property Appraiser offices.