Use Your Current Home
To Leverage Investments

The Properties: A 1,900-square-foot Mediterranean-style house in Rocklin, Calif., a Sacramento, Calif., suburb. The two-story stucco house, built in the mid-1990s, has four bedrooms, two-and-a-half bathrooms, a tile roof and a two-car garage and sits on a 0.17-acre lot. The second property, currently occupied by owner/investor Steven Glaude and his wife, Dalia, is in Granite Bay, Calif., less than 20 minutes from Sacramento. The 2,900-square-foot tri-level contemporary home was built in 1986 and has wood siding and a concrete-tile roof. The house has five bedrooms, two-and-a-half baths, two fireplaces, a three-car garage with high ceilings (allowing for a loft expansion), and sits on a sloped one-third acre lot within walking distance of Folsom Lake.

Purchase price: Rocklin: $247,000 in February 2001; Granite Bay: $396,500 in June 2003.

Additional amount invested: Mr. Glaude and his wife spent between $5,000 and $7,000 on cosmetic fixes -- new carpeting and paint -- on the Rocklin house before they moved from it and began renting it out. Because the house was relatively new, it was in good condition and didn't need much work, says Mr. Glaude. In 2003 he refinanced with a 15-year fixed-rate mortgage and also took out a $30,000 line of credit against the property, money he applied toward the purchase of his current home in Granite Bay.

Of this $30,000, Mr. Glaude used $20,000 for a down payment on the Granite Bay home, leaving $10,000 for improvements. He added $30,000 of his own money to come up with a $40,000 renovation budget for the Granite Bay house, which, while in a good neighborhood, hadn't been updated since the mid-1980s. Mr. Glaude says the yard was a jungle, the kitchen was retro, the carpet and wallpaper were ugly, and, because the house was on a slope, rainwater runoff had begun to erode the yard.

The Glaudes started with a kitchen renovation ($15,000) in part because kitchen improvements can add the most value to a home, then moved on to update other areas of the house. The work included resurfacing the driveway ($10,000); installing 1,700 square feet of laminate flooring throughout formerly carpeted areas ($8,000); landscaping and adding retaining walls to the sloped yard ($5,000); replacing lighting fixtures throughout the house (more than $1,500); and updating a half-bathroom off the kitchen ($1,500).

The Investor: At 31, Mr. Glaude, a former U.S. Marine and telecommunications-industry salesman, has more than $1 million in real-estate holdings in the Sacramento area. Mr. Glaude, who since 1999 has worked as a licensed real-estate agent for Re/Max Gold in Granite Bay, says he believes the value of single-family residences will increase, particularly in already-expensive urban areas such as his, about an hour or two north of San Francisco. Mr. Glaude believes that the northward sprawl from the Bay Area makes Sacramento -- still more affordable than San Francisco -- attractive to long-term investors who want to buy single-family homes to rent out.

"I've been interested in real estate since I was a kid," says Mr. Glaude. "Houses are like little bank accounts."

The Deal: "My goal is to acquire properties in exclusive neighborhoods and leverage them as executive rentals," says Mr. Glaude. He is currently shopping for his third home. If he acquires more than three properties, Mr. Glaude may enlist a property-management company to oversee his rentals. He believes that rapid home-price appreciation in greater Sacramento, including for his two current properties, will more than cover the management fees.

Mr. Glaude and his wife are debating how long to live in Granite Bay. He's looking at fixer-uppers and wants to make offers before the November election, when he thinks mortgage rates will rise by up to half a point. However, he's also considering spending $30,000 to add 1,000 square feet to the house, which could boost its appraisal value by as much as $200,000. Since it has been renovated, the home he paid $396,500 for now compares to properties that have sold in recent months for more than $630,000. Based on area rents, Mr. Glaude says he can charge $1 per square foot of space -- a sum that would beat his mortgage by only a few hundred dollars annually but which, over time, could pay off.

Profits: Mr. Glaude is currently renting out his house in Rocklin for $1,800 a month, which nets him only about $30 a month after mortgage, taxes and insurance. He says he can handle the low profits for now because he plans to incrementally raise rents over time, including increasing the rent by $100 a month beginning this fall -- giving him about $1,500 in profit next year. He said it's hard to predict exact profits over time. However, because Mr. Glaude has a 15-year fixed-rate mortgage on Rocklin, by the time he's 46 years old, the mortgage will have been completely paid off by renters and all rent payments starting in 2018 will become mostly profit. A conservative estimate that assumes no rent increase above the $1,900 per month he'll begin charging this fall shows that in 2018 Mr. Glaude will earn $22,800 annually from Rocklin.

Unexpected Expenses: After Mr. Glaude closed on the Granite Bay house, his insurer told him the driveway's buckling -- caused by a tree's sprawling roots -- presented a hazard because it could cause people to trip. If he didn't fix the problem, the carrier told him, his policy might be dropped. Mr. Glaude removed the asphalt and replaced it with pavers, a look he said he prefers -- but which cost $10,000.

"I didn't know the driveway would prove an issue," Mr. Glaude says, noting that the buckling seemed minor compared to other issues such as the yard's erosion. "I would've still purchased the property if I'd known, though."

Advice From the Investor:

1. Springboard your primary residence into an investment if you want long-term returns. Mr. Glaude recommends investors first live in the homes they plan to rent out later -- doing so improves their mortgage options when they're shopping for their next property, often enabling them to get a commercial-loan rate that is typically one to one-and-a-half points below a residential mortgage or use home-equity lines of credit to fund future deals. Investment-minded owners also should learn about the local rental market.
2. Find fixer-uppers in upscale neighborhoods. Mr. Glaude said he buys homes only in executive neighborhoods where residents are less likely to feel the economy's ups and downs. In these neighborhoods, Mr. Glaude looks for homes that need work because he can turn a bigger profit if he buys them cheaply and then renovates them. Mr. Glaude says he ignores listings unless they've been on the market for more than 45 days. His house in Granite Bay was listed for nearly 120 days before he made an offer. The next time he buys a home, Mr. Glaude plans to find a foreclosure or short sale -- a home listed by an owner who is willing to sell at a loss for personal or financial reasons.
3. Use a fixed-rate mortgage that includes built-in "impound fees" (taxes and insurance payments). The fixed-rate mortgage and set impound fees together represent most of the costs associated with owning a property. This is the minimum amount an owner must take in to break even. It makes life easier to set up a mortgage payment with the extra fees of home ownership built into the monthly bill, especially for an investor who plans to one day manage multiple properties, says Mr. Glaude.

-- Ms. Hodges is a free-lance writer in Seattle.

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