Common Mistakes

The biggest mistakes people make in real estate, there are lots of them. One of the major mistakes is buying  the wrong investment in the first place, holding the investment too long and letting your investment get stale to the point where you're making tax decisions instead of yield decisions, not treating your tenant properly to the point where you have vacancy, fix up, and cost of re-rental every couple years. Your tenant is one of your largest assets and many managers don't treat them as such. Those are the big ones.   Also, in too many cases, people buy something just because they can get a better rent to value ratio, but they're buying something that possibly won't go up in value or can be duplicated, and the price will fall.   

2008 Crash

How did RIC and its investors do during the 2008 crash?

Real estate is a non-liquid investment. During 2008, when everything went down, the close in real estate mostly held its value. There were a few that went down. There are still a few that are going down now depending on who's selling. If you go into a neighborhood and you find a neighborhood is full of short sales and foreclosures until those were absorbed, probably it's going to go down.

Our properties have basically held value due to their locations but again if you're in a bad market and you must sell, and you're an asset that is not liquid, you're going to lose money.  When you go into real estate, you need to have some cash reserves. You need to be in a situation where you're not forced to sell something when you need it. We recommend to a lot of our clients to have equity lines, and to use their equity lines like a savings account. Instead of leaving your money sitting with a bank where you get 0.2%, if you need money for something that's important, you take it out of your equity line and the moment you have cash, you put it back.

A good size equity line can protect you during a period of time when you don't want to sell. 

A little about Montgomery County


Why does Montgomery County real estate outperform most other areas of the country? Because of the federal government. Now, the federal government is the largest employer in the country, and it's primarily located here. They live in PG County, they live in Northern Virginia, they live here[Montgomery County]. But again, all of the people that are here in many, many places have jobs that are basically focused on the government, even if they don't work directly for the government.

Montgomery County, we've got air and space, we've got Walter Reed, we've got NIH. All of these are jobs that are feeding off the federal government. Even downsizing the federal government won't eliminate those jobs. Other areas of the country, if we go into a recession, if we have a major employer leave, you can have a huge amount of risk, more than you have in Montgomery County.

 As far as long term, Lower Montgomery County, we've used up almost all of our land In close, we don't have anything else we can develop other than high rise stuff, which we're eventually going to build too much of.

 In Upper Montgomery County, there's land left but what happens as you build on that land, all the people that buy there spend a disproportionate amount of time driving back and forth because of all the traffic between there and where they live. As you build more, that traffic gets worse. What's that do? That stimulates close in developing.

As far as this area, this is probably the most conservative area you can invest in, for those reasons.

Prince George’s County has not been extremely well planned. A lot of it grew up without as much input from Maryland National Capital Park and Planning. One of the major reasons that Maryland is better than Virginia, from an investment standpoint in my point of view is because of Maryland National Capital Park and Planning. Maryland National does all the zoning and all the planning from the beltway as you come in to Maryland in PG County to the beltway as you go back into Virginia in Montgomery County. You don't have the spot zoning that you have in a lot of other areas. Again, there are a lot of areas in PG County that developed before that spot zoning went away.

If you go into Northern Virginia, you can be in a situation where you find a beautiful home on five acres of land backing up to woodland. Three years later, the next thing you know, that woodland can become warehouses that are being planned by some other jurisdiction entirely. If you drive down route 1 in Virginia, you're going to see residential, commercial, warehouse, junk, residential, commercial, warehouse, junk, signs. We don't have that in Montgomery County and we don't have it to the same degree in PG County either that they have it in Northern Virginia.

 Maryland National Capital Park and Planning and central zoning is a huge benefit that you have in Maryland but you don't have in Virginia?

D.C. has their own general zoning, but it doesn't work in conjunction very much with Maryland or Virginia or D.C. It's their own. D.C. is pretty much all built, so D.C. is just a matter of money. If you go into some of these old areas, like Anacostia, where those properties aren't necessarily the best use of that land. People come in and buy those, go to DC government and say 'we want to do this high rise, we want to bring in shops, will you help us' and DC says 'yes'. That's a different type of development, where you're taking something where the supply is fixed and the demand is growing and you're tearing the supply down to create a different type of product.

That one, from an investment standpoint, unless you're a developer, that's not necessarily where you want to go. 

Have you asked yourself these questions?

Questions to ask yourself 

Before you invest in real estate, do you know #1, where to invest? You need to select an area, you need to select a government, you need to select regulations, you need to select a product. Without that, you can go on out and buy something that you lose a lot of money on. You can make a lot of money in real estate, and you can lose a lot of money in real estate.

Leverage, what is the benefit of leverage? Do you want a lot of leverage? Do you want less leverage? What does it do to yield?

Tenant screening. Do you know how to screen a tenant?  Remember when the tenant comes to apply for a property, they're on their very best behavior. They're as nice as they're ever going to be. Once you get them in the property, they might be something different. The key is to spend a lot of time making sure that the tenant is who they say they are. Their landlord, when you call them the landlord may say they're great tenants, and they're not. The landlord might not be the landlord. The landlord might be their best friend. The landlord might be anxious to get rid of them, and by telling you they're good tenants, they will.  The landlord may not own the property they live in. As an individual, you need a credit report.

How much rent do you charge? If you charge too much, you wind up with a disgruntled bad time. If you charge too little, you've taken away your return.

What type of property do you want to buy? Do you want to buy commercial? Residential? Fixer upper? Flip? Do you know the cost to flip? Are you able to do the work?  Do you have a team of reliable and honest contractors ready and willing to work with you on your schedule.  Are you able to bear the vacancy and the carrying cost while you do the flip?

Investing for cash flow, or for yield, and do you know the difference?  There's far more to yield than cash flow, especially depending on the property that you buy.

How long do you hold your property? Do you want to put it in your estate, do you want to live off cash flow later on, or do you want to maximize the yield of the tax benefits? Remember real estate's a decreasing yield, so the longer you hold it, the less money you might make.

Why is that?

Well, if you're investing because you think you have a product that will go up in value. Let's assume you buy "property #1", and you put 10% down, and it goes up 10% in value the first year. What's your yield?

100%. Leaving out the other 3 factors. Let's assume they equal 0. You put 10 down, you make 10. The second year you make 10 more.

What's your yield?

50. Third year 10 more.


25. After 5 to 7 years of appreciation in value, you don't have any yield left anymore. You're better off putting your money in the bank. You can refinance it, and you can get your denominator down again to where your yield goes up, but now you have all this taxable gain through 7 years of appreciation in value and 7 years worth of depreciation in your tax return. Now you're starting to make, even with the refinance, you're starting to make tax decisions, not yield decisions. In real estate there's generally not a long term hold except your home.

Are you versed in real estate taxation? Do you know how to determine what your depreciable base is? Your marginal profit? The method of depreciation you might want to use? How long you want to hold it? What's your capital gains rate?

What is your anticipation of the future? Are tax capital gain's going up, which is a democratic standpoint, or are they going down, which is republican. Are they going to waive the estate tax entirely? They call it the death tax. If they do that, a lot of property that you've allowed to get stale, you've got to hold onto.

When you deal with a real estate agent, do you know how they make money? Do you know what their goals are? A real estate agent that sells you a property gets a commission on the sale of the property, and he goes away.

A property manager, how does a property manager get paid?

Every time it's re-rented?

And of the rent, which is the bigger amount?


Does he want your tenant to stay 10 years?

No, because he's got no skin in the game.

Maintenance. You're doing your own management. Your phone rings at 1:00 in the morning and your tenant's roof is leaking. What are you going to do?

Well yeah, and the other thing that's going to happen is eventually if you have a property manager, the property manager (who has no skin in the game) is going to call a roofer. Does he care whether the roofer replaces your roof or fixes the hole in the roof? Does it matter to him?

No. What's he going to prefer?

Probably a new roof.

That way his phone's not going to ring in the middle of the night again. There are a lot of different things you have to think about. If your tenant calls and says the kitchen light switch, who are you going to send?

Well you're probably going to go search the internet and you're going to look up an electrician. The electrician charge is $125 just to show up, plus another $70 an hour, about. For that switch, your light switch in the kitchen, it's going to cost you $200 to $250. By the time he charges you $25 for the switch that you can buy at the hardware store for 4.50. As compared to somebody who has a staff (RPI) who will go over and replace a light switch for $50.

Those are some of the things that we do for a client that people don't think about. You can go on out and you can buy a fine piece of property, but if you try to manage it yourself and you don't have the contacts, or if you try to maintain it through just appointing people who you don't know from diddly, all your money can go away.