Post Housing Bubble, Property Still Pays

By David Crook
From

So you think there's still a buck to be made in real estate? You're right. There's plenty of money to be made because everyone still has to live somewhere. And everyone has to work somewhere. And everyone has to shop somewhere. And someone has to provide the space.

That's where the real-estate investor comes in -- making money by providing one of life's necessities. And just about anyone can be a real-estate investor. The capital requirements are quite minimal, and there are comparatively few legal restrictions on how you operate.

Keep that in mind as we look at how to raise money and learn the real-estate business. So let's start at the beginning, with the first thing any investor ever asks.

'Where Will I Get the Money?'

You can get good quality loans on buildings with up to four apartments under the same easy-lending terms that you can use to buy any residential property.

A lender will allow you to include the rental income along with your salary when you compute whether you can afford the loan. Try to keep the basic payment -- called "PITI" for principal, interest, taxes, insurance -- to 25% or less of your before-tax income, including the rental income.

You want to limit your risk and you want to buy as much property as you can comfortably afford. You do that by using "leverage" -- paying a fraction of the purchase price yourself and borrowing the rest. It's called using other people's money.

It's a good kind of debt to take on if you have an investment that uses even more of other people's money -- renters -- to make the monthly payments and produce a profit.

The properties may not always be in the neighborhoods you most prefer and they may need more work than you might like. But as long as a building is livable (or can be made so quickly) and a neighborhood is passable, then you can get started building your real-estate empire.

Getting Focused

And the beginning actually starts well before you're ready to buy a property.

You will need to decide early on what kind of properties you want to specialize in. What kind of real-estate empire do you see for yourself in 10 years? Once you determine your focus, you will need to learn as much as you can about that business as it functions in your area. Don't be discouraged, but do give yourself plenty of time; plan on at least one full year from the time you decide to get into real-estate investing and when you close on your first property.

Build a Network

You need to develop a network of real-estate professionals, people who can help you acquire properties, because you are unlikely to find the best places just scanning newspaper or Web listings all alone.

Marc Asselin and his partners (his brother-in-law and his father-in-law) trade in properties in the Boynton Beach, Fla., area. They concentrate on buying vacant lots that they can get for a fraction of their developed value, and hold on to them until a buyer comes along. Mr. Asselin has even developed his own "investor network" that puts potential land buyers in touch with other landowners.

"You'd be surprised how many of the people you know are involved in real estate, if you ask them," says Mr. Asselin, a software engineer, who built his network starting with just the real-estate agent who sold him his home. Then the network expanded to include an attorney and an accountant.

One place you might look for contacts is in real-estate class. While certainly not required of real-estate investors, a real-estate license doesn't hurt. It helps to establish you as a professional, which has distinct tax advantages, and it lets you negotiate as a professional, which can result in sales-commission savings for you.

Real-estate class is also a place where you can find a mentor -- someone like Hal Wilson, a real-estate agent and entrepreneur who has helped to educate two generations of Nashville-area real-estate professionals and investors. He calls his own investing philosophy "driving for dollars" -- searching for derelict, abandoned or otherwise below-average diamonds-in-the-rough houses and buildings in neighborhoods that are showing improvement.

It's a way of doing business that he has taught to hundreds of local landlords and investors through his classes, his personal appearances, his radio show and through the 500-member Real Estate Investors of Nashville network (). The group, which meets once a month or so, gives local landlords a place to get to know each other and to swap stories while making contacts with lenders, contractors and other real-estate professionals.

Most cities have similar organizations. Ask around. The Internet is also a good source. Yahoo lists more than 5,000 local, national and international real-estate investing groups.

Don't Fall for Schemers' Lines

Be skeptical. Listen to your inner bull detector. Avoid schemers. Avoid real-estate investing gurus and other blowhards who make money selling investment seminars or "get-rich-quick-and-easy" real-estate books. These guys make their money feeding fantasies.

As the nation's real-estate frenzy reached a full boil in 2005, the real-estate schemers went into hyperdrive at a series of "Real Estate Wealth Expos" in Los Angeles, New York and other big cities. Thousands of would-be Donald Trumps paid up to $250 to hear, well, Donald Trump and other marquee princes of the rich-and-fabulous lifestyles, extol the virtues of real-estate investing to huge pep-rally-type assemblies.

Don't waste your money. You can learn a lot more driving around with someone like Jack Friedman, a philosopher-musician-landlord in Nashville. He'll take you around to his properties in his '99 Ford Escort with all his tools -- wrenches, pliers, hammers, whatever it takes -- in the back seat. And he will tell you what 20 years of investing has taught him, all for the price of the barbeque platter at Corky's.

"I am in most ways an anomaly," he avers. "I borrowed relatively little. I was lucky enough to find a few below-market buys, and I do 95% of my own work. In short, I've never done one of the sexy ways people envision doing real estate."

Like most serious real-estate investors, Mr. Friedman is the classic millionaire next door -- that famously frugal, unassuming, invisible, yet quite well-to-do American who bears none of the vulgar, clichéd trappings of wealth displayed in TV infomercials. You could do worse than learning from someone like that as you try to step into the real-estate business.

Places to Look for Financing

Here are a few money sources you can explore for your real-estate buys:

Banks and mortgage companies: Usually, you can borrow for smaller properties (buildings under five units) through the residential-lending departments. If you also plan to live in the property, you will likely qualify for loans of 90%, or even more, of the purchase price, and interest rates will be lower. Larger buildings and other commercial properties are handled through "commercial lending" departments.

Partners: Fifty percent of something is better than 100% of nothing. Consider enlisting a partner to raise the capital you need to get an attractive property. If both of you put up equal amounts of money and equally participate in managing the property, you will both be entitled to 50% of the income and the appreciation. More likely, however, is a partnership in which you do most of the work and your partner puts up most of the money.

Friends and family: Just some cautionary comments here. You can't choose your family, but, fortunately, you can choose whom you do your business with. An "Uncle Al" interest rate inevitably comes with Uncle Al's interest in your business.

Private or "hard money" lenders: At best, private lenders can make deals happen when no one else can. At worst they are Tony Sopranos. These loans are usually approved within days and are often funded in two weeks or less. But the costs will be quite high. Interest rates in the teens are not uncommon, and the lender may require 5% to 10% in upfront "discount" points.

Sellers: It's quite common to have a seller "take back" 5% or 10% of the purchase price and carry it as a second mortgage for a few years. You can expect fairly low borrowing costs and few hassles, but the seller likely will insist on a higher price if he agrees to lend you money. Investing truism: "His price, your terms; your price, his terms."

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