- The Washington Times - Thursday, December 16, 2004

Try a Google search for “real estate investing,” and prepare to read — a lot. The popular Internet search engine returns more than 6 million hits on the topic. The same search on Amazon.com returns a list of more than 600 books.

In the Washington area, with home sales measured in hours and days from listing to purchase, real estate investing carries a particular allure.

The statistics and assessments of experts in the field make real estate investment all the more attractive.

The National Association of Realtors recently revised its 2004 year-end home-sales forecast upward, with an expected jump in sales of 7.9 percent to 6.58 million nationwide. The median existing-home price is projected to climb 7.9 percent, as well, to $182,500, and the new-home median price is projected to rise 8.9 percent to $214,600.

The Washington area continues to strongly outperform the national market. And the Realtors group projects next year to be the second-best on record.

If that’s not enough to whet the appetite of a potential real estate investor, a recent report from the Urban Land Institute and PricewaterhouseCoopers pegs the Washington area for its “markets to watch” category, along with New York City, Southern California and Florida in the coming year.

The Washington area is a “government Mecca practically immune to economic downturns,” states the report, “Emerging Trends.”

Whether you are fully engaged in managing your investment portfolio or a passive investor, experts say, real estate investing should not be overlooked as a way to diversify your portfolio.

Still, real estate investing, like all investments, is not without risks.

“It’s very risky,” says area Realtor Frank Llosa. “People are not fully considering the risks. You can absolutely go wrong buying real estate investment property the wrong way.”

So what is the right way?

The first consideration is assessing your risk tolerance. Interviews with area Realtors suggest that the riskiest strategy in the current seller’s market is investment in “fixer-uppers” — the purchase of real estate in need of repair with the intent of reselling at a profit.

The reality is that profits are squeezed out of this type of investment in the current Washington-area market with potential “fix and flip” properties being sold at near what they would sell for in the current market fully restored, Mr. Llosa says.

He says he had one client who overpaid for a fixer-upper by underestimating the costs of improvements and repairs.

Investors are also likely to be pitted against general contractors in the area who specialize in fixer-uppers, says Joseph Himali, principal broker for Georgetown-based Best Address Real Estate LLC.

In addition, if you do not plan on doing the work yourself or do not have the time or inclination to coordinate necessary repairs or improvements to enhance the value of the property, you may find yourself hiring a contractor, cutting into profit.

Mr. Himali says it is almost impossible in the current market to locate suitable fixer-uppers, but they are out there. He encourages investors to buy what they know.

“If you live in Reston, you know the area,” Mr. Himali says. “Look around to see what is available, know what you are looking at, and be ready to move on the property,” including having the necessary financing lined up and prepared to go with no contingencies, such as foregoing appraisals or home inspections.

In general, Mr. Himali says, any time is a good time to make the investment when you can find the right property.

Mr. Llosa suggests that the winter holiday season is an especially good time for would-be investors.

“Buyers are less irrational. There is less exuberance resulting in 10 bids driving up the cost,” he says.

An alternative to putting your investment dollars in the fix-and-flip market is rental property.

The key to rental property, Mr. Himali says, is generating cash flow, when the monthly rent generated by the property is greater than the total monthly costs associated with owning it.

However, positive cash flow is contingent on a number of factors that are best discussed with an accountant or at the very least a visit to the Internal Revenue Service Web site (www.irs.gov), which covers allowable deductions from rental income for depreciation, repairs and operating expenses (Tax Topic 414, Rental Income and Expenses).

If you are planning to rent your vacation property or rent to a relative, there is Tax Topic 415.

The bottom line, Mr. Himali points out, is that after all the numbers are crunched, a monthly payment of $1,000 on a loan for rental property generating $900 a month in rent could still result in a positive cash flow, given allowable tax deductions.

A seller’s market also affects rental properties.

“It’s a lot riskier than people think,” Mr. Llosa says. “Money is cheap right now. There is a major slowdown in getting renters. Everyone seems to be a buyer in the current market. It is harder to rent, as many current renters are joining the buying frenzy.”

Mr. Llosa says he paid “top dollar” for investment property near the Clarendon Metro station, and he says bluntly, “It was very expensive, and I can only hope there is a greater fool than myself that is eventually willing to pay more.”

Another consideration for the rental-property investor is laws governing tenant and landlord rights and responsibilities. These laws differ by state and jurisdiction.

Mr. Himali recommends consulting with attorneys familiar with local laws and requirements “instead of purchasing a lease form off the shelf.”

Picking the right type of financing and loan for real estate investment, Mr. Llosa says, is as important as picking the right type of investment property.

“Debt can be your friend, as long as you know how to manage it,” he says.

Financing options include cash on hand and leveraging the equity of a primary residence to secure a mortgage loan or a home-equity line of credit. A key consideration in loan options is whether the investor is looking to buy property to “flip” (buy and quickly resell) or investing for the long haul in rental property.

Mortgages for investment frequently come with higher interest rates and larger down payments, which make home-equity lines of credit with lower interest rates an appealing option for investors, particularly first-time investors, Mr. Himali says.

Shorter-term adjustable-rate mortgages and “balloon” mortgages are options with the appeal of lower interest rates and are popular among investors engaging in fixer-upper investments, Mr. Llosa says.

Myriad financing options with associated benefits and costs encourage potential investors to explore their options with qualified loan officers and financial advisers to identify the options that best fit their needs.

Yet another real estate investment strategy involves real estate investment trusts (REITs). These are companies that own and, most often, manage income-generating commercial real estate, such as apartments and residential properties, office buildings, regional malls, shopping centers, and a number of other types of commercial properties.

Investors are attracted to REITs because they provide high levels of income and the opportunity for moderate long-term growth, says National Association of Real Estate Investment Trusts spokesperson Jay Hyde.

These “real estate stocks” continue to outperform other equity investments, Mr. Hyde says, and they are required by law to distribute 90 percent of their taxable income to shareholders every year.

“In essence,” Mr. Hyde says, REIT investors are “landlords without the problems, including the calls in the middle of the night that the toilet is backed up or the house needs painting.”

He says many of the area’s office buildings, hotels, shopping malls and other commercial properties are owned by REITs.

Forbes magazine reports that REITs this year have averaged a return of 26 percent, a figure which includes price appreciation plus dividends. This comes on top of a 36 percent return in 2003.

NAREIT’s Web site (www.nareit.com) reports that on Nov. 30, the dividend yield averaged 5.08 percent, based on the performance of 191 REITs. The Web site provides a comprehensive overview of REITs for potential investors.

In the final analysis, there is a lot to consider in weighing the pros and cons of real estate investing. Like many other important investment decisions, it is one best made in consultation with experts: Realtors who have investment-property expertise, accountants, lenders and attorneys.

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