In our conversation, Julia Curran talks about her experience renting from Graham for four years, which ended in 2011. You may have already heard about the gaping hole in an exterior wall, written about by Naomi Kritzer here. But there’s more: Julia getting staples in her head after having a poorly installed light fixture fall from the ceiling; having no heat in the winter to the point one of the tenants left due to a frozen toilet; squirrels chewing through walls, a problem covered up by hanging a painting (you know, scooby doo style); failure to address a leaky roof and a carpenter ant infestation; never delivering a lease to Julia despite her requests, then asking other tenants for leases after his hard drive failed; having Graham kick her and others out of the house soon after the door-pounding delivery of a foreclosure notice; Graham nickel and diming his tenants on the way out, billing them for the problems he failed to address.
After the Star Tribune wrote about Graham being cited for over 200 housing violations, he responded with a statement saying these were properties he managed for other owners and he was “disappointed that there are people who have sought to distort my business involvement for political gain.” But Julia’s story is about a property owned by Graham.
Below I’ve posted the full text of an article about Scott Graham’s success building a portfolio of rental properties starting in the mid-90s: “Renovate, rent, and grow rich” (published on realtor.org in 2001, no longer online). The article holds him up as a model for others aspiring to get rich in real estate, doing $5 million in sales in just his second year, earning a better return than the stock market, and able to retire whenever he wants.
The article also mentions Graham’s strategy of intentionally purchasing “derelict properties in prime neighborhoods,” having good tools, and doing all the renovation work himself so he can deduct it on his taxes. The house Julia lived in on Colfax Ave was owned by Graham and his wife for 14 years. I can’t say how derelict it was when they bought it in 1997, but it was certainly in that condition when Graham stopped paying his mortgage and Julia was forced out by a foreclosure notice in 2011. If Graham was really getting rich, it was by providing unsafe, deteriorating housing and not putting any of his rental income towards maintenance.
This article was published on: 01/01/2001
Managing Your Money
Renovate, rent, and grow rich
Purchase and rehab rental units to live the way you want.
Scott Graham didn’t know he had a knack for renovating. In 1994 he and his wife, Susan Davis, bought a rental property in order to live in a nice Minneapolis neighborhood they otherwise couldn’t afford.
“I started at a small, unambitious level,” he says. “I had to do rehab because of the condition of the property.”
He sold that first property in 1996 and used the money to buy several other rental units. In that same year, Graham got his real estate license so that he could get more property leads.
Since then, Graham, a real estate professional with Coldwell Banker Burnet, has purchased and renovated nine properties. Some he has sold; others he continues to rent. Becoming active in real estate sales has been a boon to his income, too.
“The first year, I had $3 million in gross sales volume,” he says, “and the second year, I had about $5 million.”
That income didn’t exactly come easy. “I work 65-70 hours a week. About 60 percent of my time goes to real estate sales, and 40 percent is spent on property management,” he says.
Graham learned to renovate by asking a lot of questions and reading a lot of books. “I invested in good tools,” he says, “and now I’d say my work is the equivalent of a low- to mid-level professional.”
Graham says his investments generate a better return than the stock market, even during the best of times. “I maximize my investment by doing the renovation work myself,” he says. “When you compare the amount of money put into my real estate with an investment in the stock market, there’s no comparison, because you have no control over the stock market.”
Furthermore, Graham expenses a lot of renovation costs on his taxes. “Every two-by-four, my tools, and my pickup truck are all tax deductible,” he says.
In addition, Graham says, the rents offset the cost of rehabbing a building.
Graham says he controls his investments by carefully selecting buildings–derelict properties in prime neighborhoods–and knowing what renovation they’ll need.
When buying a rental building, Graham looks for a location with a high average sales price, rents that will generate a positive cash flow, and a fundamental soundness of the building.
“I like to see 700 square feet for a one bedroom and 950 square feet for a two bedroom,” he says. “I also want the units to have separate utilities.”
Once he finds a property, Graham makes sure the leases are in order and the tenants are renters he wants to keep. Sometimes a property is low priced because of tenants who are causing problems or behind on payments he says. “If there are problem tenants, I put in the contract that that apartment has to be vacated. Make the sellers the bad guys, because they’ll be out of the picture anyway.”
Once he’s ready to buy, Graham turns to loan officers he trusts to help him make downpayments as low as 5 percent for non-owner-occupied buildings.
“It’s really important to have a good credit score, about 700, to qualify for those low downpayments,” he says.
His last bit of advice: Buy as much property as you can.
“The depreciation is based on the sales price and is tax deductible,” he says. If you own properties worth $1 million and your income is $100,000, you can deduct about $36,000 off your income in addition to your renovation expenses.
“I like what I do,” Graham says, “because it gives me freedom to retire when I want and to live as I want.”