Expert Advice - June 2007

Investing in Real Estate

Risky but Rewarding

by Soozi Jones Walker

We have recently heard about homeowners and investors who have had notices of defaults filed against them due to interest-rate adjustments, and 100 percent financing placed on their homes and investment properties. While it would appear that the sky is falling, in fact, this is just a small percentage of the total loans funded throughout the country in the past few years. Many assume the bankers and lenders are wearing the black hats, while others place the blame on borrowers for over-extending themselves. Still, others are blaming the brokerage community. As a result, the government is looking at enacting more laws that will protect property owners.

Investors raced into the market over the past 36 months, day-trading homes, land and investment properties the same way they day-traded stocks before 2000. The character Gordon Gecko, played by Michael Douglas in the film Wall Street, summed it up when he said, “Greed is good.” But where does common sense enter the equation?

Investments, whether they are a principle residence, income-producing property or land speculation, all have a level of risk. The higher the return, the higher the risk. At which point are you willing to loose it all? Investors should review a checklist before committing to an investment even if a lender approved the financing, and make sure they are financially able to accept the risk associated with the commitment. That checklist should include the following:

• Cash in bank: Do you have at least three months expenses to cover vacancies and repairs?

• Using equity from home: Should the investment turn sour, will it affect your lifestyle and that of your family?

• Due diligence: Have you thoroughly researched the area where you are about to invest, or are you relying on other parties’ opinions, rumors or compared pricing, which may or may not compare due to location, taxes or available jobs?

• Borrowing funds: Will the payments cover principle and interest or is it interest-only loan, or even a negative amortization? If the loan is growing and the property is not appreciating, it may cause the investment to cost you equity over time, thereby raising the risk. What is the term of the loan? Is it due in just a few months or years? Is your decision being made strictly for short-term appreciation? What effect could the ownership have on your credit score?

There are no guarantees when investing. Real estate is typically not considered a liquid investment. Financial gain is usually forecasted over a five-, 10- or even, 15-year span. Real estate is cyclical, if you do not cover all your bases you may be caught buying high and selling low. After you have reviewed the checklist, consider ethics.

• Are you being fair to yourself and your family?

• Are you committed to make every payment on the property, no matter what happens with the value?

• Do you feel as though you are taking too much risk?

• If you are the broker – do you speak up if you think your clients are over extending themselves, or do not understand the downside risk?

• If you are the lender – do you speak up if you think the buyer is overextending, or does not understand the down side risk?

Real estate is an outstanding investment, however, time is a requirement to maximize its value. Hopefully, you choose wisely.

Soozi Jones Walker
Soozi Jones Walker, CCIM, SIOR, is corporate broker and president of Commercial Executives Real Estate Services in Las Vegas