Tuesday, July 19, 2005

Q. My husband wants to buy a small house that we can rent out.

From everything I've seen I don't think we can get enough in rent to cover the mortgage, taxes and insurance. That doesn't sound like a very good investment to me. Is there a way to guarantee that we wouldn't have a negative cash flow?

A. There are no guarantees when it comes to investing. However, most of the investors I've worked with are happy for a negative cash flow, which gives them a tax write off. The real pay-off is an excellent return on their money when they sell.

Even in a slow year Vashon Island real estate appreciates at about 10%. In the last couple of years, of course, it's been far greater. There are those who are making 10% to 20% profit in less that a year. I don't recommend buying with the idea of "flipping" a home which usually means a quick cosmetic fix-up and re-selling it in under a year. Like musical chairs, someone will be caught holding the bag.

What I do recommend is buying a good, sound house that has features that are desirable and holding on to it for three to five years. Then you have long term gain as well as short-term tax benefits. You can up-grade the house a little at a time to enhance it's resale value.

Rents remain low because of low interest rates. Most people who can afford to buy are purchasing their own homes. That means there are fewer renters out there. But if you keep the rent reasonable and spend the effort to keep up the property, you'll attract good renters.

A client recently decided to re-finance a rental property I sold him in 2000. He told me that he was pleasantly surprised to learn that it was worth twice what he'd paid for it! His comment was "you can't get that kind of performance out of an IRA." I agree. Real estate has always been a good investment and a carefully selected, well-managed property will bring you an excellent return.

Wednesday, July 06, 2005

Q:I'm really disappointed in you.

I sent my daughter and son-in-law to you because they want to start a business here. After talking to you they're really discouraged. They have some good ideas, some savings and they work hard. Shame on you!

A: I'm sorry you're disappointed but it takes more than a little savings and a couple of ideas to be successful in business. Small businesses are a very high risk and most fail. I tried to encourage them to do some more research before plunging in. Many years ago I taught in the business school of a state university. I told my students then, as I tell my clients now, that there are some basic rules to business. The first one is "find a need and fill it." In other words, spend the time and effort to discover what a community needs, not just what you would like to do.

You have to ask yourself questions like; does this town really need another pizza parlor or coffee shop? If the answer is no, then you are setting yourself up for frustration and failure. That's particularly true if, like your daughter, you don't have experience in self-employment or in the business.

Years ago, when I lived in Seattle, I remember being impressed with the recent southeast Asian immigrants who, in two or three years, learned English, began citizenship classes and became successful entrepreneurs. One such family started a Mexican restaurant in my neighborhood because there wasn't one nearby and they did their research and discovered that it would be a welcome addition to the community. They had to learn a new language and a different cuisine, but they were very successful because they did what is called a "needs assessment" and delivered what the community would support.

Self-employment is often brutal. High overhead, cost over-runs, unexpected downturns, regulations, taxes and personnel problems are standard fare. I suggest your daughter and son-in-law start by working for someone else in a business that interests them, do research on the Internet to find out the basics and take some good business classes.