Fishing for Hot Investments in A Cool Market

· Improvements include changes as simple as adding a new coat of paint or more involved projects such as a complete renovation. These changes should enable you to charge higher rents and get more money when you sell the property.

· Investors frequently overlook additional revenue opportunities . For example, perhaps you can add coin-operated laundry machines, charge for parking or sell advertising space on the side of the building. Alternatively, maybe you can change the building's use -- when permitted by local zoning laws -- making it a more profitable endeavor. Indeed, many local investors have made fortunes in the last several years by converting small rental apartment buildings into condominiums and selling them.

In the aforementioned case, if you believe you could sell each unit for $400,000 as a condominium, then you would have $600,000 (four times $400,000 is $1.6 million, less the $1 million you paid for the property) to cover renovations, transfer, conversion and carrying costs and -- we hope -- profit.

· Local catalysts are changes in the area that could increase (or decrease) the value of the underlying property faster than the general market. For example, is a new Metro station opening or new commercial development coming to the area? On the flip side, is a major employer leaving? If so, that could decrease your property's value. Shrewd investors often start by identifying these positive catalysts and then limiting their search to nearby properties.

For instance, just in the District, there are extensive plans for new commercial development in Columbia Heights and near the Friendship Heights Metro station. And of course, the proposed new baseball stadium in Southeast has attracted flocks of real estate investors big and small who are betting that a stadium will be a positive local catalyst.

· Systemic shifts change the entire investment landscape in a city or nationwide. These shifts are sometimes obvious, with predictable consequences. For instance, the 1968 D.C. riots devastated neighborhoods and left commercial corridors traumatized for decades. More often, these shifts are somewhat obscure and their impact understood only in hindsight. If you can see a shift coming and understand its impact before the market does, you may be able to profit.

Recent examples of such systemic shifts include changes to the tax code. For example, the Tax Reform Act of 1986 contributed significantly to the decline of the real estate market in the late 1980s by making real estate a less desirable investment. Almost a decade later, the Taxpayer Relief Act of 1997 had the reverse effect and arguably has been one of the key drivers of the current real estate boom. That law enabled a single homeowner to exempt $250,000 in capital gains from the sale of a principal residence under certain conditions ($500,000 for married couples). The homeowner could theoretically repeat the process every two years, creating a strong incentive for individuals to speculate in the housing market.

Keep in mind there are other factors to consider when evaluating an investment property that are beyond the scope of this article. They include property condition, leases and contracts, title, zoning, rent-control laws, tenants' rights, tax implications, capital gains treatments, deferred depreciation expense and recapture rules, closing costs, historical and environmental easements. There are experts out there -- lawyers, lenders, accountants and real estate agents -- who may be able to help determine the right choice for you in this uncertain investing environment.

Steven C. Wydler and Hans L. Wydler are Long & Foster real estate agents who work together as the Wydler Brothers Realty Team. Steven, who is based in McLean, is a former transactional lawyer. Hans, based in Bethesda, has an MBA from Harvard Business School and more than 15 years of marketing experience. Both are real estate investors.