One Family’s Finances: Reading, Writing and Real Estate
By one measure, Peter Konrad, 34, and his wife Terri, 31, are rich. They have a net worth of over $270,000 and own property in Denver worth $434,000. At the same time, their income for the last four months of 1979 was only $ 1,000.
The Konrads’ out-of-balance finances result from a cluster of changes in 1979. Terri took maternity leave from her job teaching French in a junior high school; the Konrads’ son Christopher was born in June. Peter left his job as director of a school for problem children and started on his own as a consultant in education and juvenile rehabilitation. The role is still so new that Konrad sometimes has to check his business card to remember the name of his firm: the Rocky Mountain Center for Social Research.
Though their salaries have been interrupted, the Konrads took in $48,000 in 1979 by selling and refinancing three houses. They used part of the money as a down payment on their present residence; the rest went into savings, which they have lately been draining by about $1,500 a month. Depreciation on their property keeps their income tax low.
With eight houses and $13,200 in the bank, the Konrads have no serious money worries. But they fear that they may be too heavily invested in real estate, particularly in single-family houses, at a time when mortgage money is expensive and some analysts think that the real estate game is over. They ponder diversifying into other investments as well as other types of properties. Konrad also asks: “Is there a market for my type of service?” and “Can I move from consulting to running a small foundation?”
Craftsmanship and air
Through a combination of timing and judgment, the Konrads have ridden high on the influx of people that made Denver one of the fastest-growing U.S. cities in the past 10 years. As in many cities, middle-income families moved in droves to the suburbs during the ’50s and ’60s. Roomy urban houses with solid brick construction, turn-of-the-century craftsmanship and airy backyards were selling for $20,000 or less. But by the early ’70s the tide began flowing the other way. Today property values in town have doubled or even tripled.
In looking for investment properties, the Konrads inspected and rejected two condominium projects in the foothills of the Rockies and concentrated instead on single-family houses not far from downtown Denver. “The basic housing market is middle-class families,” says Peter.
The sites of the Konrads’ real estate are still mostly in transition from seedy to flourishing. Three of their eight properties, including their own house, are a block or two from East Colfax, a boulevard as straight as a razor with a mean reputation to match. Colfax is the main drag of Denver’s night town, where drugs, whiskey and bodies are on sale around the clock. But as affluence edges nearer, furniture strippers are crowding out strip joints, and French restaurants cater to a new kind of hunger.
Peter Konrad’s first attempt at property ownership was no walk on the wild side, but it blew up in his face. In 1973 he and two other bachelors bought a house in a quiet neighborhood zoned for single-family residences. The zoning proved unexpectedly strict, and nine months later the men were evicted. “We considered adopting each other,” Konrad jokes, but instead they sold the house for $1,000 profit apiece.
Using the money and a Veterans Administration mortgage, Konrad was able to acquire another house, across from Lowry Air Force Base, with only $750 as a down payment. He lived in the basement and rented out the rest for $250 a month. His monthly mortgage payment was only $225. “It doesn’t take a Rhodes scholar to figure out that’s a good deal,” says Konrad. With one of his former roommates, a tax lawyer named Bob Ballard, as a partner, he began searching for other properties.
Today, almost exactly four years later, Konrad has put about $20,000 into real estate that has a current market value of $434,000. The mortgages, like the houses, have generally been bargains. Interest rates on all but three are less than 10%; the highest, on a house he acquired last July, is 12%. “People tell me,
‘You’re so lucky,’ ” says Konrad. “I don’t believe that. I believe you make your own luck. Maybe anybody could have done what we did, but it’s a matter of doing it. We’re doers.”
Driving around Denver, Peter and Terri often try new routes, nosing into old sections of the city that seem likely to swing from low-income families to more prosperous ones. Friends, associates, brokers, even casual acquaintances all plug into the Konrads’ real estate grapevine. From one person they heard about a house up for sale because the owners had missed several mortgage payments. Another source told them of a house that had been half-renovated when the owner had to leave Denver.
Last November, while chatting with an old man who had come to fix the Konrads’ furnace, Peter learned about a house that was going on the market for between $10,000 and $12,000. He kept his bid low but got the house by offering full payment on the spot. “Ten thousand in cash is hard to refuse,” he says.
The money, as with most of the Konrads’ real estate investments, came from a combination of household savings and profits from property sales. Starting in August 1977, when Peter sold his house near the Air Force base for $37,500 — a 50% increase in two years — he and Terri have made close to $60,000 from selling four houses. Their biggest gain was on the house they lived in before moving to their present address. They got it in 1976 for $33,750, with a down payment of $1,000 and a mortgage insured by the Federal Housing Administration. They put $5,000 and a lot of their own labor into improvements, and sold it three years later for $73,500.
Despite his success, Konrad is not interested in transforming his real estate activities from a life-size Monopoly game into a full-time job. For one thing, he says, he would miss the “personal feedback” he gets from working with children enrolled in the teaching programs that he designs or evaluates. “In real estate, the personal thing doesn’t exist,” he says. “The only motivation is money.”
And money — or rather, wealth — does not especially interest him or Terri. Ideally, Peter would like to earn $30,000 to $40,000 a year with six weeks off. Terri, though still undecided, thinks she might prefer half-time to full-time teaching. To both, free time, flexible schedules and vacations are more important than high salaries. In 1979 the Konrads spent $1,550 on trips, just $280 less than on food. This year they have already worked in a skiing holiday at Aspen and a visit to Terri’s parents in Ohio.
Other than vacations, which Peter often manages to combine with business trips, the Konrads’ expenses are moderate. When both were working full-time, they put aside about $750 a month. They don’t budget their expenses and, says Terri, never watch the grocery bill. “We eat well,” she says proudly. “No tuna casseroles.” Eating well does not preclude eating leftovers, and buying half a side of beef at a time for their freezer cuts the price of meat nearly in half.
Terri Schott and Peter Konrad converged on Denver from opposite directions about eight years ago. She’s originally from Cincinnati; he’s from Sacramento. Peter, a basketball star at the University of Redlands, in Redlands, Calif., wanted to indulge his passion for skiing and mountain climbing. Terri craved wider horizons of a different sort. Teaching French in a Catholic high school near Dayton, at 24 she grew restless. “Everything in my life had been sort of predictable,” she says. “Things had to change.”
With no job, but with an offer of a one-month sublet from some college friends then living in Denver, Terri packed up and left Ohio. After two years of odd jobs, including work as a waitress, seamstress and substitute teacher, she landed a permanent teaching job in 1974 in an inner-city junior high. Tougher than she looks at five-foot-five and 115 pounds, Terri found the job easier than she’d thought. “If anything’s the jungle, it’s subbing,” she says.
The two met in the spring of 1974. Two years later, having lived together on and off, they were married in the backyard of the house they bought themselves as a wedding present. Terri made her own wedding dress and embroidered a fancy shirt for Peter. He wore the flower child shirt at their reception but for the ceremony chose a businesslike three-piece suit.
A tenant’s message
The change of costume could serve as a symbol of Konrad’s dual commitment to social progress and real estate profits. In his job, he patiently tries to help juvenile offenders and troublemakers find a comfortable place in the straight world. In real estate he has less time for other people’s problems.
Konrad did not hesitate to evict a tenant he believed was deliberately withholding a month’s rent. His main regret, other than having misjudged the tenant’s reliability, was waiting until the month was up to evict him. “You always want to have tenants paid up in advance,” he says. “That way you evict them on their money, not on yours.” When the recalcitrant renter finally moved out, in January 1979, he left a message for his landlord. The heat was going full blast with all the windows open; dog excrement covered the floor and the stench from the long-unflushed toilet would have stunned a zookeeper.
Recently Konrad found himself struggling with the moral dilemma of whether to evict an old woman from the heatless, run-down house where she has lived for 13 years, so that he could renovate and raise the rent. After trying unsuccessfully to get a rehabilitation loan in the tenant’s name so she could stay, Konrad has arranged for her to move into city-subsidized housing.
Most of the Konrads’ problems with tenants are minor, requiring only a call to a repairman. Peter estimates that he puts in about six hours a week on his properties. Terri spends about 10 hours a month as a bookkeeper and bill payer. But even the small infraction on their time is too much for the Konrads. “When a tenant calls at 1 a.m. to say that water’s dripping through the ceiling,” says Konrad, “it’s a terrible pain in the butt.”
On the first houses they bought, the Konrads did most of the renovation and repair work themselves. In one house they had to shovel out about 50 pounds of dirt after removing wall-to-wall shag carpeting. In their present residence, however, they confined their efforts to redecorating a room for the baby.
One of their biggest mistakes, says Konrad, was letting a friend talk them into meticulous renovation of a house they bought in 1977. After a year of work and $35,000 — $4,000 more than they paid for the house — they had an aesthetic triumph but a financial disaster. “We made the same $3,000 we would have if we’d accepted an offer we got a week after we bought it,” says Konrad. The lesson: never fix up a rental property as if you mean to live there. “Tenants rip out half of it anyway,” he grumbles.
Ambitious and risky
While trying to cut back on the time he spends on most of his properties, Konrad has been spending about one day a week on his most ambitious and riskiest project to date. Last July he and his partner paid $125,000 for an 1891 mansion, known as Keating House, which they are converting into offices. The renovation will cost about $80,000. As of late January, no tenants had signed up.
“People see a place like this and think we’re rich because we own it,” Konrad says, walking proudly through the mansion’s spacious, high-ceilinged rooms. “They don’t realize that a lot of the money is not readily accessible.” Rents just about equal maintenance costs; profit comes only when a house is sold.
“I don’t feel either rich or poor,” says Terri. “I have things I want. I’m happy. Sometimes it’s hard for me to imagine what more I’d like.”
The Konrads have decided to concentrate more on commercial property, by converting another historic house into office space. Peter is thinking about forming his own nonprofit company.
Peter Konrad: I feel more confident now but realize that the real estate market is changing. Instead of trying to speculate on quick profits, we’re going to be even more careful about what we buy.
Nice work; now diversify
The possibility of a real estate slump worries the Konrads, who fear that their investment in seven break-even properties might no longer be safe. The doubt nags them all the more because Konrad is trying to find his footing as a self-employed consultant.
To help the Konrads resolve their questions. Money called on three advisers from the Denver area: David A. French, a real estate broker and developer; David C. Liddell, a certified financial planner and real estate consultant; and Robert F. Leduc, executive director of Technical Assistance Center, a management-consulting service for nonprofit organizations.
David French, real estate broker:
So far, you’ve been doing the right thing. But with property values up so much, buying single-family or even small multifamily buildings for income doesn’t seem to work anymore.
My recommendation is to move into small commercial properties, where the rampant inflation we’ve already seen in single-family houses is just taking off. You’re going in the right direction with Keating House. There’s a tremendous demand for old mansions remodeled into office space. Commercial lessees have different demands than residential tenants, though. The landlord is expected to take care of everything, so you’ll need janitorial services.
David Liddell, financial planner:
Over the next two years, you probably could raise rents rather dramatically because of the continuing population boom in Denver. One thing I would not do is try to sell.
High mortgage rates have discouraged a lot of buyers. Instead, consider trading. Say you want to get more income out of owning property. Maybe another investor needs a tax loss. A broker arranges a meeting and you swap properties. You pay a commission, but since you’re exchanging like for like, there’s no capital-gains tax on either side. A lot of people call this a tax-free trade, which is a misnomer, but it does defer taxes. In a trade, you carry over the purchase price of your old property, minus depreciation, as the cost of the new one. This usually means higher capital gains when you sell, and a bigger tax than if you’d bought the new property at its current market value.
Even though you’re doing well in real estate, I wouldn’t bet everything on it. Diamonds can be a good investment if you hold them for at least three years. The American Gem Society [2960 Wilshire Blvd., Los Angeles, Calif. 90010] can supply a list of reputable member jewelers. Then shop around, specifying investment-quality diamonds.
Robert Leduc, management consultant:
Many corporations and foundations are looking for ways to evaluate their grant programs. There are tremendous opportunities for entrepreneurs in the nonprofit sector.
Looking at your own consulting firm, the way you’ve set it up you’re a sole proprietor with a trade name registered only in Denver. The legal benefits of this are practically nil. Why not incorporate as a Colorado nonprofit organization? You provide an educational service, so you’d probably qualify. You’ll be eligible for exemption from both federal and state corporate income taxes. The most obvious advantage is not having to pay income taxes on your revenues as a business. You also don’t pay sales taxes, Social Security tax or most of your property tax. The salary that you’ll pay yourself will still be taxable. In the foundation world, if a full-profit and a nonprofit company offer the same service, the nonprofit has a definite marketing advantage.