Real Estate Investing: The Personal and Financial Benefits
Despite the troubling headlines in the financial pages lately, today’s real estate market can be a very hospitable one for investors. High rates of foreclosures and homeowners selling under financial duress have led to rising home inventories. Combined with the recent decline in home prices in many areas, these factors have helped to create an environment of great profit potential for the savvy real estate investor.
A traditional form of real estate investment is to purchase a home and hold it until the value rises, then sell it for a profit. These days, with so many bargains homes on the market, the patient investor has the potential to realize a much larger profit margin should the property bought in today’s struggling economic climate be held until values rise to a more typical level (assuming the market you buy in has “over-corrected”). People always need a place to live no matter how the markets flow, and properties held in this manner can bring income as rentals until the time is right for selling.
Among the most popular routes to profit in real estate investment in recent years is home “flipping”, where investors buy a home, rehab it, and sell it for a profit. While this may be a bit more difficult in the current real estate market, an investor can realize a substantial profit margin with the many low cost homes available on the market today. While homes may move more slowly than at the height of the housing boom, again, housing is a commodity that is always needed, so patience can bring profit.
Another one of the many benefits of real estate investment lies in the tax advantages that can come with such ventures. Deductions for depreciation of your investment property can be quite lucrative. Since the IRS requires that investment properties be devalued on paper by a standard formula, depreciation can also reduce the amount of capital gains tax you will be obligated to pay when the property is resold at a profit.
There are also tax benefits for investors who are eligible to be designated as real estate professionals. To qualify for these tax advantages, one must spend at least 750 hours managing real estate investments per year, or more than half of total annual working hours. If you meet these requirements, your real estate investing venture can become eligible to claim a long list of business related income tax deductions.
Aside from profit and tax advantages, real estate investing offers more freedom than the typical nine to five job. Residual income from rental properties can offer much in the way of financial security and quality of life by allowing one to work fewer hours for as much income or even more than that steady office job offers.
As with any form of self-employment, hard work and self discipline are required for success. However, those willing to spend some time educating themselves in the basics of real estate investing can find a great deal of satisfaction in controlling their own destiny while enjoying the many benefits of investing in real estate.
Low Prices and High Housing Inventory: Profit Potential or Losing Proposition?
If real estate investment is your goal, then education is an important part of success. An investor who profits consistently is one who learns how to research market indicators and interpret them properly, gaining some insight on the current market trends. While there are certainly plenty of lucrative investment opportunities available for those that do their homework, today’s uncertain markets can be treacherous, making it more important than ever to acquire effective research skills.
In the midst of the housing boom, many inexperienced investors were able to stumble into highly profitable real estate investments with little real knowledge about the housing market. However, times have changed, with markets in many areas recently experiencing significant slumps. In some of these areas, the markets have begun to recover, while in others the downward slide is still well underway. In this market climate, knowing how to judge the viability of a particular real estate market is crucial to successful real estate investment.
The standard mantra for investors of any kind has always been “buy low, sell high.” Sinking real estate prices in many areas may seem to create the right atmosphere for that rule of thumb, but low priced real estate won’t be much of a bargain if property values in the market continue to fall. The sell high part of the equation can present some difficulty in a market that has yet to hit bottom, making it essential to know in which direction the market is moving before you commit your capital.
Basic supply and demand trends are important indication of the direction you can expect a real estate market to travel. If the supply of homes is far greater than the demand for them, downward pressure on home values is the most likely result. On the other hand, if demand is rising in a market that has been depressed, your investment has the potential to rise in value as the market moves towards recovery.
Housing inventory statistics can be the best way to judge the supply and demand in a particular housing market. Released monthly, these numbers track how many homes are on the market waiting for a buyer. By examining these statistics over several months, you can determine whether supply is on the rise, which can indicate that the market that has yet to reach its lowest point and one the wise investor will avoid. If inventory is diminishing, the market has likely hit bottom already and is beginning to rebound, a condition that is ripe with investment potential.
Gone are the days of the housing boom, when nearly any real estate purchase was bound to appreciate in value, making profitable investment as easy as shooting fish in a barrel. However, learning to research and evaluate real estate markets effectively can help you choose your investments wisely. Armed with a bit of basic knowledge of how the housing market works, you can learn to recognize the signs that experienced investors use to avoid the pitfalls of today’s unsettled markets and follow them down the road to successful real estate investment.
Green Real Estate Investing Proves Profitable For Some, But What About You?
Every where you turn these days somebody is touting the goodness of going “green”.The most aggressive real estate investor/speculator out there, Frank McKinney, is building a $29 million, 15k square foot “green” mansion in West Palm, FL.Some will argue how “green” is it to build such a large home, but he retorts with “The kind of people that buy my homes would have bought a similar sized home anyway, so why not build green?” I agree with him.
Toyota, JPMorgan Chase, IBM, and Goldman Sachs are among some of the large corporations that have made the switch into “green” buildings and Bank of America has plans to build a 52 story “green” skyscraper close to Times Square.
While these investments will pay off from Mr. McKinney once he finds a buyer and for these corporations through better corporate image, will it prove profitable for the average real estate investor to go green?
The exact cost of building “green” depends on how “green” you go.Many sources estimate it usually costs about 10% more than traditional building to go “green”, so you will usually pay a higher price for your real estate investment.The upside is you can usually command higher rent because “green” buildings average a savings of 10% in utility costs per year (tenants usually pay utility costs).
It’s been my experience that most investors usually “lose” a little cashflow by investing “green”, but they feel great about their new real estate investment.
So…yes, it can make prove profitable for you to invest green….if you have a conscience.
Data is Needed before Investing in a Property
Remember the lovable Johnny 5 from the movie Short Circuit? One of my favorite things he’d say is “Need Input! Need Input!” while reading a 500 page book every 10 seconds.
Investors, we should all take a cue from Johnny 5 while examining the next real estate market you invest in. I’d like to talk today about some of the crucial data (input) needed before investing in a property.
Timing is everything when it comes to real estate investing. You have to be able to determine the speed and direction of the market place, and the relationship between supply and demand. These factors will give you a fairly clear picture of whether it’s the right time to invest.
Your local real estate agent will likely not tell you this, but there are investments that you may want to avoid investing in. When you determine real estate supply and demand trends, you need to look at how many months worth of housing supply there is on the market. This supply of housing is the measure by which you need to test your real estate market. The prospect of overpaying is high if you don’t pay attention If the supply of housing continues to expand faster than the demand for new housing (supply is greater than demand), values will drop.
For instance, a market with a nine-month supply of housing reveals that there is an over-supply of houses on the market in a given area. It does not reveal whether it is a good time to make an investment - it only tells you the market status as of now. However, if we go back to housing supply trends in the past and compare them, we begin to get a better picture of what’s going on. For instance, if we were aware that there was a 10 month supply of housing last month, and an 11 month supply a month before that, and a 12 month supply the month before, this would be an indication that the housing over-supply is being absorbed. What this tells us is that this is a market on the rebound. So, while a housing supply of 9 months may not look that great, the additional information about past months trends provide a different angle from which to see the bigger picture.
To recap, look at the data before you making your real estate investment. Need Input!
Attention California and Florida Investors; Don’t Get Cut!
Many real estate investors that love Florida and California because of their long term prospects are licking their chops right now while looking for a great investment. While I do believe there are some good ones out there right now, my advice is to really be careful. You might be thinking “Jeremy, there is blood in the streets already! What more can happen?” To that I say “A lot!”.
Option ARMs taken in 2006 make up about $140 billion of the $350 billion of outstanding option ARMs and 45% to 50% of them are expected to default. The 2007 option ARMs, which were originated just as home prices began falling, are expected to perform badly also.
And get this, 70% of the Option Arms are concentrated in California and Florida.
While you may be able to pick up a “great deal” relative to peak values I say don’t catch a falling knife.