A Return to Basics: Buy Low, Fix, Rent

While it may seem crazy to bet on real estate for a steady retirement income these days, that is exactly what Edward and Olivia Green are doing.

With their golden years fast approaching -- he is 64 and she is 60 -- the husband and wife have snapped up five investment homes in the past three years. They hope to buy more as the struggling real estate market continues to produce cheap properties. Their portfolio includes a condominium apartment in Manassas; two houses in Prince William County; and two houses in Memphis, Tenn. Their goal is to buy cheap foreclosure properties, fix them up and rent them out.

The Greens said they prefer real estate to stocks and bonds because they can touch it, drive by it on a weekend and look at it -- which gives them a level of comfort in the midst of a volatile economy.

Buyers such as the Greens seeking long-term cash flow from their holdings are emerging as the new investors of the bust. In many ways, they are reclaiming the term "investor" from the speculators who bought homes during the boom years with intentions to flip them for quick gains.

"At the peak of the bubble, you had a lot of people who called themselves investors but were really only buying a property with the hopes of selling it at a higher price to a greater fool later," said Michael D. Larson, a real estate and interest rate analyst at Weiss Research in Florida. "The long-term way to invest in real estate is to buy cheap and buy at a level where it is profitable to rent; traditionally, anything you got from appreciation was icing on the cake, not the cake itself."

In areas such as Prince William County, where sales of foreclosure properties have dragged down home prices but rents remain relatively strong, the Greens' strategy has become particularly popular, local real estate agents said. Nevertheless, these are not easy times for those looking to profit from the bust. Lending standards have tightened, making mortgages for investors harder to come by. There is also no guarantee that home prices will end their free-fall. Buying a foreclosed-on home, fixing it up and then becoming a landlord requires patience, vigilance and capital, and success is not certain.

The Greens have had their stumbles. Their first investment property was a two-bedroom, two-bath condominium apartment not far from Interstate 66 in Manassas that they bought from their daughter in 2006 for $250,000. At the time, they anticipated that the housing market would take only a mild hit, and so they financed the property with a mortgage but rented it out for less than their costs. They expected to sell as home prices appreciated. That didn't work out, so they're taking a hit to their cash flow -- a mistake they don't intend to repeat with the other places they own.

Glenn Kelman, chief executive of Redfin.com, an online brokerage based in Seattle, said one of the first questions to consider as a potential investor is whether you want to become a hands-on landlord.

"If they don't want to become a landlord, then they have to hire a property management professional, and that is going to cut into their investment," Kelman said. "That is the fundamental decision that somebody has to make when going from a very liquid asset [such as stocks] to something that is not all that liquid -- and will make their phone ring in the middle of the night when the toilet clogs up."

While rental income ideally provides a steady stream of cash, a tenant's finances can fall prey to the souring job market. With the recent wave of foreclosures, potential tenants may also have shoddy credit ratings, meaning landlords need to decide whether they're worth the risk.

Kelman said the best investors are often the "fix-it" types who can quickly size up how much they need to spend on a property to make it rentable. They are also the ones who are willing to spend their weekends and evenings making those repairs and maintaining the homes over time.

"They are often wearing a tool belt on the weekend and doing it all themselves," he said.