Real Estate Investing: 'Not for the faint of heart'

Traditional investors hunting for better returns on their money should be cautious about venturing into income-producing properties, says an experienced real-estate investor.

Real-estate investing can have a strong upside. Buying a house or other income-producing property can produce a steady stream of rental income and result in financial-leverage advantages and tax shelters. Buyers of such properties can manage their risk more effectively if they are aware of the potential problems and pitfalls that come with such investments, says Ed Hokanson, a professional real-estate investor in the Grand Junction area with more than 30 years of experience.

“It’s a fairly sophisticated thing for somebody without experience in real estate,” Hokanson says. “It’s not for the faint of heart.”

Hokanson says investors shouldn’t buy real-estate with the expectation that the property will take care of itself. On the contrary, owning rental real estate can be a time-consuming job that requires strong management skills and even a little handyman knowledge. Those might be obvious requirements for investors who manage properties themselves, but investors who hire property management companies to run their rentals must know how to “manage the manager,” Hokanson says.

In fact, he suggests that investors manage properties themselves for two years before hiring a property manager so that they become familiar with the issues they will face as owners of income-producing property. In addition, the more you know about the property you own, the more efficiently you can manage that property and maximize your returns.

Another suggestion from Hokanson: “Don’t buy junk.”

Although foreclosed properties can seem like great bargains, many of them have sustained a significant amount of damage, courtesy of the former owners who defaulted and either neglected or trashed the property before leaving. Such properties can cost investors large sums of money to repair, and there’s no guarantee that more problems won’t appear.

The better investment properties tend to be existing homes or multi-unit complexes that have been kept in good shape and have stable tenants, or new properties that have warranties. Hokanson compares the process to buying a used vehicle: Most people would rather buy a high-quality used car or a new car, rather than a damaged car that requires continuous repair, and the same concept applies to the purchase of investment properties.

Hokanson says real estate can be an effective way to diversify an existing investment portfolio, but he suggests that investors make sure they are comfortable in the role of landlord before they put money into income-producing properties. That means they should be willing to take phone calls from tenants and should be prepared to handle the problems that can arise with buildings, from sewers to roofs and everything in between.

“People still need to know something about real estate before getting into it,” he says. 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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