Real Estate as an Investment

Your Own Home

Many people, perhaps yourself among them, dream of owning your own home. If you do not now own one, but do see it as a desirable goal, you should probably be stressing your savings actions more than you might ordinarily want. You need to be saving to build up your net worth, and that savings needs to be in a form that is generally liquid, and that can grow on its own. If you use this savings as down payment on a house, it becomes illiquid, and its growth, if any, is also illiquid. Therefore it makes sense to stress finances a bit more to save especially for the down payment on a house. While there may be some cases where you can buy a home with little or no down payment, you pay more in the long run in higher interest rates or longer payment terms. The bigger the down payment, the better the deal.

Because it costs so much, you might consider your house a part of your financial estate, and of course it is that. It is probably a mistake to consider it in that regard, though. You have to live somewhere, and if you are living in your home, you will not want to do anything that will jeopardize its stability. So, it is better than paying rent, and rather than thinking about the amount of equity you have in your house, you should simply consider it a part of your living expenses, and leave it out of the day-to-day consideration of your “wealth health”. Yes, if you own your home and have been paying on it for some time, perhaps you have built up equity and perhaps you can borrow against that equity. Most often, though, the reasons for borrowing against that equity come as a result of misjudgments in other areas of financial (mis)management. For instance, taking out a 20-year second mortgage to pay off high-interest maxed-out credit card debt is probably just digging yourself deeper into a hole, when you should be looking at why you have so much credit card debt in the first place. You really want your home to be a sacrosanct part of your financial picture, kind of in its own partition. As one writer put it, consider its value as money that’s “in jail” for you.

You may decide that you need or want (need to move due to a change in job perhaps, want to move for more room or different neighborhood) to change homes; then the equity of the current home becomes an important part of the consideration — the home partition has to be viewed along with the rest of your financial picture to see what is feasible and practical for future courses of action.

Also in the category of personal residential real estate, you might consider rural acreage on which you’d plan to build a retirement home. Perhaps instead it would be a second home on the lake, or the mountainside retreat. In any case, the goal here is personal satisfaction, and you will not reasonably consider it a part of your financial growth strategy. After purchase payments, insurance and taxes, even growth is problematical. In some areas, growth in investment value is quite likely, but to make use of it you have to part with your investment, thus removing it from your “lifestyle portfolio”.

Beyond Your Own Home

If you have sufficient liquid investments –checking, savings accounts, stock market accounts, mutual funds (they are, after all reasonably liquid, though perhaps disadvantageous to make use of in this fashion), and the interest moves you, you might consider investing in local real estate. Perhaps you buy a duplex, live in one half and rent out the other half. Or if you’re a handyman type, perhaps you buy a few old houses, repair and recondition them, and then either rent or sell them. Some professional people will build an office for themselves, but enlarge it sufficiently to rent sections to other professionals. Or you just have a feeling that a strip mall is going to be needed at a certain location, and you want to take on the challenge of working with city or county officials, contractors, rental agencies, etc. to get the thing built. Certainly this is high risk, but it could also be high reward; it also assumes you have built up a good deal of your own working capital, because you won’t be able to borrow to finance the total costs. Which leads naturally into the next topic…

Commercial Real Estate

To participate in real estate on a larger scale, if you have lots of money, you can be a part of a limited partnership to buy, build, or remodel office buildings, apartments, or residential developments. If you go into such an arrangement with friends or business colleagues, you really need to have an attorney looking out for your interests. The money spent for legal advice may save you much in the event of some unforeseen disaster.

You can also invest in essentially the same thing, and starting on a much smaller scale, by investing in REITs, Real Estate Investment Trusts. You buy REITs in the stock market, through a brokerage, either discount or full-service, and most REITs have a web site with investor information. Each REIT will have its main focus defined, for instance, business rental in the Southwest, or apartment buildings in the east coast, particularly around Washington, D.C. REITs generally have to pay their owners (as an investor, you would be a part owner) a portion of their Funds From Operations, so you generally will be paid a dividend. The value of a REIT’s stock, however, can vary up or down. If you buy when it’s high priced, and sell after it has gone down, even a dividend payment may not make up for the difference in capital gains (losses). Do a Google or Yahoo Finance search on REIT or enter REIT in the “Search Amazon” box at the side of this web page (I’d suggest using the pull-down menu above the search box to limit the responses to “books”). If you’re going to invest even just a couple thousand dollars in REITs, you should take the time to become somewhat knowledgeable about them.

Real Estate Options

In the option scenario, you notice a property that you feel is just ripe for some kind of development—farmland at the intersection with a four-lane, heavily traveled highway, for example. Perhaps you don’t want to undertake its development on your own, but you think someone should be interested in buying it sooner or later. You learn more about optioning property than is outlined here, but the general idea is that you offer the owner cash for the right (but not the obligation) to buy his or her property at a certain price and on or before a certain date. You then find somebody who is interested in developing the property, or at least buying it from you (your option should mean that the owner cannot sell the property directly to somebody else without satisfying your terms). Presumably, the money or value you receive from your (client, customer, partner) pays the cost of the option and enough extra to turn a worthwhile profit. Here again, you need to know much more about this than this one paragraph tells you, and this probably should (and in some cases must) be handled with the assistance of your attorney.

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