Finance: The ABCs of Real Estate Investment

Turn the clock back 10 years, not so long ago. “Everybody” in South Florida was a real estate investor. Real estate was the “can't miss opportunity of the century.”

You could buy just about anything it seemed, with little or sometimes even no money down, and sell it for 20-30 percent profit a year later.

But then... “Something Happened.” The chart shows what that “something” was. I suppose people without a long-term perspective could have looked at 2001-2006 and thought it would last forever. Most mortgage lenders and Realtors did, after all!

The first rule of any kind of investing is, when you hear somebody say things like “sure thing,” “no risk,” or “guaranteed”... RUN!

Now with that said, I work in the real estate business, and I have clients who have both bought and sold investment properties. I can tell you that, under certain circumstances, real estate can be an excellent investment as a component of someone's overall savings and investment planning.   But there is no such thing as a sure thing, and you need to do your homework and get the right kinds of advisors on your side.

There are three major advantages to prudent real estate investment.

  1. Cash flow

    Presumably you will purchase a property – whether residential or commercial – that someone will lease from you for a specified period, for a specified rent. Of course, you will have to deduct from that your expenses. There will be property taxes, maintenance and repair costs, insurances, possibly property manager fees, and your mortgage payment. However as a leveraged investment (you borrow money to buy it) the amount of your own capital that controls the property will be less than the property value. The (hopefully) positive cash flow, in comparison with the actual capital employed, can produce an attractive rate of return.
  1. Property appreciation

    No, property values don't always go up by 20-30 percent per year. In fact we went through a period where valuations here in South Florida sometimes dropped by that amount in one year! The long-term rate of appreciation in Greater Fort Lauderdale, looking back over the last 40 years, has been about 4.5 percent per year. Thus, if you buy investment real estate and hold it for a long enough time, you will probably be able to sell it for more than you paid for it.

Several of my clients have also purchased properties that have required some rehabilitation, and sold them (sometimes relatively quickly) for a profit. While this is still possible, it is not as easy as it was 3-4 years ago.

  1. Tax advantages

    The Federal government, through the tax code, has enacted several programs to make real estate a more attractive investment than many other alternatives. First, the interest on what you borrow to buy real estate is generally fully tax deductible. In addition, gains on real estate are taxed at a favorable rate, and there are mechanisms to defer recognizing those gains for a very long time. Finally, you are allowed to depreciate (write off) a portion of the value of the building and improvements every year (not including the land), thus reducing your taxes.

It really doesn't take a lot of money to get started. More correctly, it takes a decision to make this part of your strategy. And sometimes people have a hard time making decisions!

You can invest in partnerships or limited liability companies with friends and relatives. You can even buy things called Real Estate Investment Trusts (REITs) on the stock market. Now, I can't advise you on those; you'd have to speak with a securities advisor or financial planner about that. These are basically shares of real estate projects of various kinds.

The best advice I can give you on purchasing actual investment property is:

  1. This is all about the numbers

    It's not about prestige, emotion or ego. It's a hard-nosed decision based on the best potential return available for your risk tolerance and circumstances. Just because you wouldn't live there or have your business there, doesn't mean it's not a great opportunity that could make you a nice return.
  1. Have the right people on your team

    You're going to need an experienced Realtor who knows the numbers to help you find properties and assist with their purchase and sale. In addition, you'll need good tax and legal advice, and knowledge of (or ability to hire) property management services.
  1. Be a little contrarian

Don't go where everyone else is going; prices will be high and competition will be fierce. You're not going to be the only person seeking the “easy money” opportunities. Instead, look for the diamonds in the rough, properties in neighborhoods that may be a bit off the beaten path, but that have potential.

James Oaksun, Broward's Real Estate GeekSM, is a Realtor with the Wilton Manors office of RE/MAX Preferred. In addition to having degrees from Dartmouth and Cornell, he is a graduate of the Realtors Institute (GRI).


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