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Real estate investing: Profitable but risky game -- Page 2

It's also accessible for a large segment of the population, says Poorvu, also a professor emeritus of real estate at Harvard Business School. "That's the point about real estate," he says. "The ease of entry for almost anybody makes it a very attractive investment medium."

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The dark side of real estate
Like all assets, real estate has a down side. Buying a home is never as easy as picking up stocks or mutual funds.

Sklar admits he's already hit his share of speed bumps.

The first house he bought had four bedrooms and two baths. But the county appraisal records showed it had only two bedrooms and one bath. "It was a huge obstacle, and it was messing up the financing," he recalls. "I remember at the time we were totally stressed about it."

Another house almost didn't close because the finance company came in at the last moment with a much higher rate than promised. "They hadn't shopped it as an investment property," he says. "They had shopped it as a residential property."

Sklar quickly switched lenders and closed on time, "and it ended up being a better deal than the original," he says.

"You learn something with every deal," Sklar says. "You almost expect some sort of event to happen and learn not to worry about it."

Another challenge for investors: Real estate is not liquid.

"The problem, from an investment point of view, is these investments are lumpy," says Guttentag. "They have their money tied up in one asset. And a catastrophe could hurt them badly. The market could turn down in a neighborhood. They are not diversified."

And, like other assets, value is cyclical.

"My point of view is that the people getting into the market are late to the party," says Robert Kiyosaki, co-author of "Rich Dad, Poor Dad." "The most dangerous times are when times are good." Real estate, like a lot of other assets, tends to move in cycles of about 18 years, he says.

These days, Kiyosaki says, "I am a seller, not a buyer."

Buy at the wrong time, like the height of the market, and "you can be stuck for a very long time with a very low return," Poorvu says. Or if an area is decimated by an economic downturn or a big employer goes under, "you can be stuck for a long time with a mortgage" on a property you can't rent, he says.

Real estate also includes a human equation. "You're not buying a bond," says Poorvu. What if tenants can't or won't pay? Or if they trash your property before you can get them to move?

Pat Vredevoogd is a real estate agent and an investor. She bought her first property to lease to her college student daughter and three friends. And while it was a great situation for both, "there were some issues," she says. "It's not Cinderella land."

First, it put pressure on her daughter to be the go-between for the tenants, the landlord and the neighbors, she says.

And in a community not accustomed to rentals, neighbors weren't always understanding. Each of the four girls had a boyfriend and sometimes there would be eight cars in front of the home, which would set off the neighbors. They "would call and say 'They're renting to more than you should. We're going to send the city out.'"

After her daughter and her friends graduated, she rented to a doctor and his wife. "The neighbors loved me then," Vredevoogd says with a laugh. Eventually, though, she got weary of the upkeep responsibilities and sold the house. A vice president with AJS Realty in Grand Rapids, Mich., she still has another home in Florida, which she rents for three months a year, and a resort condo in Colorado.

"I am a big fan of diversity in your wealth building portfolio, and real estate is a big piece of mine," says Vredevoogd, who also is the 2006 president elect of the National Association of Realtors.

But she finds that many potential investors change their minds once they crunch the numbers. "I make sure we sit down and talk about resale, school districts and rentability," she says. In her area of the country, the rental rate is down. "With interest rates the way they are," she says, "people can buy."

While Kiyosaki looks for properties that will support themselves, he also wants an escape route. One example: he owns a building of apartments that generate a monthly income. But he also knows that he could take them condo and sell each for almost $100,000 above the current value. So he has a contingency plan.

Kiyosaki makes a distinction between investing (when buyers improve the property, change the zoning or market it to produce a steady stream of actual income) and speculating (when buyers hang onto the home, hoping it will increase in value while making money only on paper).

"If you're betting on the price going up, you might as well bet on the Super Bowl," he says.

In real estate, today's plan might not work tomorrow, says Kiyosaki. "Your strategy has to change with the market. This is what people don't understand," he says.

Dana Dratch is a freelance writer based in Atlanta.

-- Updated: July 18, 2006
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'05 Real Estate Guide
30 yr fixed mtg 3.56%
15 yr fixed mtg 2.76%
5/1 jumbo ARM 3.26%
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