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Real Property, Real Returns

Keep in mind that single-family homes require hands-on management, and so are difficult to run from afar. Also, make sure you’re okay with being a landlord.

“Some people aren’t cut out for it,” Huettner says. “They don’t feel comfortable telling someone they’re behind on their rent.”

Another potential downside: cash flow is all or nothing. If you lose your tenant, it drops to zero.

Residential: Multifamily

Apartment Building

On the other hand, if you have 20 tenants and one moves out, you still have 19 others paying the rent, Isaksen says.

Other pluses of investing in this category: your rentals are all in one location, so there is one lawn to mow and one roof to repair; if the property is large enough—over 80 or so units—you can hire a professional manager.

“Then you’re not in the landlording business—you’re in the property ownership business,” Isaksen says. “You’re not getting called at two in the morning to fix that toilet.”

On the downside multifamily properties are often more expensive than single family homes, and the financing is different.

For one, loans are based on debt service ratios—an assessment of the cash flow rather than an appraisal of the resale value. There are more financing options for loans over $1 million, Huettner says.

Local bank loans will typically be portfolio loans, and be 10- to 15-year fixed rate loans, which means high payments, or 20-year loans with balloon payments.

Commercial

“A lot of the residential investments on the market are foreclosures,” says Tim Grizzle, author of Creating Wealth in a Turbulent Economy, a CPA and a commercial real estate broker, registered investment advisor. “I just don’t want that karma.”

Another reason he invests in moderate-sized commercial properties is that the rents are generally higher than with residential properties.

Lending for commercial properties is based on the income the properties produce.

Winterizing Your Portfolio - A CNBC Special Report

“Generally the income the property produces needs to be 1 1/4 times the debt service,” Grizzle says. Financing can be difficult to obtain these days, but private investor groups are a common option. “Basically you call everybody you know and ask if they know anyone who has money to invest.”

When seeking out potential properties, research local market dynamics—the commercial real estate saw is, “Retail follows rooftops.”

Shari B. Olefson, author of “Foreclosure Nation” and an attorney with Florida-based law firm Fowler White Boggs, suggests strip shopping centers as an investment.

Though retailers are not doing well currently, grocery stores, discount stories and drugstores are.

“Look for a local strip venture that you’re familiar with and has local businesses that people use and need,” she says. Also be aware that they need to be renovated every five to ten years.

But no matter what you’re considering, don’t be afraid to walk—for any reason.

“The best investment decisions are usually the properties that you turn away,” Huettner says. “There will always be other great deals.”

 

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