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."
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
Sklar admits he's already
hit his share of speed bumps.
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."
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,"
"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.
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
other assets, value is cyclical.
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.
days, Kiyosaki says, "I am a seller, not a buyer."
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.
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?
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
First, it put pressure
on her daughter to be the go-between for the tenants, the landlord and the neighbors,
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
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).
betting on the price going up, you might as well bet on the Super Bowl,"
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.
is a freelance writer based in Atlanta.