Landlord Has No Regrets
After Year of Investing

It's been a busy year for Jeff Jones. The 33-year-old real-estate investor has a full-time Microsoft Corp. sales job and is the landlord of two Seattle single-family homes, which he purchased within the past 19 months. He now plans to own 20 investment properties by 2020. As his first year of real-estate investing comes to a close, so does this series, which has traced his investment efforts.

Looking back, Mr. Jones says he doesn't have any regrets about the homes bought -- or the purchases he lost out on. Investors, he says, have to start somewhere, then apply what they learn with each transaction to other deals. He's made smart investments in water-view property in his local market, he says.

"I don't regret making these purchases in Seattle," he says.

Lately, Mr. Jones has been chewing on a question that's plagued most U.S. homeowners and real-estate investors: Are we in a housing bubble? "We're in one in Seattle," he says. "We're not necessarily in one nationally."

A bubble commonly refers to markets where home prices have been driven up to unsustainable levels, often in part by aggressive investors.

For Mr. Jones's purposes, a "bubble" means a market in which sales prices are rising faster than rents. Since he started with only enough resources to buy single-family houses (versus multi-family properties), he says, the rents he can fetch don't yet cover his mortgage and related expenses. And, with housing prices rising, he can't currently afford to buy another house or building where rents don't outpace his carrying costs. So, for now, he's not looking in Seattle.

But, he says, bubbles are a regional phenomena, and smart investors can spot lower-risk investments. Lower-risk markets show modest appreciation, have low crime rates, an increasing population and growing job opportunities, he says. In these areas, he could make a 10% down payment and ask enough in rent to cover mortgage, interest, taxes and other expenses, plus pocket a profit, he says.

From Water Views in Puget Sound to Small-Town Bargain Buildings?

Throughout his first year as a landlord, Mr. Jones has spent as much energy prospecting new investments as he did worrying about his existing properties.

He's interested in investing in multifamily units, but after significant research, he's sitting out of the Seattle multifamily market, he says. Last fall, he looked at a duplex in Seattle's Queen Anne neighborhood with an asking price of $799,000. To bring in enough to cover monthly expenses plus make a profit, he would have to rent units for nearly $3,000 a month -- which makes sense in New York or San Francisco, but not in Seattle. He later found out that the sellers were hoping an out-of-state bidder unfamiliar with Seattle rents would bite.

He's now eyeing small cities: Tulsa, Okla.; Oklahoma City; Raleigh, N.C.; Cheyenne, Wyo.; Tucson, Ariz.; and Manchester, N.H. He says he wants to make a new investment by the end of the year. His goal is to make a purchase only if he can collect enough rent on a property to exceed its associated costs.

There's another reason he's looking at the numbers more conservatively: He's considering using home equity to fund deals. During 2004 and much of 2005, he had said he didn't want to take out a second mortgage or home-equity line of credit on his home to finance deals. However, he recently reanalyzed how much equity he holds in his home and learned that because he's been making extra payments, he can pull $150,000 out of his house to fund deals.

The strategy could put him at additional risk. If he lost his day job, he would still have to write his three monthly mortgage checks (for his primary and two investment homes). He does have a financial cushion, however, given his other investments, he says.

Field Trip to Oklahoma City

In May, Mr. Jones and his girlfriend, also a real-estate investor, visited Oklahoma City, which he says could be an attractive place to invest.

Area employers include Dell, the state government, Devon Energy, Kerr-McGee, pharmaceutical companies and aerospace employment at The Boeing Company or Onex. Mr. Jones points out that Oklahoma City could benefit from a developer's plans to revitalize a historic downtown hotel, and older neighborhoods like Bricktown are drawing a hip, young crowd.

When researching the city, Mr. Jones bypassed residential real-estate agents and contacted commercial brokers regarding area multifamily properties. He learned that there are numerous two-, four- and eight-unit buildings around town, but that it's hard to both employ a resident manager and still turn a profit on these properties.

"One broker said to me that the main way an out-of-state investor can make money is to get a 16-unit or bigger building," Mr. Jones says.

This broker told him he could buy a 16-unit building for $425,000 to $450,000, employ a resident manager and make profits, though slim ones, from studios that rent for $260 to $280 a month and two-bedrooms that go for $425 per month, Mr. Jones says. To manage the building remotely, he could give a resident manager reduced rent on-site plus incentives or commissions for maintaining high occupancy. At a cost similar to what he would pay for a single-family home in Seattle, such a 16-unit property could garner him immediate profit.

Meanwhile, he says, he will make money on renting his Seattle homes eventually. Apartment rents in Seattle are expected to increase 10% between March 2005 and the end of 2007, according to Seattle research firm Dupre + Scott. (The company doesn't track single-family rentals). If he succeeds in generating larger chunks of cash to finance deals in a cooler Seattle market or at a multi-family building that promises immediate cash flow, he'll buy there again.

"It wasn't perfect," Mr. Jones says of his first investment efforts. "But I feel pretty good about what I've done."

Ms. Hodges is a free-lance writer in Seattle.

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