- The Washington Times - Wednesday, August 27, 2003

During a hot real estate market, proponents, present company included, can get a bit carried away about all the benefits of owning real estate. Sometimes, we forget to warn readers about the potential downsides of real estate investing.

Unfortunately, to be honest, when real estate drops, it can hurt big time.

If your stock portfolio drops, you’ve lost mostly paper value — unless you were about to cash out — then you’ve lost hard cold cash. In real estate, an investor could be in a very hot market but still have to put out money to keep the portfolio in marketable condition.

When the renter calls, you’re the one on call. That means you must be ready with a repairman and the funds to pay for any breakdowns. A water heater alone is a $600 problem — and that’s assuming there weren’t any leaks involved that ruined flooring or dripped down to a neighbor.

Hopefully, with your real estate investment, you have a positive cash flow.

The first thing you should fund with this is a home warranty. Home warranties cover the house for unexpected breakdowns. They run from $250 to $500, depending on the policy and what protection you want, but they are well worth it.

Most home warranties come with a per-instance deductible — usually about $100 — and some require you to pay a service fee to a pre-approved vendor.

Nevertheless, it’s well worth the investment when you consider the cost of replacing a big-ticket item, such as a heating or cooling unit. Keep in mind, however, that there are plenty of provisos and limitations to these warranties, so read the fine print.

The prudent investor will build up the monthly surpluses in preparation for the day some other big repair rears its head — such as a leaky roof, broken appliances or electrical problems.

Depending on your lease, the renter should be responsible for daily wear and tear items, such as light bulbs, yard maintenance and overall cleaning of the dwelling while they’re in possession of it.

Here’s a tip: Either you or your manager should be responsible for changing batteries in the smoke detectors, for a couple of reasons.

Many times, tenants think this is a troublesome task — you want to make sure they and your investment are properly protected by the detector.

Second, industry standards dictate that the battery should be changed during time changes in the spring and fall. This gives you the opportunity to check out the property at least that many times each year to make sure the investment is being properly maintained.

Other expenses the investor will encounter come from just regular living expenses, such as taxes and homeowner fees. In between renters, you’ll also have to fork over money for utilities and insurance to cover the property when it’s vacant. (By the way, you’ll need a homeowners policy on the property, as well, just to cover your investment in case of fire or flood.)

For investors who bought in a hot market, they could easily have the rents drop to where the market rate is less than the monthly mortgage payment. There’s nothing worse than $750 in rent coming in, but $1,000 required by the mortgage company.

Even if the rent is right and the mortgage is low, you could run into cash flow problems when a renter you let in your dwelling is actually a deadbeat and doesn’t pay his rent, much less all the other bills. Depending on where the property is located, the tenant laws may lean in their favor, making it nearly impossible to evict them without a legal battle.

As you can see, there are some downsides to investing in property where only good research and reading can protect you.

M. Anthony Carr has written about the real estate industry for more than 14 years. Reach him by e-mail ([email protected]erols.com).

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