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Guest-host Leonard Baron, a real estate professor at San Diego State University and principal of LPB Services, a real estate consulting firm, tackles your real estate questions today as part of Savvy & Sage: Tips on Buying and Selling in 2009.

Reader Mike asked:

My wife and I are considering adding real estate to our investment portfolio. I’ve often thought that if we owned rental properties, that we eventually paid off, they could be viewed as virtual pensions. We contribute to 401K’s, but I feel that we need more diversity.

I’ve read several arguments about the stocks vs. real estate rate of returns. The argument usually goes that over time, stocks blow away real estate. But what seems to never be mentioned is the leverage factor in real estate. …

My gut tells me that real estate is the place to be (assuming the numbers work out). I’ve known several people who do own rental properties, and they all say they’ve done well over time, and would do it again.

Hi Mike,

One great thing about real estate is that it forces you to save money. Real estate can be a great asset to hold and yes it can provide significant cash flow upon retirement — but stocks, bonds, and cash generally do not have clogged and overflowing toilets, tenants who leave without paying rent, and other real estate issues.

Owning real estate as an investment, I personally believe, is a great long-term bet. But it is hard work. The question you need to ask yourself is, “Am I prepared to commit to these potential issues?” I personally enjoy, most of the time, working on property and do not mind dealing with these issues — but I am getting better at calling someone else to fix stuff these days.

Let’s look at it this way: If 25 years ago, you bought five moderately priced condos (over a five-year period) just about anywhere that moderately priced condo are in town, they’d be paid off today — no mortgages. You would pick up the average $1,300 per month in rent and pay the average $200 homeowners association fee, $25 insurance and $100 maintenance/reserves.

That would leave you, in today’s dollars with $1,000 per property X five properties X 12 months = $60,000 per year. To get there, you would have had years of hard work, some major “issues”, many expenses you never dreamed of, and did I mention the hard work?

But, honestly, what isn’t hard work? I think retiring with little or no recurring income is probably a lot harder work than retiring with $60,000 recurring income that should grow each year just a little.

Luckily, it is a great time to buy cash-flowing properties. (More on this from a previous post.)

Real estate has lots of risks, but you can dramatically reduce, but not eliminate, your risks by doing your due diligence and working hard managing it:

  • penciling out your deal — rents, expenses, vacancy in the area
  • analyze the HOA financials and disclosures if a condominium
  • prepare an accurate and conservative budget for any remodeling work needed for the property
  • keep it in good shape and get quality tenants and deal fairly with those tenants
  • read your loan documents before you buy (and title insurance the purchase docs)
  • learn about and have adequate insurance and the right coverage for your risks

Doing all that is hard work and time consuming — and few people know how to or actually do that — but a potential $60,000 per year in retirement income should be enough inspiration to make you want to cover your backside along the way.

Oh, and leverage, which means borrowing a portion of the purchase price via a mortgage — so not paying all cash — juices your returns (that is rule #1) on cash-flow-positive properties and really can actually reduce your risk overall. Plus it allows you to buy more properties to diversify and make more money.

If you have more questions for Leonard Baron, please leave a comment below or send an e-mail to kelly.bennett@voiceofsandiego.org.

— LEONARD BARON

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