Real Estate's New Reality

For patient investors there's income to be found.
Magazine Contributor
4 min read

This story appears in the July 2009 issue of Entrepreneur. Subscribe »

We've seen the infomercials and watched the reality shows. Some of us have even read the books and attended the seminars.

But does investing in income-producing real estate--long touted as the place to be for long-term growth and financial independence--still make sense after the beating the real estate market took last year and, in some parts of the country, is still taking now?

Hot properties: Where to look for real estate guidance A list of real estate investment clubs User ratings on books and courses

The Advanced Guide to Real Estate Investing, by Entrepreneur columnist Robert Kiyosaki For the bloggers' viewpoint

Mastering Real Estate Investment, by Frank Gallinelli
I think the answer is yes, and I'll tell you why. Think of income-producing real estate as a bond that pays you interest. As long as the property has a rent roll that kicks off enough cash (after you pay your mortgage, taxes, insurance, repairs and other operating expenses) to provide you with a decent ROI, you're in the clear no matter how much the property's value may fluctuate in the meantime. As long as you're prepared to hold on to the property for the long term, you won't get burned like those speculators who bought houses when the market was hot and tried to flip them at a profit.

"The first thing you need to do is ask yourself if you're doing this to create long-term wealth or make a short-term killing," says Frank Gallinelli, president of RealData Inc., a software company that provides analytical tools for real estate investors and developers, and the author of Mastering Real Estate Investment. "You can't treat real estate like an IPO stock that you buy after breakfast and sell after lunch."
The key to making money in real estate, Gallinelli says, is to analyze the property's expenses and cash flow to make sure that you buy it at the right price. It's also important to factor in the

location and property type, as well as how much cash you can afford to put in to the deal and how much financing you're likely to need to close it. One of the biggest mistakes first-time real estate investors make, Gallinelli says, is buying a single-family home and renting it out in the hope of making a profit and gaining long-term appreciation. Because the price of residential properties is typically based on "comparables" (the selling price of nearby homes) and not on cash flow, you'll probably end up paying a lot more for the house and may see the value of your property plunge if the local market slumps.

That's why the quickest and easiest way to make money in income-producing real estate is to not buy a home, fix it up and flip it, but to find a seller who's owned a building for many years and is charging his tenants below-market rents. This way, you can come in and raise the rents, find new tenants and increase the value of the property by boosting its income stream. The downside is that you'll need to be prepared to cover any vacancies in the short term. Another alternative is to leave the current tenants in place (even though they're paying lower than market rents) and sign them to shorter term leases, usually one year instead of the usual five or 10, to ultimately replace them with tenants willing to pay more. This way, you lock in a steady stream of cash flow.

What types of opportunities does Gallinelli see now? Apartment buildings, for one, and off-campus housing (near major universities) for another. There are even pockets of opportunity in distressed markets like Florida and California.

So roll up your sleeves and start doing your homework. There are opportunities in every market--you just need to find them.

Rosalind Resnick is founder and CEO of Axxess Business Consulting, a New York City consulting firm that advises startups and small businesses, and author of Getting Rich Without Going Broke: How to Use Luck, Logic and Leverage to Build Your Own Successful Business. She can be reached at rosalind@abcbizhelpcom or through her website,
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