Q: I heard flipping was illegal. Is it?

A: Several years ago, the Dept. Of Housing and Urban Development (HUD) announced that "flipping" was defined as acquiring houses and then using manipulated data in an effort to artificially inflate property values for the purpose of defrauding a federally chartered lending institution.

I have always referred to that activity as "mortgage fraud," but HUD now calls that flipping. And since they rule the roost when it comes to real estate word definitions, I guess "flipping" is illegal, by their definition.

However, there is nothing illegal whatsoever about buying a house, then reselling it the next day for as much as you can get. There is no minimum holding period, and there is no maximum profit.

Be aware that some lenders may not be willing to offer loans on houses that have seen dramatic price changes or short holding periods, but that policy is in response to past abuses of mortgage fraud criminals, not because the activity is in any way prohibited.

Q: I have been investing in mutual funds up until now. How does that compare with real estate?

A: When you buy a share of stock or invest in a mutual fund, you become a silent owner in American business, and if the business thrives, your stock or fund should reflect that fact. The management of the companies you have invested in will handle all the day-to-day decisions about running the company. All you do is send in the cash and wait. That is a true investment.

Real estate, on the other hand, is really more like a part-time job. When you buy a house, you have to make all the decisions. From paint color to exit strategy, you are the boss. And while you can certainly hire qualified contractors to assist you, they will need direction from you.

The good news about real estate is that financing is available at such an attractive rate that you can buy a bargain property, fix it up, put a tenant in it, refinance your entire investment over thirty years, and have a break even cash flow from the beginning.

To be successful as a real estate investor, you will have to put in a lot of hands-on effort, and that is simply not a feature of mutual fund investing.

Q: I have heard that being a landlord can be a nightmare. Is that true?

A: Becoming a successful landlord is like any other endeavor. If you want to be good at something, you must learn the proper procedures.

Owners who fail to run their property like a business can get into trouble when their tenant expects service levels that simply can not be delivered. This can lead to misunderstandings and refusal to pay rent, and the entire rental relationship can quickly fall into jeopardy.

But a good landlord screens for the right kind of tenant, uses credit scoring and verifies applications, makes clear what services will be available, then delivers on those commitments. In addition, a well written lease which complies with state law is the only acceptable basis for a solid landlord-tenant relationship.

My experience has been that management problems are minimized when the landlord treats his properties like a business and not like a hobby. I have included a "Landlord Checklist" on my website at money99.com under additional resources.

Q: How do I know that real estate will always go up in value?

A: While that is the commonly held belief, it is a false assumption. Appraisers will tell you that homes go up and down in value depending on a multitude of factors. Supply and demand, cost of borrowing, community amenities, and the quality of local schools are just a few of the many factors affecting value at any given time.

However, it is important to know that, in general, residential real estate has seen a slow, steady increase in value over the past fifty years. In areas where home prices have spiked up, it is not unusual to see them drop later as they adjust to a national norm.

Economists have noted that there is a built-in resistance to falling home prices. A house is not usually bought and sold like a stock. Most people live in their own homes, and plan to stay for a number of years. This gives great stability to the housing market, and prices tend to be inflexible downward.

In addition, there are strategies the investor can use to boost property value, such as seeking out undervalued properties or highly motivated sellers to find bargain prices on homes that have upside potential.

Q: What is the long-term goal of real estate investing?

A: Different investors will likely have different goals. Some simply want to buy their own personal residence at a bargain price and work toward being debt-free. Others hope to assemble a portfolio of ten to fifteen little houses

and work toward paying the loans off, then use the rental income for retirement. Some want to leverage their way into commercial or multi-family properties.

There are an unlimited number of opportunities in the field of real estate investing.

Q: What is the best way to get started?

A: I recommend that you get more information by reading two easily available books. "Building Wealth One House At A Time" by John Schaub is an excellent overview of the topic, and will let you know quickly if real estate is right for you. I also like "The Millionaire Next Door" by Thomas Stanley & William Danko. In addition, many colleges offer non-credit courses on investing in houses, and investor clubs are popping up nationwide.