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Published May 2002

Patience, initiative pay off in property market

Most people who have had some success with investing in real estate started with practically nothing. They often put together just a few thousand dollars to buy their first income property. Some put their money together with friends or family and bought in that way.

Regardless of the source of initial investment capital, there are a few different routes to go once you decide to jump in.

The “go it alone” route often takes about $10,000 to $20,000 minimum in order to buy into your first rental property in the Puget Sound market. Buying into an owner-occupied rental property can provide the highest loan-to-value ratio and might make the down payment requirement even less.

Under this approach, you would live in one unit and rent the others. Most such debt vehicles require you live in one of the units a minimum of six months, though, so there’s a lifestyle you need to be willing to live with this approach.

I’ve seen dozens of successful real estate investors who started this way. Most ultimately sell their first rental and roll-up (tax deferred) via an exchange to another, larger one.

Buying foreclosed-upon properties is one variation of the go-it-alone route, but there are nuances to that approach that can cost you big if you make a mistake.

Most commonly, investors seem to take the “team up” approach whereby they might pool their starting-out money with family members, friends or through structured private investment groups. Your portion of the returns depends on your share of the initial investment. But for some investors, this is more attractive, as pooling funds with others allows them to buy larger properties and enjoy economies of scale on the operating side — including hiring professional management — that make the investment more or less a passive one.

Made popular in the 1990s, Real Estate Investment Trusts (REITs, pronounced “Ree-its”) are as easy to invest in as any publicly traded stock in most cases and are another approach entirely.

REITs are pooled funds that own, collectively, a portfolio of properties. Many REITs are publicly traded on the major exchanges. Call your stock broker, and you can place as little as $500 in a REIT this afternoon and have it working for you. It’s that easy. Publicly traded REITs are far more liquid, of course, than ownership in an individual building, and that feature alone often attracts investors to this vehicle.

One common thread among income property investors is an affection they seem to have for owning something tangible. There’s something comfortable, evidently, about owning “sticks and bricks.” As a seasoned investor once shared with me, “With real estate, I know where my money is all the time. I can drive by and touch it.”

But perhaps the most common trait of successful real estate investors is their initiative to get started and their patience once they do. At some point, they took a chance and jumped into their first income property. And many kept “rolling up” from one property to another, gaining leverage on the market and building equity along the way with tax-deferred capital gains.

Initiative and patience. These character traits sort of oppose each other at an intuitive level. Yet the combination of the two often is the key to success in income real estate, no matter which approach you take.

Tom Hoban is CEO of Everett-based Coast Real Estate Services, a property management and real estate advisory company specializing in multi-family and commercial investment properties. He can be contacted by phone at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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