By Emily Meehan

From The Wall Street Journal Online

When David Vallas, 28 years old, decided to take a year off from his lucrative job as a systems engineer and move from Anchorage, Alaska, to Pennsylvania, where he grew up, he needed to do it cheaply. He wanted to relax, hang out with his dog, and maybe write a book.

His girlfriend would be the breadwinner, but she didn't have a job lined up in Philadelphia. He grew up in the suburbs, but she was set on the city. In December, they moved into an $875-a-month two-bedroom house in West Philadelphia, a part of town that is cheaper than many other neighborhoods. The two-story unit is within their budget and has a washer, dryer and yard.

But Mr. Vallas is not relaxed.

In early January, he and his girlfriend heard gunshots outside their door. They huddled in the basement. Police arrived, and chased a suspect along the side of their house. An officer at Philadelphia's 18th precinct casually characterizes the incident as an argument between two acquaintances, not a homicide. "In the end, a bullet went through our right neighbor's window," says Mr. Vallas. "Four bullets went through our upstairs neighbor's car. Police tape was strewn across our porch." When a neighbor later suggested that the chipped bricks on the side of his house were the result of bullet ricochet -- not from the mayhem in January, but from a shooting incident three months before -- Mr. Vallas and his girlfriend decided to move.

For young adults on a tight budget in the city, moving to a less expensive -- and less fashionable -- neighborhood is a way to make ends meet. The hood has perks. In addition to more space for less money, we may find historic housing stock, a bohemian atmosphere, and vibrant multicultural communities. Many of us were brought up in the suburbs. Now we either can't afford to move back, or can't stomach the prospect of being so isolated and bored ever again. But as Mr. Vallas learned, there may be irreconcilable downsides.

Besides gunshots, Mr. Vallas says there's a litany of problems on his block. There are two condemned buildings. Their backyard is actually a mudflat where neighborhood dogs jump the fence and attack their Doberman pinscher, Phoenix. The front porch attracts uninvited neighbors who leave empty Pepsi bottles and chip bags in their wake. One neighbor relieved himself on the side of Mr. Vallas' house.

Next month, he and his girlfriend will move to a pricier part of town, near Philly's posh Rittenhouse Square, where they'll rent a smaller apartment for $900 a month. "There's less likely to be a shooting there," says Capt. Benjamin Naish, a spokesperson for the Philadelphia police department.

Others who cope with inner-city conditions may be amused by the cat-calls of local lotharios and appreciate graffiti. These hearty individuals can be rewarded for their patience.

Hrag Vartanian, 33, is one of them. He first moved to New York City's Bushwick neighborhood in Brooklyn six years ago, when the area was in bad shape. Much of Bushwick burned in riots, looting, and arson prompted by a 1977 blackout -- and the housing stock still hadn't recovered. In 2000, Mr. Vartanian's rent for an 850 square foot loft was $1,000 a month -- quite low for a comparable space in fancier city districts. The price was right. He was single, a free-lance writer and earning just over $30,000 a year working at a nonprofit in Manhattan. He says he wanted to live alone, with more space and light to do his writing than he had in a basement apartment he had shared in Manhattan.

In 2001, Bushwick's 83rd police precinct had 606 violent crime complaints, including rape, felony assault, and murder. Five miles south, in Brooklyn's tony Park Slope neighborhood, the 78th precinct had 120 violent crime complaints the same year. Mr. Vartanian says he was robbed of his cellphone once while walking down the street, attacked once by muggers and, he says, there was a crack house at the end of his street. The neighborhood had small grocery stores and only a few restaurants, where he says the staff often gave him the cold shoulder. But he puts a positive spin on it: "It encouraged us to cook," he says. He laughed at the teenage wise guys who heckled him, and befriended his fellow tenants: a carpenter, a bartender, a writer, an artist. "It put me at the epicenter of creative life in New York," he says.

Mr. Vartanian and other creative types may have helped spur Bushwick's continuing gentrification. Though he says his rent has not increased significantly in the past six years, nearby loft spaces of the same size, listed on Craigslist.com, are on the rental market now for $1,600 to $2,000 a month. A couple of hip restaurants have arrived, and quirky residents of the area's copious converted warehouses host dance performances, D.J. parties, rock concerts and open studio tours that make it into blogs, newspapers and magazines. Mr. Vartanian says that "The New York Times," long absent from neighborhood shops, is finally available. The crack house went out of business. Its building has been refurbished and adorned with a graffiti mural of penguins, sanctioned by its owner. The number of violent crime complaints in the 83rd precinct was down to 436 in 2006.

Young adults have been homesteading in neglected urban neighborhoods since after World War II, according to geographer Neil Smith, an author and professor who studies gentrification at New York's CUNY Graduate Center. Artists did it long before, in spurts, he says. Now gentrification by the poorer, younger crowd is almost systematic in cities around the world.

That doesn't mean we will reap the benefits when the neighborhoods become trendy. Unless we buy, we may eventually have to leave when the urban trenches become rose gardens -- and rents rise accordingly. "People who are moving in at the front end of the process often become victims, along with the long-time residents, of the very gentrification that they helped foment," says Mr. Smith.

In Atlanta, Andy Sisk, 27, says he and his wife bought a three-bedroom house in the Edgewood neighborhood two years ago for $200,000. "In the suburbs of Atlanta we could have found a cheaper house, but traffic is notoriously bad... and they're cookie cutter housing developments."

Mr. Sisk, a financial analyst at a real-estate fund, figures that the value of his 1928 bungalow has appreciated about 5% each quarter on average since he bought it, based on Atlanta real-estate-price-appreciation rates from the Office of Federal Housing Enterprise Oversight. "Early on, we suffered two home break-ins and one stolen car stereo," he says, "but we began to adapt... I enjoy being close to the cultural center of Atlanta where I can catch a play or go to the aquarium." Mr. Sisk says the eclectic mix of people in his neighborhood has exposed him to sorts of people he didn't meet growing up in the small Georgia city of Warner Robins. "It has been nice to not worry about 'keeping up with the Joneses' next door," he says.

Part of the reason Mr. Sisk chose the neighborhood in 2004 is because he foresaw a demographic transition and subsequent increase in the value of homes, he says. In chorus, Barnes & Noble, Target and Best Buy arrived with other "big box" stores a year later. However, Atlanta police department crime statistics show that rates of violent crime, robbery and burglary have gone up in Mr. Sisk's neighborhood in the past two years. While crime there is not the city's worst, it's not low either.

In Texas, Christian Stagg, 27, bought a three-bedroom house in East Austin's Govalle neighborhood last August for $167,000 (about $7,000 less than the median home price in the metropolitan area). Austin's city demographer, Ryan Robinson, describes Govalle as a "historically undervalued barrio that's gentrifying. It's the last part of the urban core that's affordable," he says.

Ms. Stagg grew up in rural Idaho. She works in development at a university and produces theater with her husband. The house was in their budget. "People always ask me, 'Do you walk around at night by yourself?' but I feel pretty safe," she says. Their lawn mower was stolen, but otherwise the neighborhood has been hospitable. She can walk to the theaters she works in and to an organic farm a few blocks away where she gets the bulk of her groceries. "After growing up in a rural community where you are so dependent on cars ... it's huge."

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By M. P. McQueen

From The Wall Street Journal Online

A backlash against insurers is building in several coastal states where homeowner premiums have increased sharply despite several years of rising industry profits and an uneventful hurricane season in the East.

In Florida, where back-to-back hurricanes have helped some rates more than double since 2004, the state legislature yesterday approved a measure aimed at reducing homeowner premiums offered by private insurance companies by 5% to 25% or more. The legislature has been meeting since last week in a special session specifically aimed at addressing the state's insurance crisis. The measure now goes to Republican Gov. Charlie Crist, who has made insurance-rate cuts a top priority since taking office this month.

That comes after several large insurers in California recently agreed to roll back homeowner insurance rates by as much as 20%, or a total of $439 million. The cuts, by insurers including Farmers Insurance Co., State Farm Mutual Insurance Cos. and Safeco Corp., came in response to the state insurance commissioner's efforts since last summer to force down rates in the state. Premium rates rose substantially in California in the early part of the decade, and many homeowners lost their coverage after devastating wildfires in 2003.

Insurance companies are regulated by the states, and officials in Connecticut and Georgia recently rejected some requests for further insurance-rate increases. Also, regulators in both states are investigating whether insurance companies are maneuvering to circumvent rules aimed at making sure that homeowners in all areas, including riskier coastal zones, can get coverage. Florida regulators also late last year turned down requests by some insurers to raise rates further by as much as 40%.

Last year, home insurance rates along the Atlantic and Gulf coasts rose between 20% and 100%, or more. Homeowners also are paying more for less, because insurers are dropping policy coverage for wind, hail and mold damage in many states. By contrast, rates outside of coastal areas last year rose between 2% and 4% nationally, according to the Insurance Information Institute, an industry research group, and are expected to rise modestly in 2007.

Efforts to rein in rates are meant to help people like Arline Lafferty Wallace, 68, a real-estate agent in Marathon, Fla., in the Keys. Ms. Wallace says her windstorm policy premium soared from $5,500 two years ago to $21,000 last year on a home with an insured value of $775,000. Ms. Wallace says she has never filed a windstorm claim in the 30 years she has lived there. By increasing the deductible to 25%, and getting assistance of a consumer advocacy group, Ms. Wallace managed to cut her bill to $9,000. "It is absolutely unbelievable that this kind of thing can happen," she says.

The backlash comes as the insurance industry has had three straight years of rising profits, despite 2005's devastating Hurricane Katrina, the country's costliest ever. (Insurers continue to do legal battle in Katrina-hit zones.

Property and casualty industry profits rose to $68.1 billion in 2006 from $49 billion a year earlier, according to A.M. Best, a ratings concern.

Insurance officials say the high profits essentially reflect the industry making hay while the sun shines. In most years since 1980, insurance companies have barely broken even or have paid out more in claims than they collected, says Julie Rochman, senior vice president of the American Insurance Association, a trade group. "It's a good idea that insurers have good years so that we are around for exceptionally bad years like 2005," she says.

Analysts and insurers say that if states force insurers to take on risks they don't want or to price their policies too low, then companies might withdraw from unprofitable markets, creating shortages, or be unable to pay claims.

The Florida measure would require private insurers to cut homeowner rates an average of 5% to 25%. Devastating hurricanes in 2004 and 2005 made insurance rates unaffordable for many state residents. Insurers also dropped coverage for many homeowners, driving thousands of people into the state's high-risk pool, Citizen's Property Insurance Co.

The Florida bill also would require insurers who write home and auto policies in other states to offer home insurance in Florida, or else be banned from selling any other line of insurance in the state. Avoiding riskier lines of business, commonly known as "cherry picking," also has come under pressure in other states because it reduces the availability of homeowner insurance. The bill also would allow Citizen's Property Insurance to lower its rates to compete on price with private insurers, which is expected to inject greater competition into the marketplace.

Florida plans to ease some of the pain the measure may cause insurers by boosting contributions to its hurricane catastrophe reinsurance fund. The fund, which is intended to bail out insurers if claims run too high, allows insurance companies to purchase reinsurance at cheaper rates than the companies can buy in the open market.

"The bottom line is that Florida has just reinforced its reputation as one of the most overregulated insurance markets in the country," says Cecil Pearce, vice president, Southeast region, for American Insurance Association, an industry group.

In June, the California insurance commissioner ordered several insurers, including Allstate Corp., State Farm, Farmers and Safeco Insurance, which combined insure over half the state's homes, to justify their rates. The move followed release of a study that showed the insurers were paying out less than 50 cents in claims on each dollar of premium they took in. Insurers historically have paid 65 cents to 75 cents on claims for every dollar in premiums, excluding expenses, according to the Consumer Federation of America. Safeco says a 20% rate reduction amounts to an average annual saving of $190 per household. Combined with reductions in automobile insurance rates, California overall has won rate cuts totaling $1.6 billion since the summer.

"We will be monitoring our costs in California closely, but we hope we will be OK," a State Farm spokesman says. The company expects the reductions, which are awaiting approval, to take effect as early as April.

In Connecticut, the attorney general has opened an antitrust investigation into attempts by some insurance companies to require homeowners to install storm shutters at a cost of $50,000 or more as a condition of continuing coverage on properties near the Long Island Sound. Critics say the steep added cost could make it impossible for some homeowners to obtain insurance.

Georgia's insurance commissioner says he plans to hold hearings next month on whether St. Paul Travelers Companies Inc. is discriminating against coastal homeowners by cutting independent agents' commissions in six coastal counties by about one-third, but not in the rest of the state. State law forbids insurers from writing business in the interior but not on the coast. "This appears to be a backdoor way around the law," says Commissioner John W. Oxendine.

"We understand the commissioner's concerns, and we remain committed to the Georgia insurance market," says a St. Paul spokeswoman.

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By Ben Casselman

From The Wall Street Journal Online

Last year proved to be a tough one to sell a house. In many parts of the country, sales were down, inventories were up and homes lingered longer on the market. In August, the median price of an existing single-family home fell 1.7% compared with a year earlier, the first year-to-year price decline in more than a decade, and prices continued to fall for the remainder of 2006, according to the National Association of Realtors.

The high end of the market wasn't immune, either, as evidenced by the lackluster sales of the homes highlighted in Weekend Journal's "House of the Week." Of the 46 houses featured between October 2005 and September 2006, only 14 have sold, most at steep discounts -- an average of 16% below the asking price published in our column; another four are in contract. Timing was also critical: Only one house featured since June has found a buyer. (None of those featured in the fourth quarter of 2006 have sold, but they aren't included in this survey because most have only recently come on the market.)

Homes featured in House of the Week aren't representative of the national housing market. For one thing, they tend to be high-end properties: the average asking price for the homes in our sample was nearly $10 million, while only one asked less than $1 million. They are also selected for other qualities -- noteworthy architecture, colorful histories or singular locations -- that set them apart even from other luxury homes.

Still, their sales performance has generally followed national patterns. Overall sales volume peaked in mid 2005 and then declined steadily throughout most of 2006, according to the National Association of Realtors, and existing home sales in November 2006 were down 11% compared with the previous year. The same held true for the Houses of the Week. Of the 23 properties featured from October 2005 through March 2006 -- when the overall market was relatively strong -- 12 have sold or are in contract, compared with just six of those featured during the following six months.

The properties that were most likely to find a buyer were those with the highest price tags. Half of the Houses of the Week with asking prices of $15 million or more have sold, versus just over a quarter of those asking less than $15 million. That, too, follows a national trend, according to Jonathan Miller, president of the New York appraisal firm Miller Samuel. "Super luxury" homes have continued to sell in high numbers, he says, though not necessarily close to their asking prices. In fact, one reason they tend to sell, Mr. Miller says, is because their owners can be more flexible; these deals don't live or die over a $5 million difference. And unlike the general housing market, which is strongly affected by interest-rate fluctuations, upscale home sales tend to be more sensitive to the stock market and the overall economy because buyers are more likely to pay in cash.

San Lee, the owner of a 10,000-square-foot waterfront mansion in Palm Beach, where the market remains healthy, actually raised her asking price recently, to $22 million from $18.5 million. That builds in room to negotiate, says listing agent Wallace Turner of Sotheby's International Realty. At the same time, "the buyers feel that they're getting a value, even though we're settling it at about the same price in the end," Mr. Turner says.

Most sellers, however, moved in the opposite direction. About half of the House of the Week properties still on the market have had a price cut since they appeared in the column, in one case by 35%. Others have been taken off the market entirely, although many sellers say they will try again when the market improves. It may be a while, according to Mark Zandi, chief economist for Moody's Economy.com. "There's still a lot of oversupply," even at the high end, he says. "I think the correction really has a year left to run."

Here's a sampling of four Houses of the Week in different parts of the country.

SOLD: Southern California oceanfront contemporary, for $27 million.

This 3,544-square-foot home in Carpinteria, about 12 miles south of Santa Barbara, sold for 77% of its $35 million asking price, but Charlene and Sherrill Broudy say that's still far more than they expected before they put it on the market in the spring. The asking price was "a shot in the dark," Ms. Broudy says. The value in the 1.7-acre property lay primarily in its seaside location -- with 150 feet of beachfront -- rather than the house itself -- a four-bedroom home built in 1980 (which Ms. Broudy says needed work). Listing agent Kathleen St. James of Sotheby's International Realty moved into the house while the owners were away in Costa Rica and cleaned it up, a project that included pressure-washing and oiling its redwood exterior. The May 5 "House of the Week" sold in 60 days. The buyer, local venture capitalist Brian Kelly, saw the property in its first week on the market, before Ms. St. James's cleaning job, and submitted the only serious bid. "You don't have that many people calling you up to spend that kind of money," Ms. St. James says. "Sometimes you get lucky."

AVAILABLE: 319-acre Montana ranch on the Yellowstone River. Asking $13.5 million.

Dan and Barbara Todd recently cut 10% off the $15 million price of their ranch in Livingston, about 26 miles southeast of Bozeman, after it had been listed for about a year. Mr. Todd says the price cut was a response to a softening market -- Montana ranch sales volume is down from last year, though prices have continued to rise -- and to signal that he is ready to make a deal. The property includes a recently built six-bedroom, 6,400-square-foot main house, a guest cottage and a one-bedroom barn/artist studio.

This is the eighth ranch that the Todds have bought and sold, but the first that is primarily recreational, not agricultural. "When I show the property, I don't know whether someone wants to shoot a deer or look at it," Mr. Todd says. He isn't concerned that the house, which was featured on March 17, has yet to attract a buyer. Listing agent David Johnson of Hall & Hall says ranches usually stay on the market at least a year.

SOLD: Connecticut midcentury modern with pedigree, for $3.75 million.

This Philip Johnson-designed house in New Canaan went into contract within four months of being listed, albeit at a 12% reduction, from $4.25 million. The sale closed in just six months. Meanwhile, sales volume in Fairfield County, Conn., was down nearly 15% in the first three quarters of 2006 compared with the same period in 2005. Listing agent Susan E. Blabey of William Pitt Sotheby's International Realty attributes the modern home's speedy sale to its being "100% pure Philip Johnson," practically unchanged since the award-winning architect designed it in 1950. Not that there weren't challenges to overcome, including strict preservation easements that protected the land, the house and even some of the interior features. The "House of the Week" for June 9, had also been vacant two years and needed work.

But Craig Bassam and Scott Fellows knew what they were getting into. The buyers run the design firm BassamFellows and also own another vintage modern in New Canaan, which they're selling.

AVAILABLE: Low Country home on a South Carolina island. Asking $1.95 million.

This four-bedroom, nearly 5,000-square-foot home on Daufuskie Island, a second-home area about a mile from Hilton Head Island, came on the market in July 2005, just missing the area's primary selling season. Interest picked up the following spring, says listing agent Catherine Donaldson of Cora Bett Thomas Realty, but then the market hit a severe slump in the summer. (The home was featured on June 16, 2006.) The owners -- Detroit Red Wings center Robert Lang and his wife, Jennifer -- cut the price in August, but by then it was too late, Donaldson says. She adds that the 21% cut has generated interest, but mostly low-ball offers. "When you drop a price that much, you give the impression that it's a fire sale, and it's not." It doesn't help that Daufuskie Island is accessible only by water. "It is tough to sell a home on an island you can only get to by boat," she says.

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By Amy Hoak
From MarketWatch

An English-style, Alpine, N.J., residence with guest cottages, pool and tennis courts was the most expensive home sold in the United States in 2006, the Institute for Luxury Home Marketing said Monday.

The 63-acre estate, located five miles from Manhattan, sold for $58 million and was bought by Advanced Photonix CEO Richard Kurtz, according to a news release. Henry Clay Frick II was the seller. The property included a 10,000-square-foot mansion. The price was substantially lower than 2005's biggest sale, the record-setting $70 million sale of financier Ron Perelman's Palm Beach, Fla., oceanfront estate, according to the institute.

That said, sales of homes priced at $5 million and greater were on the rise in 2006, the group reported. And at least 10 buyers throughout the country were willing to shell out $28 million or more for high-end residences last year.

"Strong corporate profits, good news on Wall Street and a global commodities boom helped grow fortunes and sparked a surge of demand for trophy homes in 2006," said Waco Moore, vice president of The Institute for Luxury Home Marketing, in the release. The group trains real-estate sales agents who work in the luxury market.

"Final numbers aren't in, but estimates are that the U.S.'s 2006 sales of homes priced at $5 million and above were up about 11% over 2005," he said.

Moore went on to predict that recent Wall Street bonuses would provide a "jump start" to luxury sales in New York in 2007, and that other markets would follow.

The priciest home currently for sale is the $139 million Updown Court in Windlesham, England. The home, near Windsor Castle, boasts 103 rooms, five pools and a heated marble driveway, according to the release.

Also on the market: A Saudi Prince's Aspen, Colo., retreat priced at $135 million and Donald Trump's "decorator-ready" Palm Beach, Fla., property priced at $125 million, the group said. A waterfront home in Istanbul is available for $100 million. Domestically, a $100 million waterfront estate with views of Lake Tahoe is also on the market.

According to the institute, the most expensive home ever sold was a London mansion, bought by steel magnate Lakshmi Mittal in 2004. The home sold for $125 million.

http://www.realestatejournal.com/

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By David Crook

From The Wall Street Journal Online

The real-estate bubble has burst. Get over it. In areas that saw big home-price run-ups in the first half of the decade, prices are stagnant, or worse. New-home inventories are up; new-home builder stocks are down.

A kind of real-estate weariness has set in. Who's the cocktail-party boor? The guy still talking about making a killing on Miami Beach condos.

Smells like a buying opportunity. Probably not right away, because there's still plenty of froth in the markets that saw the biggest price increases. But soon, you'll see the real-estate investors -- property vultures who buy when prices are low and then ride property manias to their crest -- toeing the market again.

Even in today's uncertain climate, novice real-estate investors can make money, especially in smaller properties that are easy to acquire and manage.

Let's explore some options.

In-Law Units

The most basic form of property investment is a so-called in-law unit or guesthouse on the site of your home itself, sometimes attached to the main house, sometimes not. No one has ever gotten rich renting out such properties, but they can significantly reduce the cost of homeownership. Renting out an in-law unit for $400 a month and using that money every month to pay down principal on a $350,000 30-year mortgage will shave 10 years from the mortgage term and reduce total payments by more than $165,000. And you will be able to write off all your costs on your income taxes -- including depreciation on the unit -- up to your actual rental income.

Weekend or Vacation Homes

Just as with an in-law unit, renting out your weekend house is not a way to get rich. Many of the same numbers that applied to in-law units can be applied to your weekend home, although the tax situation is decidedly different.

First, the IRS gives second-home landlords a very nice little present in that it allows two weeks of tax-free rental income a year. Beyond that, however, the accounting can be irksome. The IRS doesn't want people buying second homes and disguising them as rental properties. It has two criteria to determine whether the property is a second home (bad) or a rental (good). It's a second home if you don't rent it out at all or if you personally use it at least two weeks a year or 10% of the number of days the place is available for rental, whichever is longer.

Single-Family Homes

Throughout much of the country, the market for single-family homes is seriously out of whack. As prices fall and inventories rise, that's changing. But, compared with rents, prices are still quite high, outstripping the ability of such properties to cover their mortgage and operating costs.

Avoid this segment of the market unless you have a chance to buy a property at a 30% or 40% discount from its previous price. Don't think this is out of the question. In the late 1980s and early 1990s, when the government liquidated the real-estate loan portfolios of bankrupt savings-and-loans, speculators picked up properties for just dimes on the dollar.

Managing a house that pays for itself is what it's all about. You can do it in one of two ways: Renting or "flipping." Renting is a "buy-and-hold" strategy, while flipping calls for quick turnarounds of fixer-uppers that can be spruced up and sold quickly.

But in the current environment renting is probably the more prudent path, although it can be very difficult to make a house pay for itself at today's prices. That's because if your house carries an 80% or 90% loan, the renter will have to pay more per month to rent the house than he would to buy it.

Look at it this way: There's a handsome three-bedroom, two-bath house in Tampa, Fla., for sale at an asking price of $199,900. If you bought it with 10% down and a 90% loan at 6%, your monthly payment will be about $1,550 (that's PITI -- principal, interest, taxes and insurance). As a landlord, at a minimum, you'll want to budget at least $200 a month in additional expenses. That puts your break-even point at almost $1,800 a month. That's far more than you can reasonably expect to earn where comparable properties in the same neighborhood can be rented for less than $1,300.

But it turns out that there's a similar house available less than a mile away. This other house is roughly the same size. The difference is this one's being taken over by its lender, and the house has a mortgage loan of $110,000.

A buyer with cash can drive a hard bargain and make out very well. And the worse the market, the better for the buyer. But don't get carried away. If you simply take over an existing 90% or 95% note, you won't make any money. Let the lender foreclose and take over the place. Then lowball the lender.

Multiple Units

A housing market that saw the price of single-family homes skyrocket was not quite so generous to smaller two-family or multifamily properties. Because the universe of home buyers expanded so much in the past 10 years, the universe of renters contracted, and the market for smaller rental properties contracted with them.

In Memphis, where two-bedroom apartments in better neighborhoods rent from $500 up to $800 a month, good two-family properties can still be bought for far less than a one bedroom condo on either of the coasts. Recent prices for 40-year-old two-family homes near the University of Memphis main campus ranged from $70,000 to $110,000. Monthly payments, including insurance and maintenance, on an $88,000 mortgage (20% down on the $110,000 property) come to only about $750 a month. So renting both units at the low end of the market would result in a positive after-tax cash flow of more than $100 a month. Upgrade the units, and you can charge top-of-the-market rents of $800 a month.

Good deals on smaller buildings can be found throughout the country, even in some of the hottest markets. In trendy Pasadena, Calif., where even modest homes can sell for $400 to $600 a square foot, two-, three- or four-unit rental buildings can be bought in the $250 to $350 range.

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