Are you a refi junkie?

Refinancing is all the rage. But when does this savvy financial move become a short-sighted mistake?

By Sarah Max, CNN/Money Staff Writer

New York (CNN/Money) - This summer you won't have to listen to your neighbor bragging about his latest undiscovered tech stock. Instead, he might spend the better part of your annual barbecue telling you about his latest coup de finance -- refinancing his mortgage.

With mortgage rates still near new lows, homeowners are lining up to refinance. Demand for mortgages still is zooming, according to the Mortgage Bankers Association of America, with refinancings accounting for three-fourths of all applications.

Much of that is coming from repeat customers.

"This low rate cycle has been going on for three years now," said Doug Perry, first vice president of Countrywide Home Loans. "It's not uncommon to see people who've refinanced two or three times over this cycle."

Indeed, the old rule of refinancing only after rates drop two percentage points is about as passé as paying cash. These days, homeowners are willing to go through the hassle of refinancing to trim their rates by a percentage point or less.

Can you blame them? The 30-year mortgage rate is below 5.5 percent, down from 6.81 percent this time last year.

Bringing a 30-year loan for $400,000 from a 5.75 percent rate to a 5.25 rate saves more than $120 a month in mortgage payments and more than $45,000 in interest over the life of the loan.

But there are times when squeezing every bit of interest out of your loan makes sense and times when it does not.

"I have one client, we'll call Cindy, who has refinanced eight times in four or five years, and that doesn't include the times I've done a second mortgage for her," said Bill Roberts, owner of The Mortgage Specialists in Redmond, Ore.

Roberts adds that Cindy refinanced to consolidate debt, only to turn around and spend more. "It got to the point where her husband asked if I could do something to help her, so I steered her toward a mortgage with a pre-payment penalty."

There's a fine line between being a savvy homeowner and a "refi junkie." How do you know when it's gone too far?

You're oblivious to upfront costs

Before you go about refinancing, you'll want to have a good estimate of the upfront costs. A typical transaction will cost 1 percent of your loan plus title insurance, attorney fees, origination fees, appraisal fees and the cost of running a credit report.

If you refinance through your current lender you may be able to save on some of these fees. Still, you can expect to pay anywhere from $2,000 to $4,000 for a $200,000 loan.

You can calculate your "break even point" by dividing your up-front costs by what you'll save each month in mortgage payments. If you'll save $100 a month, but pay $2,000 in up-front costs, it will take you 20 months to recover your costs. Such a deal makes sense if you plan to stay in the house for a while, but not if you think you'll be moving in a year.

Something else to keep in mind: The more you refinance, the higher your up-front costs are likely to be, and you may have no choice but to take a loan with a pre-payment penalty.

"You can bet there is a fee or rate premium for rolling refinancers," said Keith Gumbinger, vice president of HSH Associates. "There are costs associated with originating a loan that are typically amortized over a period of time, which is why lenders may require more up front if they think you'll turn around and refinance again."

You keep extending you terms

One thing homeowners sometimes overlook when they refinance is that their new monthly payment is low not just because they've locked in a lower interest rate but because they've extended the term of their loan.

For example, if you're 20 years into a 30-year loan and refinance from a 6.5 percent rate to a 5.5 percent rate, your monthly payments will go down about $350 a month. But, because you're turning back the clock and paying off this loan over 30 years instead of 20, you'll pay an extra $50,000 in interest -- even with the lower rate.

You may be better off shortening your term to, say, 15 years or at the very least asking your lender if you can refinance with the existing term of your loan.

"With rates as low as they are people can cut years off the mortgage for the same monthly payment," said Gumbinger.

You refinance to pay your Visa

According to Gumbinger, one of the most popular reasons for refinancing is to extend the life of a loan (and lower monthly payments) and cash out on equity to consolidate debt. "Basically these people are interested in improving their cash flow," he said.

While borrowing against your home often makes sense -- not only do you get a low rate but you can in most cases deduct your interest -- it should not be a license to spend more.

Unfortunately, for many people, that's exactly what it is.

"Within a two years, two-thirds of people who pull equity out of their home have the same amount of debt as they had before they consolidated," said Chris Viale, general manager of Cambridge Credit Counseling Corp., nonprofit debt management firm. "People think they're saving money but really they're just cashing out, spending it and not adding to the value of their home."

Black-Mold Fears Spawn. Home-Buying Headaches

By Robert Irwin

Question: I am in the process of buying a home and the inspection report has revealed that there are beams covered with black mold in the crawlspace under the house. I called in two fungus-removal companies and both say it should be removed -- at a cost of around $12,000!

The owner says the black mold was on the boards before the house was built (he had it built himself) and says it hasn't grown in the 17 years he has owned the house. He also says he has never had a health problem because of it. He is unwilling to pay anything to have the mold removed. Should I not worry and continue with the purchase, or should I back out of the deal?

-- Holli, San Antonio

Holli: As you have probably surmised, black mold is the latest horror story to crop into real-estate transactions. Five years ago almost no one had heard of it. Today, every house seems to have it. While there are questions over the severity of black mold as a health issue, at this point it is clear that it has become a serious economic issue. There have been lawsuits over it, inhabitants of homes with it have demanded that their insurance companies remove it and some homes, apparently, have even been destroyed to get rid of it. The big questions are: Is it a serious health hazard? And should it affect the purchase of a home?

As far as health is concerned, a recent booklet from the U.S. Environmental Protection Agency, "A Brief Guide to Mold, Moisture, and Your Home," says:

"Molds are usually not a problem indoors, unless mold spores land on a wet or damp spot and begin growing. Molds have the potential to cause health problems. Molds produce allergens (substances that can cause allergic reactions), irritants, and in some cases, potentially toxic substances (mycotoxins)."

The federal Centers for Disease Control and Prevention and many states are currently conducting tests on black mold in the home to determine if it poses a true health hazard. Until the results of these studies are in, people probably won't know for sure what they are up against.

On the other hand, there is a kind of hysteria about black mold today among home buyers. Many people won't go near a house that they know has black mold in it. This means that homes with black mold will either need to be cleaned before being placed on the market or face the prospect of offers that may not meet expectations.

As far as your situation is concerned, you may feel perfectly at ease buying a home with black mold, and you may very possibly live in it without health problems, as the seller claims to have done. However, when you go to sell, you will have the same problem that the current seller has: You might have to remove the black mold to keep from having trouble finding a buyer.

Therefore, my suggestion is that you prepare to foot the cost for removing the mold at some point along the line (it is unlikely to disappear on its own) or get the owner to pay for removal -- or at least reduce the price accordingly. You also could pass on the property and let someone else deal with the headache.

For those with long memories, a decade ago a similar problem cropped up with high-tension electrical wires above homes. There were reports that the wires caused everything from heart disease to cancer. Although the subsequent studies I have seen failed to link the wires to specific health problems, even today the value of homes near high-tension wires tends to be diminished because of them. This is a lesson worth remembering.

-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent books are "How to Get Started in Real Estate Investing" and "How to Buy a Home When You Can't Afford It" (McGraw-Hill, 2002).

The Right Real Estate Agent

By Robert Brokamp (TMF Bro)
May 22, 2003

What level of service would you expect from someone you paid $4,830? For that kind of money, you'd probably demand personal attention, prompt responses to inquiries, expert insight, and a daily foot massage.

Then that's what you should expect from a real estate agent since -- based on the median home sale price of $161,00 and the standard commission of 3% -- she stands to make several grand once the transaction is complete. (You probably won't get a foot massage, but it might not hurt to ask.)

So, what are the characteristics of an agent who's earning her keep? An excellent agent:

• Stays on top of deadlines with home repairs, inspections, appraisals, and paperwork.
  
  
• Helps prepare your home for sale. She provides honest and helpful insight about what will be a turn-off to potential buyers and offers to help spruce up the place (known as "staging" in the business -- a good agent will even have props such as lamps, pictures, and plants).
  
  
• Returns calls and emails quickly and answers questions completely.
  
  
• Will consider negotiating the commission, especially if she is handling the sale of one home and the purchase of another.
  
  
• Evaluates all aspects of a house you're interest in, including the size of water heater, the type of heating source, the ages of the appliances, and suspicious stains.
  
  
• Continues working for you even after the deal is done. She makes sure you get your checks from escrow, gets you copies of all important documents, and answers questions after she's banked her commission.
  
  
• Is a vigorous but fair advocate. A real estate agent (or buyer broker, or selling broker) is your guide and counsel during what can be a lengthy, complicated ordeal. She defends your interests without offending the other party.
  

If your agent fits this description, congratulations. If not, strongly consider hiring someone else. Why pay thousands of dollars for anything but the best?

If you'd like to learn more about the home-buying or selling process, including how to get the best mortgage, you're in luck -- it's Buy, Sell, or Home? month at the Fool.

Will it last?

We like to think our homes are safe havens. But that doesn't mean the boom will go on forever.

By Amy Feldman, Money Magazine

NEW YORK (Money Magazine) - Everyone's talking real estate these days, and it's no wonder why. With stocks down for three years, the outlook for bonds pretty poor and money markets paying next to nothing, Americans have taken to stashing money in their homes.

Home ownership rates are at record levels, as easy credit and historically low interest rates have expanded the ability of average folks to buy rather than rent. The value of our homes -- and the debt we've taken on to buy them and to fix them up -- just keeps rising. At year-end, our homes were worth $13.64 trillion, 92 percent more than a decade ago, while our mortgage debt totaled $6.05 trillion, more than double, according to Federal Reserve data.

"What's going on is portfolio adjustment," says Karl Case, a professor of economics at Wellesley College and co-founder of Case Shiller Weiss, the country's premier housing researcher.

Which can't help but make you wonder: Has that adjustment gone too far? With all that money shifting into real estate, could what happened to our Cisco stock a few years ago happen to our homes? In other words, is this a bubble -- or might it become one? And what can we expect to happen over the next few years to the value of our largest asset?

Bubble, bubble?

Let's state this right off: Over the past three decades, national home prices have never declined from one year to the next in nominal terms, though their rate of growth has sometimes lagged that of inflation. So the chance that homes everywhere in the country would suffer a simultaneous precipitous decline seems close to zero.

But real estate is an inherently local asset: What's happening to the high-end housing market in San Jose (where prices are overheated) has little relevance for home buyers in Kansas City (where they are not). Though there hasn't been a national price crash in recent years, numerous places -- among them, Boston, Houston, Los Angeles -- have suffered substantial price declines in the past, while others have seen prices stagnate for years at a stretch.

In Los Angeles, for example, prices rose 147 percent from 1980 to 1990 -- then fell 27 percent by 1996 as cuts in defense spending hit the region hard. Likewise, in Houston, prices climbed 24 percent from 1980 to 1983, then dropped 25 percent by 1987, corresponding with the years of the oil boom and bust.

Today, similarly, there may be bubbles in some parts of the country -- "bubblettes," Mark Zandi, chief economist of Economy.com, calls them, pointing to California, the Northeast corridor and South Florida -- and opportunities for snapping up undervalued homes in others.

For some big-picture understanding of what might happen to home prices in the future, let's first look at what's been propelling them upward. Across the country, average housing prices rose 6.9 percent in 2002, and a total of 38.3 percent from 1997 to 2002, according to statistics from the Office of Federal Housing Enterprise Oversight.

Those numbers are hardly the stuff of Internet stock rises during the dot-com bubble, but for actual home buyers the real returns are magnified because of leverage. That is, for a home buyer who put down 20 percent and borrowed the rest, that 7 percent price increase represents a return of 35 percent. (Of course, if you buy a home you also effectively get a dividend -- that is, the rent that you would have paid to live there.)

A home's true value

Housing historically weakens during a recession. Yet during the 2001 recession and sluggish economic recovery, real estate has remained strong. Economists cite many reasons for this, from demographics to constrained supply, but the single biggest factor was interest rates.

As the Federal Reserve kept cutting rates to stimulate the economy, mortgage rates dropped to 40-year lows. Today the average rate for a 30-year fixed-rate mortgage is below 6 percent. Consider: At 6 percent, the monthly payment on a $150,000 mortgage is $900 vs. $1,100 at 8 percent. That's made it a lot easier for home buyers to afford a higher price tag for the same monthly carrying costs.

But fundamentals like low interest rates can't explain all recent price increases. In certain markets, a degree of speculation has also entered the picture. As Case puts it, "If what you mean by bubble is, 'Is there a psychological element to the market?' Yes. If you mean that psychology explains it all, no."

Is there a way to put a psychology-free value on your home? Appraisals don't, really, because they're typically based on other houses that have sold recently in your area. That tells you what someone might pay for your house today but little about its underlying value. But some economists think that there are more accurate yardsticks.

Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard University, thinks that the best way to gauge the housing market is in relation to income growth -- and that over the long term, in most areas of the country, the two seem in line.

"It is unusual to see rapid price declines unless there is substantial job loss, and that kind of job loss did not take place over the 2001 recession and it is unlikely to take place," he says.

Meanwhile, Edward Leamer, an economist and the director of UCLA Anderson Forecast, argues that we should value our homes much as we do our stocks -- by using a kind of price/earnings ratio.

With a house, the "price" is the market value, and the "earnings" part of the equation is what the home would rent for on the open market. Leamer points to the San Francisco Bay Area for an example. "The 'E' is very weak as rents are starting to decline substantially, yet home prices have been very strong," he explains. "That's a bubble not unlike the dot-com bubble."

Follow the data

To better understand what's really going on in the real estate market, we asked Case Shiller Weiss to run the numbers for us on the largest metropolitan areas for which the firm has access to data.

What's interesting is that even in areas where prices have soared in recent years, none zoomed up the way Cisco or Yahoo! did during the tech craze (when they were up some 3,500 percent and 6,000 percent, respectively).

Consider the best-performing metropolitan area during 2002: In Nassau and Suffolk counties, on New York's Long Island, the average price of a single-family home rose 22.6 percent. The hottest metropolitan area over the past five years: The Vallejo-Fairfield-Napa area of California, where home prices increased by 106.8 percent.

Similarly, on the downside, the drops have been relatively moderate. The worst decline for any four-quarter period since 1990, for example, was 11.9 percent in the Los Angeles-Long Beach area of Southern California.

Still, because of leverage, your loss could be far worse. Say you bought a house at the peak for $295,000 (today's median), put down 20 percent and then had to sell your home after an 11.9 percent drop.

Not accounting for any increase in equity from paying down the mortgage and excluding transaction costs, you'd have lost more than $35,000 -- a painful 60 percent of your down payment.

That said, as long as you can keep paying your mortgage every month, you'll probably hang on to your house -- after all, you can continue to live in it -- rather than sell it for such a substantial loss. Which is one big reason why the boom-bust cycles of real estate don't look the same as the rises and falls of the stock market.

During a real estate downturn, economists explain, transactions dry up first, as sellers refuse to lower their prices and the gap between what sellers will accept and what buyers will pay widens. Only later, as selling times drag out and sellers slowly lower their asking prices, will prices drop at all.

Those who get squeezed in a housing bust are simply those who can no longer afford to keep paying their mortgages and so lose their homes to the bank. "A slowing of sales does not necessarily mean a collapse or even a decline in prices," says Harvard's Belsky. "Prices may grow very slowly, perhaps not even as high as inflation, so you would have a slow deflation."

As the current housing boom winds down, that gives some cause for comfort. For even in those places where there is a housing bubble, there is unlikely to be a deafening pop.

Additional reporting by Linda Berlin, Donald Caplin, Joan Caplin, Tara Kalwarski, Michael J. Powe, Aparajita Saha and Kathy Shayna Shocket.

File a claim, lose your coverage

Insurers are dumping customers who file a few claims. Here's what you can do.

By Leslie Haggin Geary, CNN/Money Staff Writer

New York (CNN/Money) – Peter Roedel was away on business when he got the call from a friend who was staying at his Milwaukee home. A burglar had broken into the house and made off with two televisions, the VCR and a few hundred dollars in cash.

Luckily, Roedel had homeowner's insurance. He filed a claim and received a check for the full amount of $1,234.

End of story? Not quite.

Nine months after settlement, Roedel received word from his insurer that he would not be allowed to renew his coverage because of his "loss history," as well as his driving record.

Roedel was stunned. The theft was the first claim he'd filed in the eight years he had been with the company, and he had no idea that a speeding ticket would be grounds for him to get dumped.

"You think, 'I've been paying $400 a year in premiums for eight years and I had one claim for $1,200. They're already ahead," he said. "It leaves a bad taste in your mouth. There was no forewarning. No nothing."

Roedel's plight is not unique. After lowering premiums or keeping them steady for years to attract new clients, property and casualty insurers have done a 180-degree turnaround. These days, they're cleaning out their rosters with an efficiency that's leaving many homeowners, and insurance agents, stunned.

Many of the old assumptions about insurance – namely, you pay the premiums and they cover the losses – are now being questioned.

Financial losses prompt cutbacks

In fact, it's partly because insurance companies kept premiums low that they're now in trouble. Last year, property and casualty insurers suffered a $7.9 billion net loss, according to Insurance Services Office Inc. Losses were exacerbated by massive mold claims as well as investment losses, which have hit the industry hard.

Farmers Insurance Group, for example, says it wants to stop renewing plans in Texas because it has paid some 17,000 mold claims this year alone and more than $1 billion for mold damage since 2001, said spokesperson Mary Flynn.

What's more, the state insurance department wants Farmers to repay $150 million to customers and roll back prices after the agency said the company unfairly increased premiums – a move the company is loathe to do. "Those are huge numbers," said Flynn.

File a claim, lose your coverage

Consumers say they've also suffered losses.

Frances Manley is among those who had to file several claims after a string of bad luck. Her first, for $1,200, was made in 1997 after her home was burglarized. A year later she filed two more -- one for a $1,500 leak and a $100 claim for a new antenna after a wind storm ripped through her former Arizona neighborhood. She was reimbursed for all three. Prior to that, she says she had insurance for 18 years and had never filed a claim.

"They sent me a check for $100 and I got a letter four months later saying 'We're no longer representing you,' " said Manley. "I was devastated."

Manley was able to find insurance from another company – for twice the price. But even then her troubles didn't end. When she moved to Maryland in 1999 she found insurers in that state didn't want her business. The problem? They were scared off by her claim history in Arizona, which was laid out in a CLUE (Comprehensive Loss Underwriting Exchange) report that insurers use to keep tabs on clients – and homes – to edit out potentially costly business.

"I was furious. I had a perfect record before this. But the claims were out of my control," said Manley. She eventually found insurance after going to an agent who was able to shop around and after agreeing to a higher deductible than what she originally wanted.

Keep deductibles high

With the market tightening up, insurance agents say consumers will need to change their expectations. For starters, don't expect to file a claim without repercussions. It's probably best to cover the smaller losses out-of-pocket and save the claims for big-ticket damage.

One way to trim costs is by increasing the deductible, or amount you agree to pay on your own before coverage kicks in – at least $500 and even $1,000 or $2,500 if you can afford it. That said, there is a bright side to this tactic. Boosting deductibles is one of the fastest, easiest ways to trim premiums – by as much as 25 percent a year, according to Insurance Information Institute.

"If someone stole your TV set and it's $700 it's probably not worth it in the long run to file a claim because you could pay higher rates or be non-renewed," adds III spokesperson Jeanne Salvatore. On the other hand, if you had a fire in the kitchen, you should be filing that claim."

Did you pay too much?

You worry you bought at the top and will rue the day. Here's how to tell if you overpaid.
By Jeanne Sahadi, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Record low interest rates and double-digit price appreciation proved too hard to resist. So you took the plunge and bought a house in the last few years.

Now, though, you can't quite quell that nagging fear: "Did I pay too much?"

If by that you mean, "Did I agree to a higher price than others paid during the same period for a comparable house nearby?" -- well, the housing sales data for your area should tell that tale. (You might begin your search on the Web. Some sites, such as Domania.com, offer comparable sales data.)

But if you're wondering whether you bought at the top, setting yourself up for a loss if prices fall or stagnate, that's more complicated. And it's a question you won't be able to fully answer until it comes time to sell. Because, let's face it, the true value of your home is fundamentally what the market will bear at the time.

Nevertheless, there are ways to satisfy your curiosity.

What would your home rent for?

Real estate expert Gary Eldred, author of "Value Investing in Real Estate," suggests you start by comparing the cost of owning your home with the cost of renting it.

ne characteristic of a speculative boom in housing, he said, is an ever-widening gap between what you pay to own a home versus what you'd pay to rent it. The risk to homeowners is that potential buyers will be less interested in buying if it's cheaper to rent or they're unable to buy, especially if interest rates tread higher, making your house more expensive to them than it is to you.

A wide gap, however, does not necessarily imply housing prices will fall. It may just mean they will plateau for awhile. Either way, that profit you were banking on may not be in the bag if you're planning to unload the house in the short-term.

To determine how much your house would rent for, check the real estate listings in your local newspaper or ask a rental broker. If renting is not permitted in your neighborhood, find the nearest comparable rental, then adjust the price accordingly. For instance, add to the market rent if your area is more exclusive than where the comparable rental is located.

If the monthly cost of owning your home -- including your principal, interest, property taxes, insurance, homeowner's association fees and maintenance -- exceeds what your home would rent for by 25 percent to 35 percent, "that's speculating," Eldred said.

By that he means you're likely to need a historically high annual rate of price appreciation to turn a profit -- or just to break even -- if you plan to sell your home within the next five years. Conservatively speaking, a home appreciates by about 1.5 percent above inflation each year. But you'll need much more than that, Eldred said, if you're paying 25 percent or more than a renter would for your home. (In 2002 prices appreciated 7 percent nationally, according to the National Association of Realtors.)

Is your income keeping pace?

Another possible indication your home stands some chance of losing value in the next few years is if home price appreciation in your area has been outpacing income growth by a wide margin.

"It's not a situation that can persist over a long period of time," said David Stiff, manager of economic research for Case Shiller Weiss (CSW), a home-price research company. Nevertheless, Stiff noted, historic lows on interest rates combined with more flexible lending requirements -- which have made pricier homes more affordable to more buyers -- may allow the ratio between price appreciation and income growth to remain wide for a longer-than-usual period without a deleterious effect on pricing.

Generally, though, a big spread between price appreciation and income indicates that home prices are due to cool off, said Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard.

Take Boston. For the first half of the 1980s, housing prices rose dramatically, peaking in 1985, while personal income remained fairly level by comparison, according to CSW data. But by 1990 home prices had dropped 10 percent below 1981 levels and personal income also declined, but modestly by comparison.

That's an extreme example. The Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac, noted in one of its reports that generally speaking declines in areas that have exhibited bubble-like behavior in the past "have almost always been much smaller in absolute magnitude" than the increases that occurred during the preceding housing boom.

Put simply, areas where homes have enjoyed great price appreciation are not likely to give up all those gains should the market decline, which is why housing is traditionally considered a good long-term investment.

Today's top is tomorrow's trough

And once a down cycle is over -- they typically don't last more than a few years -- the next upswing in prices is likely to make today's top prices look like bargains in tomorrow's market.

For that reason, "the time to buy is always five years ago," said Ray Brown, coauthor of "Home Buying for Dummies."

So if you're planning to stay in your home for many years, you should be less concerned with the prospect of a potential downturn in the near term.

"Your risk is mitigated if you plan to stay long enough to ride out the cycle," Retsinas said. Generally speaking, that means at least five to seven years.

Indeed, Stiff said, in many instances, if you can hold on seven to 10 years "you can almost be assured your home will increase in value" Whether that increase outpaces inflation is another matter, but at least you're not likely to end up owing money to the bank. And you can never underestimate the intangible value of having a place to live in the meantime.

If, for some reason, you can't wait out a housing downturn, should one occur, there may be a small consolation, Brown said. The bad news is you may not get as much as you paid for your house. But the good news is if you're staying in the same area you won't pay as much for your next house either.

(This article, originally published in February, has been updated.)

Out-of-State Investing. Can Be Risky Business

By Robert Irwin

Question: My wife and I want to begin making long-term real-estate investments. The market in the area where we own our condo commands high rents and has shown good appreciation over the past several years. Our dilemma is that we would like to move to a warmer climate within the next couple of years. Given the market conditions, we would like to keep and rent our condo, purchase a multifamily building and begin collecting rents on a total of four or five units. Our total monthly mortgage payments will be $4,200 and our income from rent should be $6,800. How economically feasible is it for small investors to manage properties from out of state? Can we still take advantage of the hot real-estate market in the area if we move? Or is it better to wait, transfer our equity and begin investing elsewhere?

-- Peter, Cambridge, Mass.

Peter: You aren't alone in wanting to own out-of-town real estate. There are a great many people who find that the market they are in is too expensive to offer good rental opportunities. They look where the grass seems greener in distant areas that offer lower prices and a good supply of tenants. There is just one problem: management.

I can still bitterly remember my first experience with buying real estate at a distance some years ago. I was living in Los Angeles and bought several single-family homes in Phoenix, just about a one-hour flight away. I hired what I thought was a good management company to handle them for me. Yet I found I was forced to jet over there monthly, sometimes weekly, and those travel costs added up.

Specifically, the manager always had some other problem to deal with before mine. When tenants moved out, I often had to handle the clean-up. And then there were repairs and maintenance. A leaking faucet that I could have fixed myself for 35 cents, cost me $100 for a plumber. Needless to say, it was a money-losing nightmare.

The truth is that handling rentals requires personal attention. If it is your own property, you will give it. But don't expect someone else to offer the same TLC for you, at least not for a handful of properties. In talking with successful investors, I have found that the critical mass seems to be around 20 multifamily units. At that point you can afford to have an onsite manager. If you are into single-family homes or units that are spread around, you might need twice that number.

This isn't to say that you can't manage rentals at a distance. Sometimes you get the perfect property and the perfect tenants and everything works out. But are you that lucky? The easiest thing in the world is to underestimate the cost, time and energy involved in handling rentals at a distance. The hardest thing is to try to get yourself out of that situation once you are in it. Be careful.

-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent books are "How to Get Started in Real Estate Investing" and "How to Buy a Home When You Can't Afford It" (McGraw-Hill, 2002).