Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 25, 1994 TAG: 9407250018
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: By MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
Own your home, advised Andrew M. Hudick of Fee-Only Financial Planning in Roanoke.
Although your home is not necessarily an investment for growth and income, Hudick said, it probably is a financial planning technique that offers many benefits. Among them are current and future income tax benefits.
The decision of home ownership for most taxpayers is an easy one, Hudick said. That's because of the current deductibility of interest paid on a mortgage and real estate taxes, plus the future deferral of appreciation and the tax-free receipt of up to $125,000 of profits for homeowners who are age 55 or older.
Real estate as an investment, on the other hand, can be owned for two reasons: income and/or growth.
Hudick said most financial gurus and their newsletters suggest owning commercial real estate as a percentage of a balanced portfolio of investments. Examples range from office buildings in major metropolitan areas to a duplex house.
The recommended portion of a portfolio devoted to real estate ranges from 10 percent to 35 percent, depending upon which guru is making the recommendation.
Many large pension plans - including the Virginia State Retirement System, General Electric Co. and Norfolk Southern Corp - follow this type of investment allocation.
These pension funds own the mortgages on a variety of large parcels of real estate, Hudick said. By investing the funds set aside in these large retirement plans in mortgages, the pension plans realize a fixed and periodic income stream.
These same pension funds will also buy developed real estate, such as office parks and shopping malls, and undeveloped real estate for the opportunity of appreciation potential, Hudick said.
"So, my short answer is that most people own all the commercial real estate they need through their retirement plans if they are covered under a large pension plan," Hudick said.
If people are self-employed, Hudick added, they can build a retirement portfolio by buying shares in real estate investment trusts, many of which are publicly traded like other corporate equities, along with other traditional investments, such as equities and debt instruments (or stocks and bonds.
Hudick said it's hard for the average person to come out on a direct real estate investment. He's even seen Realtors lose money on the deal.
The upside is appreciation of the property and income through rent, he said.
But there's risk as well.
Commissions on buying and selling investment real estate - including a small duplex - are 10 percent, Hudick said, so this amount must be covered. The property might sit vacant for a period of time or you can't get enough rent to meet the cash flow.
Worse, the neighborhood might deteriorate, lowering rent and the value of the property. You might even have overpaid in the first place. That, along with the high commissions, will prevent recovery of the investment.
"There's nothing easy about it," Hudick said of the average person handling real estate.
"It is my experience, after viewing a large variety of individual financial situations, that it takes a special person to own rental homes and duplexes for investment purposes," Hudick said.
To be successful, he said, owning such rental property has to become a hobby for the investor and his primary livelihood. That's because maintenance and property management issues often are very time consuming and can be expensive. "The painting and cleaning and mowing and repairs have to become a part of their life," he said.
For this type of person, Hudick said, "owning rental property can be very financially rewarding."
People who come out on the deal, he said, are those who buy a house or duplex in the neighborhood. The owning couple are handymen who enjoy working to improve the property. They hold the investment until the value goes up and the rent is high enough to cover cash flow and provide income as well. The property might then be an education fund for their children.
"But it takes time," Hudick warned.
Dennis Cronk, a commercial real estate specialist with Waldvogel, Poe & Cronk Real Estate Group Inc. in Roanoke, said the risk varies with the type and size of the property and the tenant.
Some tenants are more risky than others, Cronk said. He has clients who are building for Blockbuster Entertainment Corp., a highly-rated national company, and those who are building for a local tenant who has never been in business before. The latter is very risky, he said.
Little risk is involved in a duplex if the owner uses half of the property, Cronk said. A shopping center involves more danger. People should look at the risk they are able to assume, he said.
Next week: Real Estate Investment Trusts as an alternative to owning the real estate directly.
by CNB