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  • Writer's pictureKen Holman

Investing in Real Estate

Tall buildings

As an investor, when you decide to invest in real estate, there are a number of important things to consider: (1) Should I invest in a REIT or in real estate directly? (2) Do I invest in residential or commercial real estate? (3) Do I try to go it alone or invest with a syndicator? (4) Do I want a property that generates income or one that appreciates in value? (5) Where is the best location to find a good investment? (6) Do I purchase a “fixer-upper” or buy a new property? (7) Do I have the time or inclination to manage the property myself? (8) How do I know if I’m getting a good deal?

This list could go on-and-on, but the questions posed above are some of the basics you must consider when investing in real estate. Let’s take them one at a time. First, a REIT is similar to an investment in a stock. The investment is highly liquid but is subject to the same market risk as most equity (stock) investments. An investment directly in real estate offers a number of tax advantages that are not available to REITs. See the article, “Should I Invest in a REIT or real estate directly?”

Investing in residential real estate offers the advantage of being understandable. Most people understand what a home or duplex is. You buy it, fix it up, rent it, maintain it, and eventually sell it, hopefully for a profit. Commercial real estate is more complicated. You’re dealing with tenants and leases and sophisticated legal concepts. In some ways, it’s more difficult to value. The primary advantage of investing directly in real estate is that you can take advantage of the favorable tax laws structured for real estate owners, i.e., capital gains taxes, 1031 tax-deferred exchanges, etc.

Most people prefer not being involved in the day-to-day operation of a property. It can be very time-consuming. Many prefer to be passive investors and work directly with a real estate syndicator which is a person or company that pools the investment capital from several passive investors to find, acquire, renovate, and/or manage the property. Passive investors earn passive income from the real estate.

Real estate has the unique advantage of providing several avenues to enhance the overall yield. Often the property will generate sufficient cash flow to provide a return on the investment, some, if not most, of the cash flow is sheltered by the depreciation the property is permitted to take. Another avenue that improves yield is the principal pay down of the mortgage. Tenants provide the income to reduce the mortgage balance. Finally, most real estate investments appreciate in value over time. This property appreciation is often the largest component of the overall yield.

Location is a major consideration with investing in real estate. The better the location the more viable the project. Some real estate investment rely on location more than others. Many people don’t realize that a number of national companies don’t own the real estate in which they operate their business. Companies like Walgreens, CVS, AutoZone, O’Reilly Auto Parts, Dollar Tree, Dollar General, Family Dollar, and numerous other companies don’t own the buildings in which they do business. These buildings are owned by real estate investors.

If you’re a handyman with a lot of time on your hands, you may want to invest in a “fixer-upper” rather than invest in a new property. Many small investors have gotten rich investing in “value-add” properties where a portion of their equity investment comes from “sweat equity” rather than cash. On the other hand, if you’re not the handyman type, you may want to consider being a passive investor.

Finally, understanding how to value property is a critical component of any successful real estate venture. Please refer to the other articles in this series that will address each of these issues in more detail.


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