Turning Around Houses Is Risky

"HUD prices their houses so that they sell extremely quickly," said Ronald Rudolph, a real estate agent with Century 21 Advantage Gold in Philadelphia who, while buying and selling primarily HUD homes, has become the top solo real estate agent in the country, according to Realtor Magazine. "HUD is not really in the real estate business. They want to sell their houses and sell them quickly. It's possible to get some great deals by working with HUD homes."

Common Mistakes

Even when investors find the right neighborhoods and the right properties, there is still no guarantee that they will make loads of money.

People new to investing in residential realty sometimes start out too big. Instead of finding a small townhouse or single-family house, they choose a huge, dilapidated spread, one that needs tens of thousands of dollars worth of repairs. Such a property could be ideal for an experienced investor, who has a network of talented electricians, plumbers and carpenters. But it is a potential disaster for novices.

Reggie Marston, president of Springfield-based Residential Equity Management Home Inspections, often inspects prospective purchases. Occasionally, he advises a client to pass on a property.

"A lot of people have watched the late-night shows on TV that promise you can make quick millions by investing in real estate," Marston said. "They figure they only have to buy something cheap, put some paint on the wall and make millions of dollars. Unfortunately, a lot of the people who try to get into this have no knowledge of construction. They don't realize that there's a huge crack in the foundation. They don't realize that the whole property may be sliding downhill. There goes all the profit."

Four years ago, Marston inspected a house in the Prince George's County town of Cheverly. As soon as Marston walked in, though, he knew the house had serious problems. For one thing, it needed a completely new electrical system. It also needed a new roof. But worst of all, the entire back of the house had collapsed. Marston advised the prospective investor to start with a different house. She took Marston's advice.

"I recommend that people start with something small," Marston said. "Maybe they can start with a little condo that's in bad shape, or something that needs a small kitchen rehab. Then they can move to the next level. Maybe they can find something that's been sitting around empty for a few years and has suffered termite damage or has some rotted flooring. They can step up a bit and cut their teeth on that. . . . After they've done three or four properties, they can then go for that big one."

Another mistake investors make is buying in a market they do not understand. That can lead to some obvious, and costly, mistakes.

Some investors forget to check zoning requirements. That can prove costly, especially if an investor buys a property with plans to convert space above the garage into an apartment, only to find out too late that such use is prohibited.

Many investors underestimate how much money it takes to be successful. Rehabbing is not cheap. Investors have to spend money on contractors, may have to pay permit fees and will almost certainly have to spend money to advertise the property after the rehab is complete.

"You have to build up a cost assessment of the project," Bird said. "Without that, you really don't have any idea of how much something is going to truly cost. You won't have any idea of whether the property you are considering is even going to work."