Posted: 10 Jun 2006 04:03 AM PDT

Buying real estate is about more than just finding a place to call home. Investing in real estate has become increasingly popular over the last fifty years and has become a common investment vehicle. Although the real estate market has plenty of opportunities for making big gains, buying and owning real estate is a lot more complicated than investing in stocks and bonds. In this article, we'll go beyond buying a home and introduce you to real estate as an investment.

Tutorial: Exploring Real Estate Investments

Basic Rental Properties
This is an investment as old as the practice of landownership. A person will buy a property and rent it out to a tenant. The owner, the landlord, is responsible for paying the mortgage, taxes and costs of maintaining the property. Ideally, the landlord charges enough rent to cover all of the aforementioned costs. A landlord may also charge more in order to produce a monthly profit, but the most common strategy is to be patient and only charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit. Furthermore, the property may also have appreciated in value over the course of the mortgage, leaving the landlord with a more valuable asset. According to the U.S. Census Bureau, real estate has consistently increased in value from 1940 to 2006, then proceeded to dip and rebound from 2008 to 2010. (To learn more, read The Benefits of Mortgage Repayment and Understanding Your Mortgage.)

There are, of course, blemishes on the face of what seems like an ideal investment. You can end up with a bad tenant who damages the property or, worse still, end up having no tenant at all. This leaves you with a negative monthly cash flow, meaning that you might have to scramble to cover your mortgage payments. There is also the matter of finding the right property; you will want to pick an area where vacancy rates are low and choose a place that people will want to rent.

Perhaps the biggest difference between a rental property and other investments is the amount time and work you have to devote to maintaining your investment. When you buy a stock, it simply sits in your brokerage account and, hopefully, increases in value. If you invest in a rental property, there are many responsibilities that come along with being a landlord. When the furnace stops working in the middle of the night, it's you who gets the phone call. If you don't mind handyman work, this may not bother you; otherwise, a professional property manager would be glad to take the problem off your hands, for a price, of course. (For further reading, see Tips For The Prospective Landlord.)

Real Estate Investment Groups
Real estate investment groups are sort of like small mutual funds for rental properties. If you want to own a rental property, but don't want the hassle of being a landlord, a real estate investment group may be the solution for you. A company will buy or build a set of apartment blocks or condos and then allow investors to buy them through the company, thus joining the group. A single investor can own one or multiple units of self-contained living space, but the company operating the investment group collectively manages all the units, taking care of maintenance, advertising vacant units and interviewing tenants. In exchange for this management, the company takes a percentage of the monthly rent.

There are several versions of investment groups, but in the standard version, the lease is in the investor's name and all of the units pool a portion of the rent to guard against occasional vacancies, meaning that you will receive enough to pay the mortgage even if your unit is empty. The quality of an investment group depends entirely on the company offering it. In theory, it is a safe way to get into real estate investment, but groups are vulnerable to the same fees that haunt the mutual fund industry. Once again, research is the key.

Real Estate Trading
This is the wild side of real estate investment. Like the day traders who are leagues away from a buy-and-hold investor, the real estate traders are an entirely different breed from the buy-and-rent landlords. Real estate traders buy properties with the intention of holding them for a short period of time, often no more than three to four months, whereupon they hope to sell them for a profit. This technique is also called flipping properties and is based on buying properties that are either significantly undervalued or are in a very hot market.

Pure property flippers will not put any money into a house for improvements; the investment has to have the intrinsic value to turn a profit without alteration or they won't consider it. Flipping in this manner is a short-term cash investment. If a property flipper gets caught in a situation where he or she can't unload a property, it can be devastating, because these investors generally don't keep enough ready cash to pay the mortgage on a property for the long term. This can lead to continued losses for a real estate trader who is unable to offload the property in a bad market.

A second class of property flipper also exists. These investors make their money by buying reasonably priced properties and adding value by renovating them. This can be a longer-term investment depending on the extent of the improvements. The limiting feature of this investment is that it is time intensive and often only allows investors to take on one property at a time.

REITs
Real estate has been around since our cave-dwelling ancestors started chasing strangers out of their space, so it's not surprising that Wall Street has found a way to turn real estate into a publicly-traded instrument. A real estate investment trust (REIT) is created when a corporation (or trust) uses investors' money to purchase and operate income properties. REITs are bought and sold on the major exchanges, just like any other stock. A corporation must pay out 90% of its taxable profits in the form of dividends, to keep its status as an REIT. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed its profits and then have to decide whether or not to distribute its after-tax profits as dividends.

Much like regular dividend-paying stocks, REITs are a solid investment for stock market investors that want regular income. In comparison to the aforementioned types of real estate investment, REITs allow investors into non-residential investments such as malls, or office buildings, and are highly liquid, In other words, you won't need a realtor to help you cash out your investment. (For further reading, check out How To Analyze Real Estate Investment Trusts, How To Asses A Real Estate Investment Trust and The REIT Way.)

Leverage
With the exception of REITs, investing in real estate gives an investor one tool that is not available to stock market investors: leverage. If you want to buy a stock, you have to pay the full value of the stock at the time you place the buy order. Even if you are buying on margin, the amount you can borrow is still much less than with real estate. Most "conventional" mortgages require 25% down, however, depending on where you live, there are many types of mortgages that require as little as 5%. This means that you can control the whole property and the equity it holds, by only paying a fraction of the total value. Of course, your mortgage will eventually pay the total value of the house at the time you purchased it, but you control it the minute the papers are signed.

This is what emboldens real estate flippers and landlords alike. They can take out a second mortgage on their homes and put down payments on two or three other properties. Whether they rent these out so that tenants pay the mortgage or they wait for an opportunity to sell for a profit, they control these assets, despite having only paid for a small part of the total value. (For more on taking out a second mortgage, read Home-Equity Loans: What You Need To Know and Home-Equity Loans: The Costs.)

The Bottom Line
We have looked at several types of real estate investment, however, as you might have guessed, we have only scratched the surface. Within these examples there are countless variations of real estate investments. As with any investment, there is much potential with real estate, but this does not mean that it is an assured gain. Make careful choices and weigh out the costs and benefits of your actions, before diving in.

Challenges, Rewards Of Commercial <b>Real Estate Investing</b>

Posted: 23 Oct 2014 04:39 PM PDT

Expert offers advice on the challenges and rewards of commercial real estate investing

Veteran commercial real estate investment expert Jeff Johnson has just published the second updated edition of his highly regarded book Cash Flow Forever!: The Real Secrets of Real Estate Investing.

Commercial Real Estate Investing advice

With over 35 years of experience, Johnson shares his best client stories and experiences and takes the mystery out of doing the right things properly, the first time. He describes his best tried and true procedures and techniques for setting and reaching realistic goals in real estate investing.

"There's no luck in this business," Johnson said. "Success comes from active involvement and constant due diligence. You have to study hard, work hard, and stay on your toes. You have to investigate things thoroughly, and make rational decisions based on the facts you find."

For both new and even experienced investors, the devil is always in the details. Johnson offers a very conservative view from the point of view of someone who has been in the trenches and weathered the ups and downs of the marketplace. His book is a comprehensive and yet easy-to-understand primer that covers the essential elements of real estate investing concepts and strategies garnered and refined over many years.

Commercial Real Estate Investing example from book

Here is an example from his book, in which he lays out a well-defined path buyers concerning the use of one of the essential legal documents, the real estate purchase and sale agreement (excerpt from Cash Flow Forever!: The Real Secrets of Real Estate Investing Chapter 32, The Paperwork):

Whenever you make an offer to purchase property, you will use a purchase and sale agreement. This should be a comprehensive agreement put together by an attorney, legal document company or real estate organization. The language of the agreement should fit the laws of the state in which you are purchasing real estate. There are generic documents that will work in multiple states but it is best to have a document that fits the state you are in. The language in a purchase and sale agreement is most important when a problem arises; in such a situation you want to be protected and have a legally binding document.

Commercial Real Estate Investing – Here are a few important points to keep in mind:

Make sure that you have the correct legal entities listed on the document.

Make sure you have the legal description of the property correct and completely spelled out.

Make sure that you have a very clear contingency clause (due diligence) that gives you a time period to inspect the property and determine if you want to purchase it. That clause must allow you to cancel the transaction and receive a full refund of your earnest money if for any reason you are not satisfied with the property during the due diligence period.

If possible use earnest money in the form of a note due if and when you remove your contingencies. This saves you from putting up cash that will sit in a trust account for a property you may not purchase.

Request that the seller provide and pay for a current Phase I Environmental Report upon acceptance of your purchase and sale agreement. If the seller will not pay for a Phase I, pay for one yourself. You can ask the seller to reimburse you for the report if it shows that the property has contamination and you want to cancel the transaction.

Make sure that the purchase and sale agreement allows you to assign the agreement to another entity.

Read the default language in the agreement carefully. In the event of default, you want the seller's only remedy to be limited to retaining your earnest money. Default would occur if you remove your contingencies, put up your earnest money, agree to close, and then change your mind and do not close.

Make sure all hand written changes made to the purchase and sale agreement during negotiation are initialed and dated. These agreements can get a little messy with a lot of back and forth negotiation. All parties want to be very clear on what their final agreement is. When the changes to the agreement are not legible it can cause problems.

Remember that you can never be too specific. Tie down all the details. If you think something is not clear, clarify it.

Request that the seller provide you with a preliminary title report upon acceptance of your offer; then, read the title report. Look for any easements, agreements or other issues that may affect the property.

Investing in real estate is a risky business. Johnson believes that real estate investing mirrors the very nature of life. Half of the battle in life is finding the right path. The other half of the battle is working to stay on the path and continuing to make forward progress, no matter how difficult the obstacles become.

Cash Flow Forever

Cash Flow Forever!: The Real Secrets of Real Estate Investing

Jeff Johnson

In Cash Flow Forever commercial real estate broker Jeff K. Johnson lays out a simple but highly effective formula for building net worth and cash flow through real estate investing. Jeff shares his unique insight from working with a number of highly successful real estate investors for over thirty five years. The book contains real life stories and investing experiences that have proven to be invaluable. This practical and easy to read book cuts right to the chase and lays out "The Real Secrets of Real Estate Investing".

Available at Amazon.

About the Author

Jeff K Johnson CCIM SIOR is the President of Black Commercial Inc., the brokerage division of NAI Black. NAI Black in Spokane, Washington. Jeff has over 35 years working with highly successful real estate investors and has formed numerous real estate investment partnerships. Jeff has taught "Real Estate Investing" at Spokane Falls Community College and is the past President of the Washington Commercial Association of Realtors. Jeff grew up in Forest City, Iowa where he attended Waldorf College and met his wife Kae. Jeff is an avid rock and alpine climber.

commercial real estate investing

Passive Income <b>Real Estate Investing</b> | What's Really Important?

Posted: 18 Nov 2014 07:00 AM PST

What is really important when it comes to evaluating and choosing between income investment properties?

There are many factors that come into question when looking for income investment properties. For new real estate investors, these factors can become a distraction. Over analyzing is one of the biggest aspects investors need to learn how to avoid. Others get taken on expensive detours due to chasing the wrong features. Having said that, are new properties better than existing ones? How important is property condition? Are multifamily apartments really better than single-family homes? What priority should taxes be given in the decision? Does property value even matter if you are investing for cash flow?

These questions and decisions can be seriously counterproductive, and often rob newer real estate investors of the ability to get started. Let's rip through some of these hurdles so that you can get right to investing in the properties.

Property Condition: New Vs. Existing Homes

The debate over whether new or existing homes are best for income investing can often get heated. There are fans of both. Both can have their pros and cons. New homes and condos look shiny, can be customized, might mean less maintenance for a while, and can look good in rental ads. However, they might be tougher to rent, start investors off in negative equity, and yield less cash flow. Existing homes can offer a lot more value, mature rental neighborhoods, and allow wider spreads. There are even new hybrid options in acquiring recently renovated and remodeled homes for less than the price of new – offering the best of both worlds.

Single-Family versus Multifamily Rental Properties

There are many debates over whether single or multifamily properties are better for passive income seeking investors. Large funds are often restricted to large apartment buildings, due to their structures. Even some mid-sized investors find it to be less work to put all their cash into more expensive apartment complexes rather than sniping and honing in on what may be more profitable individual units. For smaller, individual and mid-sized real estate investors, single-family rental homes can have many advantages too. The spreads can be better, individual units can be easier to dispose of for higher profit margins, and the built in diversity can go a long way in ensuring long term success.

The Most Important Factor in Income Property Investing

Hands down, without fail, the single most important thing for rental property investors is the numbers. In one sense, it really doesn't matter what the property looks like, its location, or if it is a single-family home. None of it matters if the numbers don't work. On the other hand, if the numbers are there, it can make sense, even if the property itself might not be the most dazzling.

In fact, appearances can be a significant trap when it comes to income property investing, and real estate investing in general. Even brand new properties, selling for tens of millions of dollars, can have major structural issues. Trophy and dream properties can also make terrible investments when they cause real estate investors to make emotional or ego based decisions rather than sound financial ones. These properties can cause investors to overpay and to hold onto them too long.

Put the numbers first. Know your primary goals and priorities in investing and use those as your checklist. For most private investors reading this, income is a priority. So which properties will deliver the best income?

Taxes, Asset Values & Income Property Performance

Taxes, return of investment, consistency of performance, and values are also important factors that warrant your attention. Taking taxes into consideration upfront can make a massive difference in net results and gains. More important than return on investment, is return of investment. No promise of record breaking returns will matter if the principle is evaporated.

It is critical to verify assumptions and statements, factor in all expenses including reserves and inflation, and to secure a great property management company that will ensure cash flow is optimized.

Appreciation and equity growth can be great bonuses, but are definitely second or third on the list of factors to watch. If held long enough, all properties will experience value fluctuations. What is most important is where the value is likely to be when you plan to liquidate. The dips and peaks in between may be completely irrelevant. So look for the best income producing properties if that is what you desire. Watch the numbers first, and find the properties which check the boxes, rather than looking at properties and trying to force numbers to work.

Real Estate Investing

Saturday, 6 December 2014

Simple Ways To Invest In Real Estate - Investopedia | Real Estate Investing

Simple Ways To <b>Invest</b> In <b>Real Estate</b> - Investopedia | Real Estate Investing

Commercial Real Estate Investing advice

Commercial Real Estate Investing example from book

Commercial Real Estate Investing – Here are a few important points to keep in mind:

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