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Real Estate Beckons as Wall St. Stumbles

More investors view rental property as an antidote to financial markets' woes. But don't underestimate the risks.


Michael Rosenblatt has two words of advice for investors spooked by the debacle on Wall Street: real estate.

The San Jose retiree began buying rental properties in the 1970s. The steady stream of income--as well as the price appreciation--has provided a welcome dose of profitability at a time when his other investments are swimming in red ink.

"I have about 55% of my assets in rental real estate," Rosenblatt said. "As each day goes by and I look at the losses in my [stock] portfolio, I am so glad."

Many investors may be ready to follow Rosenblatt's example. The stock market has been falling for nearly 2 1/2 years. Buyers of Treasury bonds have watched the yields on those securities dwindle. Cash accounts pay almost nothing.

Residential real estate in California and other regions, meanwhile, has been racking up double-digit annual gains.

Real estate analysts are debating whether the housing market has assumed bubble-like proportions, ready to pop just when everyone decides prices will keep rising indefinitely.

Even so, for many Americans real estate remains the truest shelter from financial markets' storm.

"Objectively, real estate is a very favorable investment compared to equities right now," said David Lereah, chief economist at the National Assn. of Realtors in Washington. "Home price appreciation is very strong, and it's going to remain strong because there's a lean supply of homes. You also have historically low interest rates. You can use those low rates to leverage your investment and provide an even better return."

Besides owning your own home, there are several ways to invest in real estate: buying shares of real estate investment trusts or mutual funds that own REITs; investing in commercial projects, such as strip malls or small office buildings; and buying individual houses for quick resale.

But for a long-term investor with a regular income who can come up with a modest down payment, owning rental property may be the most attractive option, experts say.

There are plenty of risks, of course. Tenants don't always pay the rent, and some may trash the property. Housing prices could fall, causing invested capital to languish. What's more, all real estate involves a time commitment from the investor, and apartment complexes in particular can require endless maintenance.

And there's always the risk of the "negative"--industry-speak for when the rent doesn't cover the cost of the mortgage, insurance and property taxes.

These are all important considerations, but they may be easier to stomach at a time when stocks are threatening to suffer their third losing year in a row.

And for those jaded by the corporate chicanery that has turned some billion-dollar companies into dust, there may be some comfort in owning a tangible investment that you can drive by each day.

One way to get started in rental real estate with a minimum of capital is to buy a duplex and live in one unit while renting out the other. This approach is particularly viable for young couples buying their first home, said Fred Pizzuto, a real estate agent who owns a duplex in Big Bear. The rent helps pay the mortgage, and you get the tax breaks that come with owning a home as well as owning a rental property.

"Fix it up and within three or four years, you'll have that moving along well enough that you can buy something else and move out," Pizzuto said.

Sounds simple enough. But it's often not easy to find the right property at the right price. Evaluating any real estate investment--whether or not you intend to live there--is complex, and there is little professional direction for the newcomer.

"It's not like Wall Street where there are a lot of analysts sitting in offices, coming out with reports on what you should buy," said Glenn Sonnenberg, president of Legg Mason Real Estate Investors in West Los Angeles. "There is no national market for real estate. It's a bunch of local markets and sub-markets."

How do you decide what to buy?

For investors buying properties on their own rather than through a syndicator like Sonnenberg's company, he suggests staying close to home, where they're better able to evaluate prices, crime, schools and the rental market.

"The danger is to go too far afield," he said. "If I were to buy, I'd want to buy in my neighborhood, where I know what the good streets are and where the shopping is. Buy what you know."

Price is always a critical issue with investments, but it may be particularly so with investment real estate.

Rental real estate generates returns in two ways: appreciation of the property and income from tenants. A buyer has to determine whether he or she will earn a decent return on invested capital--the down payment--over the long run, and whether the rent will cover the cost of the mortgage, property taxes and insurance, among other expenses.

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