Get into real estate

Sure, real estate is your job, but is it also in your investment portfolio? These REALTORS® are putting their money where their knowledge is.

by Scott Williams   Richard Thompson still remembers the day he realized what a great investment real estate could be. It happened when a client who had paid a $1,000 down payment on an $8,000 land purchase sold it a year later for a $1,400 profit.

After the man left, Thompson, a REALTOR® who lives in McKinney and now serves as divisional vice president for United Country Real Estate, turned to his broker and said, "That’s a pretty good return on that $8,000 investment."

"No," said his broker, quickly correcting him. "You got that wrong. That was a $1,000 investment."

Despite a year’s worth of loan payments and other costs involved in the deal, the $1,400 represented a substantial return on that initial investment.

It wasn’t long before Thompson began doing what many other REALTORS® do: using his extensive real estate knowledge to invest in property.

Whether your experience lies in rural land, single-family homes, duplexes, apartment complexes, or commercial property, you can employ your skills and knowledge as a real estate professional to locate profitable investment opportunities.

Divide and conquer

In Thompson’s case, he knows rural land and uses his 25-plus years in the real estate business to decide whether or not to purchase property.

"I have to make decisions pretty quickly ... a lot of times when I’m standing on the property," he says. "I know whether it’s a good buy or not. I understand raw land pretty well. It’s what I do, so I try to invest in what I do for a living."

Thompson, 50, follows simple criteria when considering a potential land purchase: He looks for property he can divide and sell for twice what he paid for it. For instance, he might buy a 100-acre tract, divide it into six pieces, and make limited improvements before selling it for a profit.

"There are a lot more people that can afford 14 acres for $3,000 an acre than can afford 100 acres at around half that per-acre amount," he says. Thompson also offers financing that is a couple of percentage points higher than he paid to buy the property and pays off his debt before collecting any profits.

"I look for properties that have a lot of road frontage, so I don’t have to build roads, and I might put a water line in, but I don’t do a lot of developing," he says.

Although multiple transactions can be more profitable, Thompson says he doesn’t push himself to be involved in several transactions at a time. "If you think you have to buy property to create inventory and start forcing it, it’s a lot easier to make a mistake," he cautions. "Wait until you know that it’ll work. If you have to talk yourself into it very hard, it usually won’t."

Single-family tuition payments

Kendra Sutherland, a REALTOR® with John Nelson Real Estate in Lubbock, and her husband, an architect, own 16 rental properties in the Lubbock area. Most are single-family homes, with one 12-unit townhome building thrown into the mix. Sutherland, who learned how to invest in real estate from her father, John Nelson, prefers single-family homes because they’re more popular in Lubbock.

"I can always rent a three-bedroom, two-bath house here and never have it empty," she says. "I think most people would rather have a house with a yard rather than a duplex or an apartment."

At John Nelson Real Estate, Sutherland, her father, and Caryl Ann Nelson manage 250 rental houses in Lubbock. The Nelsons also own 26 rental properties and are in the process of building another duplex for rental purposes.

Sutherland considers rental properties a great investment. The 33-year-old mother of three children placed all her properties on 15-year notes with the intention of having everything paid for by the time her children begin college. The income from those properties will then be used to fund their college expenses. She believes real estate is a much safer investment than, say, the stock market due to its volatility.

"Owning rental property is a pretty consistent thing as long as you put back into your houses and keep them in decent shape … . They’ll continue to bring in revenue, and every time you rent them you can probably increase the rents," she says.

But there are drawbacks to owning rental property. Some agents don’t want to deal with tenants, and there’s always the possibility that a tenant will move out before his lease has expired. "People need to be able to make a mortgage payment if a tenant up and moves out on them," Sutherland says. "They need to be prepared if the compressor goes out tomorrow. They need to be prepared to sink $1,000 back into the house."

She suggests that one of the easiest and most common ways to get started in owning rental property is to, after you buy a new house, rent out the previous one you owned and lived in–provided you can afford it.

Sutherland invests in rental property for future income and profit rather than trying to increase her current income with immediate cash flow. She also invests in property to benefit from the tax write-offs of property-tax deductions and depreciation. And on some properties, Sutherland is simply satisfied with breaking even.

"I’m not looking at my rental property to supplement my income," she says.

Because two checks are better than one

Bill Kellas, a broker and loan officer for Kellas & Associates, REALTORS® Inc. of Austin, looks for a more immediate payoff. He won’t invest in a property unless he can realize a $300 monthly cash flow.

Kellas, who owns seven duplexes, likes two-family homes because they generate two rental checks each month. "If you purchase this correctly, one check is going to pay the bulk of your mortgage payment," he contends. And if one tenant doesn’t pay, you still have income from the other tenant.

Kellas prefers properties that require very little sprucing up and hires a subcontractor to handle any needed repairs. "I make them the way I would want them to be if I lived there, although I don’t get personally attached to them and I don’t rebuild everything on the property," he says.

Kellas, 48, uses computer spreadsheets and business formulas to determine whether to purchase a property. He advises anyone interested in investing in real estate to ask a lot of questions and make sure they understand the numbers.

"This is one reason I started investing. I started understanding the numbers," he says. "Basically, you need to determine what you would like to realize per month and then sit down and form a game plan to give you what you want to make."

He believes the advantages of investing in real estate are considerable when compared with other investments. Kellas says real estate can generate as much as a 20% annual return, not counting any appreciations in value that take place.

He recommends shopping around for insurance to find a policy that protects you against lost rental income. "You want to make sure you’re not on the hook if something happens to that property," Kellas warns.

Kellas also strongly recommends that you do your own due diligence. "Don’t just take someone else’s word that the taxes are $1,500 a year," he says. "Do your own work because something large like that is going to affect your bottom line."

And don’t get emotionally involved with your properties. "Investors buy cash flows. It’s not an emotional buy, it’s business," Kellas says. "The numbers either work or they don’t; if it doesn’t work for you, walk away from it."

Getting a B or C can be better than an A

Bryan Kaminski, owner of Kamco Property Company in Dallas, also uses numbers to decide whether to invest in property. A real estate professional since 1980, Kaminski, 39, deals in commercial and multifamily properties. He began investing in real estate while working for the Hall Financial Group many years ago, and then decided to form his own company to concentrate on his investments.

"The side investments had gotten to the point where they were becoming the primary focus from both economics and time, and therefore it was not really ethical to continue to work for someone else," he explains.

Kaminski prefers to invest in apartments, because everyone needs a place to live and because apartments are not capital intensive. There’s little lag time between tenants, and generally the only expenses are to paint and clean the carpets. The opposite is true in commercial property, he says, where office space can go months or even years between tenants and often involves expensive remodeling to meet tenant needs.

Kaminski asserts that lenders favor apartment complexes for the same reasons he does, which makes them easier and cheaper to finance. Lenders will finance as much as 90% of the purchase price for apartment buildings, compared with 70-75% for commercial property, and at a lower interest rate. Government programs, such as those provided by the U.S. Department of Housing and Urban Development, Fannie Mae, and Freddie Mac also finance apartment purchases.

"The other advantage to apartments is that most people can self-manage as long as it’s a small-enough complex," Kaminski says. "You have enough business knowledge to take on the management role, whereas something else might be a little more difficult."

He recommends investing in B- or C-quality apartments rather than upscale or D-quality apartments. Kaminski reasons that a limited number of people can afford to rent an upscale apartment, and although more people can afford D-quality apartments, the tenants tend to be more problematic.

"Most people can afford to rent a D-quality, but the type of profile you get is harder on the deal," Kaminski says. "You’ll have more delinquency problems, collection problems, or crime–more external things."

Kaminski says one of the easiest ways to get involved in commercial investments is through single-tenant, triple-net buildings, where the tenant pays all the expenses like repairs, maintenance, taxes, and insurance. This form of commercial investment is easier, but the yields are substantially lower. Kaminski recommends that most REALTORS® establish a business plan and begin by buying houses, duplexes, and, perhaps, small apartment complexes in the 10- to 50-unit size.

"Early on, you should focus and kind of put all your eggs in one basket, because you’re not big enough to diversify," he explains. "Focus on an area of town or product type you’re familiar with, and once your organization gets large enough, then you begin to diversify."

Kaminski cites leverage as another critical factor to keep in mind while investing. Rather than plopping down $50,000 for a single home and watching it go up 10% (or $5,000) in value, take that same $50,000, buy five houses with 20% down, and enjoy a $25,000 appreciation.

Put your ears on

While you can turn your knowledge and experience into profitable investment opportunities, it will take some practice. You didn’t learn how to buy and sell property in a day, and Richard Thompson says acquiring investment skills is a lot like learning how to help clients buy and sell real estate: You have to listen.

If you listen to what buyers want, you’ll eventually spot trends. Once you see the trends, investment opportunities will present themselves.

Scott Williams is a freelance writer in Corpus Christi.

Photo illustration by Joel Mathews; photos © Corbis Images and PhotoDisc.

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