Real estate investing is very hands-on

Published 9:00 pm Saturday, August 27, 2005

Q I’ve been considering investing in real estate.

After reviewing different ways to invest money (rental units, discount mortgages, buying undervalued properties or fixer-uppers, business property, property auctions, etc.), I see that there are big possible returns, as well as big-time commitments needed to properly invest in these instruments.

As a family man who works 9 to 5 and likes to spend his weekends with the kids, would real estate fit my investment profile?

What type of person, in terms of risk tolerance, available time and capital, would be well suited to invest in real estate?

T.M., Everett

A I’m glad to see that you are taking the time to do some research before running out and buying an investment property.

Far too often, I have seen intelligent, successful people get into trouble because they decided to become real estate investors without first studying up on property management.

Investing in real estate is not a passive investment like buying stocks and bonds. You don’t just put your money into a brokerage account and watch the newspaper to count your profits. When you buy a rental house, you’re actually buying a small business and creating a part-time job for yourself.

When you invest in discounted mortgages, you are essentially becoming a bank, because you are buying private notes secured by real estate. But you have to think like a real estate investor, because you may have to foreclose on the borrower and sell the house if they fail to make payments on the note.

All of this takes time. If you like to spend time with your family on weekends, you may want to stay away from fixers and rental houses unless your kids like to paint and show vacant properties for fun. Landlords who can’t or won’t spend the time necessary to operate their rental properties in a businesslike manner are the ones who run into trouble.

Whenever I hear a horror story about a “tenant from hell,” it usually involves a landlord who rented to the first person who showed up, without bothering to run a credit check or verify references, because the busy landlord didn’t want to waste time showing the house to other prospective tenants. That’s a serious mistake.

In the past, I have spent as many as four Sundays in a row showing one of my rental properties. It wasn’t fun. I would have much rather been playing on the beach with my family, but I know that in order to protect my investment I must thoroughly screen every rental applicant. I don’t automatically rent to the first person who hands me a check.

But the good news is that if you do a thorough job of screening your rental applicants and find a long-term tenant, management can be very easy once the vacancy is filled.

My tenants typically stay in place for at least two to three years. That’s because I am specifically looking for long-term tenants when I take applications. The most expensive and time-consuming aspect of rental management is filling vacancies. You don’t want to go through that process every six months.

Once you have the house rented to a good tenant, you just sit back and deposit the rent checks that arrive in the mail each month – until you have a maintenance problem. Many landlords prefer to do all of the maintenance work themselves because it’s much cheaper than hiring a professional, they know the job will be done right, and some people just like to play with tools.

Personally, I prefer to hire a pro. It may cost me two to four times as much as a do-it-yourself repair job, but my time is very valuable, and I’m not very handy. Besides, the money you pay to a repairman is a tax-deductible rental expense, and you can’t claim a deduction for the value of your own time.

As for capital and risk tolerance, you should have ample amounts of both. There is risk involved in any real estate investment. Puget Sound property values have increased dramatically the past few years, but as I have stated in the past, you cannot count on appreciation to continue forever. The housing marketing will inevitably flatten out.

If you are leveraged to the hilt, a drop in your property value can leave you in the frightening position of owing more than the house is worth. That’s why I’m not a believer in the no-money-down school of real estate investing.

I believe in investing in real estate to make money. That means you should have a positive cash flow, or at least break even, before taxes. Don’t count on tax write-offs to bail you out, and remember that tax laws can change.

If you have the money, your next step is to find a deal that makes sense. That’s often the toughest challenge. Don’t walk into your local real estate office and pay the retail price for a nice clean home, because you will not be able to achieve a positive cash flow unless you make an enormous down payment.

Ideally, you want to search out a house that is in poor condition but is in a good location. However, this is extremely difficult in today’s hot housing market.

You may have to travel much farther from home than you originally planned in order to find a house you can buy at a reasonable price as a rental property.

Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206. Fax questions to Tytler at 425-339-3435, or e-mail him at economy@heraldnet.com.