Why investing in one rental per year is the right pace for many...

From Chris Lengquist's blog - he makes the case that REALTORS can build a good investment portfolio by investing in one property per year.  All that follows basically supports this advice, so if you're in a hurry you can skip this blog entry.  :^)

In our Two Rivers REIA we spend a lot of time making sure investors know that running real estate investments is actually a business.  For some agents, they simply do not want the distraction nor can they do both jobs well, simultaneously.  This may actually be a wise choice, i.e. as a REALTOR investing your money in something other than your main product is not necessarily a bad choice.    

I can tell you that from 1979-1982, I bought about 7 single-family rentals alone, 3 with partners, and one tri-plex.  That period in history was following a few years of double-digit inflation, followed by the worst real estate recession since the great depression.  The debate continues as to whether it was the Carter economics policies or the Reagan ones that got us into such a debacle.  I remember mostly the fun of it, but ultimately, the pain of losing it ... all.  I accept 100% of the responsibility but none of the blame (that goes to Reagan "trickle down", voodoo-economics policies. Never reached me, and certainly never reached my tenants -- still hasn't! -- but we'll save the politics for a differnt blog).  Anyhow ...

I was a full-time Realtor, married, with two children and I started reading lots of books, going to lots of RE ra-ra seminars (you know the ones), and I started investing some of my commissions into property.  For me, however, rather than listening to the agents in my office who said, "It's location, location, location" I seemed to gravitate to Mark Haroldson's mantra, "It's cash flow, cash flow, cash flow".  Or, "Buy with nothing down" which I frequently did.  In fact, I became so good at it, I'd put cash in my pocket at closing.  Bad plan.  

Because of the large increase in unemployment in Iowa, we actually began to see deflation in property values.  As unemployment climbed to about 10%, many of my tenants lost their jobs.  One day, I awoke to the reality of having five houses on the market, all vacant and "prepped for sale" but with no buyers.  Not even nibbles.  No tenants and no buyers led to deeds in lieu of foreclosure which led to me owing my rich Uncle a lot of cash (from having to recognize forgiveness of debt as though it were ordinary income.  I was losing my shirt and the IRS thought I was getting rich!)

So, my mantra today, 25 years later, is for investors to make sure that they understand that this is a business, this real estate investing, and like any business, there are fundamentals that must be followed in order to be successful.  We haven't seen a downturn like 1981 in our industry for 26 years, and this has been very good for RE.   And, of course, I wish I had all of those same properties today -- I would be a millionaire -- many of those properties would be paid for!  

In reality, however, all I have is a memory of what it's like to have your wife mad at you because the phone was ringing off the hook (because of ads I was running to try and get tenants!) and, tenants who would do $000's in damage to a property on the way out, or leave their dogs inside the property for two weeks before I discovered they had moved on, etc. ...

Now mind you, and anyone else that reads this, most of this I could have avoided had I been investment savvy -- had I had a mentor, or belonged to a Real Estate Investment Association like one affiliated with the National REIA.  But I was wet behind my RE investing ears and didn't even know it! 

When I returned to the business after a 25 year hiatus, to focus on Des Moines Real Estate for owner-occupants and investors, I made a decision early that I personally would only invest in Multi-family properties -- or projects large enough that the cash flow that will support at least part-time, professional management because, 1) I don't want to be distracted from my main business, and perhaps, more importantly, 2) I don't want to compete with my clients for investments.  I believe that if I help enough of my clients reach their goals, I will reach mine, too! 

Today, I know the rental market extremely well, both the ups and the downs.  I advise my clients to proceed with caution, to make sure they have adequate reserves, and to put at least 10-20% down -- to buy smart and at wholesale, the latter being the most critical component.   If you're adequately conservative, you'll have the DSCR (Debt Service Coverage Ratio) to survive a downturn -- to drop rents if you have to, to stay afloat.  In a strong downturn, you're competing for a diminishing tenant pool, and you must be positioned to win against other very savvy investors!   

I understand CAP Rates, the need for C on C return (immediate is vastly preferrable), IRR, depreciation recapture rules, DSCR, 1031's, the need for qualified property management (yes, we Realtors can do that ourselves, but every hour we spend chasing down a tenant issue is an hour we can't be in the business that cranks out that short-term commodity we all need - income), hard-money lending, rehab loans, short sales and pre-foreclosure sales, options, flipping properties (also a business -- the construction business), etc., etc.

Real Estate investing can be very profitable, but so can owning a McDonald's.  Business ownership is not  the right choice for everyone, including many realtors.  And, for those who choose to invest, join a Real Estate Investors Association long before you leap.  If you already own property, it's still not too late!    

In Chris' blog, he advocates that for many, buying one property per year is a nice pace.  I concur.