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I was interested in this because I am thinking about buy a property this summer.

Real Estate has peaked according to most experts, so I guess you shouldnt look for any big year to year gains. But what if you are investing for the long term-say 15 years or more?


Contrarian advice: Invest in real estate now
Thursday March 29, 6:00 am ET
Kamil Skawinski


Real estate has its market cycles like any type of investment, and lately it's been getting bad press. Investors may have second thoughts about putting money in this asset class right now, what with all the talk about a bursting housing bubble, the glut of unsold condominiums and homes, declining property values and the growing number of foreclosures.


But there's still a buck to be made in real estate, even in good and bad economic times. Everybody has to live somewhere, work somewhere, shop somewhere -- and someone has to provide them with space in which to do those things.

In fact, the depressing news may mean that this is an opportune time to get into real estate.

"Owning some paid-for, income-producing real estate, in addition to having a solid portfolio of other investments, can be a very good thing," says radio talk-show host Dave Ramsey, best-selling author of "The Total Money Makeover."

For investors willing to invest for the long term, owning properties "can be a path to financial freedom for many," says Ramsey, adding that it has to be done right. "It's a horrible investment when done wrong."

Single-family homes vs. multi-family units
Single-family homes make good first properties because they don't entail the same hassles and headaches associated with multi-unit apartment buildings.

"Single-family homes, which can be easily turned into rentals, are also much more affordable than, say, multi-family units such as duplexes, triplexes, and so on," says Robert Sheehan, consulting economist for the National Apartment Association.

Home sellers are now also more realistic with pricing, so the current housing market offers a lot more choices for buyers, who can get better values for their money, says Thomas M. Stevens, president of the National Association of Realtors.

"Sellers are also offering lucrative incentives, thanks to the greater competition for buyers," Stevens says. "Buyers today can often have the seller pay for things like closing costs, remodeling expenses, condo fees, etc., so buyers can look forward to not only lower prices but also lower expenses and costs associated with the purchase of a property."

Of course this doesn't mean you shouldn't consider buying a rental property that can be both your home and an investment property.

"A properly purchased duplex or triplex can also be a really good way to get started," says Ramsey. "You can almost live there for free in many cases. The biggest downside, however, is that ... there's not going to be as much of a retail market for that type of a property as there is for the single-family house with the cute little 'Leave It To Beaver' picket fence around it."

And then, of course, there's the issue of having your tenants living just on the other side of the wall.


Rewards of buying "right"
Not every property will have what it takes to be a good revenue producer. To find the most promising prospects, it's critical to work with an agent who knows your target market well and who has a long record of experience with investment real estate.

"Without the assistance of a savvy, experienced professional, finding a good investment property is like going out into the investment world and picking stocks completely at random. That could wind up being a costly hit-or-miss proposition," says Jim Geracie, a real estate marketing and investment professional with Realty Executives Integrity in Brookfield, Wis. "You need someone who'll sit down with you, look at a potential investment property, and discuss its possible strengths and weaknesses in terms of valuation and revenue generation."

Jack McCabe of McCabe Research and Consulting in Deerfield Beach, Fla., says savvy investors can make tons of money if they buy right, which means that they have positive cash flow, some equity, ample liquidity" and they're not leveraging to try and buy these things."

"There's something about real estate that most real estate people by and large just do not get: debt equals risk," says the real estate analyst. "More debt equals more risk. So, I'd advise that individual investors approach this changed market with care."

Rental rates on the upswing
For those prepared to take the plunge, the good news is that rents continue to improve.

Last year, rental rates rose more than they had in recent years. "Overall, the increase was around 3.5 percent, and that's the highest rate of increase since the late 1990s," says Sheehan, who predicts that rent growth in the year ahead will likely move in line with or slightly above inflation.

Over the long term, the rental housing market looks set to benefit from changing demographics, too. In several years, for example, retiring and downsizing echo boomers (children of baby boomers) are expected to be in the market for rental units.

Investors who have a sufficient equity stake and who are able to hold on to their properties for a minimum of three years can also look forward to substantial gains in property values once supply and demand come back into equilibrium in the real estate market, says McCabe.

"Some of the markets that are going through major corrections right now are also going to be among the same ones that'll go through a big appreciation surge, once we get through this current cycle," he says. "And for the longer term real estate investors, there's going to be some incredible fortunes made."

Hands-off investing
Not everyone wants to be a landlord, a role that requires dealing with tenants and late-night phone calls about leaking pipes, backed up toilets and broken-down furnaces. For those who lack such mettle, other real estate investments exist.


Real estate investment trusts (REITs) are one alternative. These are publicly traded stocks of companies that own and often manage several commercial properties. Because the asset class has little correlation with other common stocks, they provide diversification in a portfolio.

However, REITs do have their ups and downs.

The individual investor who wants some exposure to commercial real estate today, for example, would do well to choose a REIT mutual fund in lieu of an individual REIT stock, says John Coumarianos, a fund analyst at Morningstar. "Something like the Vanguard REIT Index Fund would be much more appropriate because it is a much more diversified investment."

Although they work like a mutual fund in that they are usually a holding of a group of managed properties, individual REITs tend to be quite specialized in the assets they own. For example, some focus on apartment buildings, others on office buildings, hotels or shopping centers. As a result, REIT stocks can be more vulnerable to cyclical economic forces as well as those of supply and demand.

Coumarianos says individuals should consider having a small percentage of their portfolio invested in REIT funds, and he cautions new investors against making any large investments today, given the spectacular performance these investments have enjoyed in recent years. They've gained 22 percent a year on average over the five-year period through March 9. Many REITs have now become overvalued, and there's a high likelihood that many could be in for a correction this year. In addition, he says, "the yield for the whole index is, right now, less than that of the 10-year Treasury."

REIT funds shouldn't comprise more than five to 10 percent of an investment portfolio. Coumarianos suggests investors buy into a REIT fund very gradually -- "dollar-cost averaging and only buying on dips." Conversely, should you already own REITs that enjoyed a multi-year run-up in value, he recommends rebalancing the portfolio so that the exposure to real estate is back in line with your originally set asset allocation.

Also, he reminds investors that the yield from REITs isn't tax-advantaged or taxed at the 15 percent rate, so these investments are best held in a tax-sheltered account such as an IRA.

Owning a piece of a skyscraper
Investing money in a tenant-in-common (TIC) property is another alternative some might want to consider, says Tom Milana, CEO of Milana Real Estate Investing Group. "TICs provide a way of owning institutional-grade real estate, with attractive income and appreciation potential, at a price investors can tailor to their individual needs."

Tenant-in-common properties are a relatively new phenomenon, one that weaves together the complex worlds of commercial real estate, securities, finance and law. First offered by a small group of companies based in southern California in the 1990s, TICs have gained popularity thanks to a favorable Internal Revenue Service procedure ruling which recognized a TIC as real estate, not a partnership. That ruling paved the way for TICs to be used as 1031 exchange properties. In her book, "Effortless Cash Flow: The ABC's of TICs," Kathy Heshelow said there were more than 70 sponsored TIC offerings nationwide in 2006.

These properties provide investors with passive cash flow, without the headaches associated with active property management. For a base investment of $100,000, TIC owners enjoy not only the full advantages of real estate ownership (including tax-sheltering and appreciation), but access to otherwise unaffordable properties such as office buildings, shopping centers, apartment complexes, assisted living facilities, golf courses, hotels or even industrial properties in various geographic regions.

Geographic diversity is important, notes Milana, because while some real estate markets will offer investors a great deal of value, growth and income generation this year -- notably North Carolina, South Carolina, Alabama, Texas, Tennessee and Montana -- others will remain flat or continue correcting for perhaps the next three years. " And you have to look beyond your own neighborhood for performance, because not every region will be done correcting in 2007."

Although TICs can be a viable alternative to owning a real estate property on your own, prospective investors need to be careful. They can be terrific long-term investments for those with an adequate reserve of capital and an understanding of the risks involved, but they're inappropriate for short-term, risk-averse or cash-poor investors.

Unlike stocks, TICs by nature are illiquid. You can't decide today that you want out and get your money tomorrow. And currently no secondary market for the sale of TIC interests exists. Also, should the real estate market go soft (as is the case in many parts of the country), the income these properties generate could be greatly reduced due to a loss of tenants.

Financing issues and management problems, too, can negatively impact a TIC investment during difficult economic times, and since all co-owners have a voice in decision-making, reaching a consensus in the midst of adversity could prove both challenging and costly.

Finally, as is true of every complicated investment "one must do a lot of homework, since they can be promoted by some really questionable hustlers," cautions Sheehan.

That said, the benefits of real estate ownership are plentiful, whether you are in the market for hands-on or hands-off investments, and whether you're looking for income or capital appreciation potential. But it's always important to examine and fully understand what you're getting into before signing any documents or writing any checks.