Regular Folks Put Retirement Savings Into Apartments.

REAL estate investing isn't just reserved for the moguls who play Monopoly with real buildings; for many regular, middle-class folks, it's considered a more reliable retirement plan than putting money in the stock market.

Of course, these people aren't buying a lot of high-rises. While some "mom-and-pop" investors do own office properties, they tend to be smaller, older buildings. Most small investors have been driven out of the commercial market by high prices and the emergence of well-capitalized real estate investment trusts, institutional buyers and pension funds.

So for the average, middle-class investor, there are essentially three real estate options: put money into a REIT, buy smaller rental properties or invest in houses in need of a rehab.

"(Multifamily) investment property is cheaper per square foot than (a single-family house). You get more for your money and it's a great way to get a foot in the market. My investment property (a duplex and triplex) is what I consider my retirement account, I have no money in the stock market," said L.A. resident Carol Stewart.

Since 1992, Stewart has put her savings into real estate, and her sideline has become her career. She has left the film business, where she had worked as a producer and script supervisor, and is now an agent for Fred Sands Realtors in Los Feliz.

An alternative retirement plan

Brokers say small rental buildings are still a popular choice for retirement income. As a mortgage is paid off with rental cash flow, landlords can look forward to the day when their property is free and clear, and they can live off that rental income.

"Rental property is a good long-term investment. It's a self-liquidating liability," said broker Paul Pagnone of Pagnone Realty in Los Angeles.

Many brokers say rental properties are a particularly good deal because of L.A.'s current apartment shortage (vacancies in the second quarter were as low as 1 percent to 5 percent, depending on the area), and the market will only get tighter as demand continues to exceed supply. Those ever-tightening vacancies will drive up average rents which, in turn, will drive up rental property values, industry observers said.

"With mom-and-pops, the upside comes through hands-on work and personal attention rather than economies of scale," said Stephen Lampe, a broker with Marcus & Millichap's downtown L.A. office. Lampe has seen many of his clients purchase smaller, character buildings, redo the units, then increase the rent 20 percent to 25 percent, recouping those outlays quickly.

For many amateur investors, real estate's financial risks soon become readily apparent: tenant-liability exposure, loss of equity if there's a downturn in the market, and the non-liquid nature of real estate.

David Sentance, a private investment advisor and owner of two Silver Lake-area apartment buildings with a combined 10 units, has found that owning investment property "is a business. It's not passive like the stock market. And if you don't like going to court, forget about it."

Twenty years ago, Sentance bought his first apartment building as a tax shelter. After the riots, tenant turnover was a problem, but that problem has decreased significantly in recent years. "Real estate is a good investment if you start young and don't bet the farm on it," he said.

Recommending REITs

Steve Solomon, senior vice president in Colliers Seeley International's Westside office, contends that the safest way for middle-class individuals to invest in commercial buildings is to buy REIT stocks. As a rule, the commercial property sales that Solomon brokers go for a minimum of $750,000, to people already in the business. Solomon also recommends that individuals seek out limited partnerships.

"Every time the (stock) market goes down, more money comes our way," says Marc Paul, president of Secured California Investments Inc., a West Los Angeles real estate investment company with more than 110 individual clients. "We're a very conservative company. Since the stock market started cooling off, longer-term value makes more sense," Paul said.

The key for any investor, according to Paul, is to buy something that is attractive and has a strong likelihood of being rented. "We like to find good areas that are becoming very good areas," said Paul, who has purchased 20 buildings in the Palms area over the last year.

Stewart points to her own experience as an example of leveraging real estate investments to acquire more property. After living in an apartment for 10 years, she bought a triplex with a friend, eventually bought him out, then leveraged the property to buy a duplex. After some equity was generated in that building, she refinanced and used the cash to buy a house. Her rental income on her apartments will pay her mortgage on her new house, which she is now in the midst of remodeling.

"The guys who make money hold their property a long time, make a business of it, and are prepared to ride out real estate cycles," Sentance said.