Investing In Real Estate

You don't have to be Donald Trump to make money in real estate. Anyone can be a mini-real estate mogul if you have both the temperament and money to make it work.

With the right real estate investment, other people will increase your equity while you're taking advantage of tax depreciation and price appreciation.

The key to success is to start small, move sensibly and gain experience. So we will begin with the easiest, least expensive investments and move up to the most speculative, most complicated.

Your Own Home
A good way to test the water is with your own home. Rent out a bedroom and bath on an annual basis. Or, if you prefer a shorter term, rent to a professional who has been transferred into the area for a short-term assignment or who needs a place to stay while looking for a house to buy. Teachers often rent. So do writers and artists seeking a Virginia Woolf style "room of their own"—one that is quiet and away from the everyday distractions of their own home.
Don't overlook your garage or storage space.
Or, if you have a very spacious house, you might do what Florence Griswold did in Old Lyme, Connecticut, in the early 1900s. She housed talented painters and sculptors, turning her mansion and carriage house into an art colony.
Before you rent, check your homeowner's insurance policy to make certain you are adequately covered in case your renter has an accident, is injured or for some reason decides to sue you. You may need to take out an umbrella policy.
Avoiding the tenant from hell. Interview prospective renters with someone else present to get a second "take" on the person. Check at least three personal and three business references and then draw up a clearly written lease in which you require one or two months' rent as a security deposit.

A Rental Property
Next on our list of options is buying a two- or three-family home, living in one part and leasing the rest to tenants. Or, if you have adequate resources, you could move directly to buying a single-family house for rental purposes.
Begin by looking for property in your own neighborhood—you know that market best. Other premium rental areas are middle income family neighborhoods and properties near military bases and colleges and universities—people with transient lifestyles usually rent rather than buy.

$Tip: Housing for people with disabilities is always in great demand. Widen doorways to accommodate a wheelchair. Put grab bars in the bathroom, kitchen and elsewhere. Install railings. Even out all floors. Add ramps throughout the house and to the backyard, deck, driveway and front sidewalk.
Expect your lender to require a bigger down payment and a slightly higher interest rate on a rental property than on a primary residence. Compare local offers with those available from Freddie Mac at www.freddiemac.com.
Your property should rent for at least 5 percent, preferably 10 percent, above your total costs. Determine your PITI (monthly principal payment, interest, taxes and insurance), plus the cost of yard and pool service. That's the amount of rent you will need just to break even, provided the renter pays the utilities. Add to that enough to cover repairs, renovations and upkeep. You will also need an emergency slush fund—money for those down times in between renters.

$Tip: Study the "For Rent" section in the paper for several weeks to see what comparable properties are renting for. Visit several. Find out what the competition is offering and charging.
Legal restrictions. In New York City, a building with three or more residential units is considered a multiple dwelling. Owners must register these buildings with the Department of Housing. These owners, however, are not bound by the rent laws and can charge whatever they want. Find out what your community's laws are for residential property, including any rental caps, your right to evict tenants, to reject pets, to turn away someone with children.

Investing to Sell
If you're handy with a hammer, or someone you know is, then buying a single-family fixer-upper and selling it is an option. Start with an inexpensive single-family home, preferably in your neighborhood or within a short drive.
$Tip: Join a real estate investment group. You'll not only learn about local lenders, contractors and real estate agents—including those to avoid—but also how others have made (or lost) money.

Investing in Land
Buying beachfront property with a lake, mountain or river view is often very profitable—after all, there are only so many acres with views left in the country. You or someone else will eventually want to build a house, restaurant or resort on such a choice piece of land.
Nevertheless, land, our most speculative choice, is the one in which many investors get burned. Knowing the potential pitfalls, however, helps clear the way for making smart decisions. Here are the four key things to watch for:
Zoning. You buy land with the idea of eventually building a house or houses or an office building, and the town fathers change the rules, rezoning the area.
The market. The area you anticipate being "hot" several years from now never even gets to lukewarm. In the meantime, your capital is tied up and you're stuck with an annual tax bill.
Disasters. Local officials approve a nearby power plant, dump site or strip mall.
Roads. A major (and noisy) highway is constructed, ruining a bucolic area.
Study the zoning rules carefully. What is the long-term plan for the community or county? Find out about current and future easements, as well as access to water, sewage and electricity.
If you plan to build your own house on the land, be sure you plan to remain in the area and that your employer won't be transferring you across the country.
Land loans. Financing land is expensive. Lenders regard land loans as far riskier than regular mortgages. Because the property isn't being used, the owner is more likely to walk away, leaving the lender stuck with a piece of non-income-producing acreage. Because of this added risk, down payments and interest rates are higher than with traditional mortgage loans. Be prepared to make a down payment of 20 to 50 percent. The most difficult type of land to finance is "unimproved" or "raw" land—land with no plans for sewers, utilities, streets or structures.
$Tip: Local lenders, familiar with the property, are more likely to grant a loan than a lender unfamiliar with the area.

If you find the loan terms too onerous, consider a home equity loan or refinancing your current mortgage. You should wind up with a lower rate since you are securing the loan with your home. Finally, be sure you can afford to pay the taxes on the land long term. You may not be able to re-sell or build as quickly as you initially anticipated.

Before you go down this path..
To be successful as a real estate investor you must:
Have access to cash. No matter what type of property you invest in, you will need deep pockets. You must have plenty of income—from a steady job, a trust fund or other investments. And your credit rating should be impeccable.
Be entrepreneurial. You should enjoy negotiating and making business decisions. Being a mini-real estate mogul is not for the timid.
Enjoy research and fact finding. You'll need to study zoning laws, and trends in housing and interest rates. Many communities have an association of landlords or real estate investors. Join to learn about local laws and regulations governing rental property. Being a member will also keep you in the loop about prices, landlord liabilities and eviction procedures.