Real Estate Investment Advice
When putting money to work in real estate, you must decide upon a strategy that matches your expertise and tolerance for risk. Some investors choose to rent out condominium units as apartments, while others prefer to buy and renovate foreclosed properties. Remember to weigh the advantages of sole proprietorships, partnerships and corporations as business structures, before buying your first property.
Real estate returns generally combine property value appreciation alongside regular rental income. Expect to earn higher potential returns for taking on increased risks. For example, you may look to aggressively flip foreclosure properties in distressed neighborhoods for quick profits. This strategy requires you to spend money on expensive repairs to transform the foreclosure into suitable living spaces within a year. Neighborhood revitalization would make these series of transactions very lucrative. However, you may suffer large losses if the distressed neighborhood continues to be plagued with high crime and jobless rates.
Conversely, conservative real estate investors prefer to do business within already well-established areas. You may be willing to accept smaller returns, for less volatility.
REITs and CMOs
Real estate investments are not limited to direct purchases of real property. Smaller investors open brokerage accounts to purchase financial claims to real estate. Publicly traded real estate securities include collateralized mortgage obligations or CMOs, real estate investment trusts or REITs and individual homebuilding stocks. CMOs and REITs are large asset pools of mortgages and real property, respectively. People who buy into these investments receive portions of mortgage, interest and rental payments from the larger real estate portfolio. Meanwhile, shares of homebuilding stocks, such as KB Home, are ownership stakes within corporations that develop newly constructed homes for sale.
Select the right business structure for your objectives. Sole proprietorships and partnerships are more so ideal for smaller operations, where the need to raise capital is relatively minimal. For tax purposes, sole proprietors and partners include real estate investment earnings as part of their personal taxable income. Corporations issue shares of stock to receive financing from investors. Corporate limited liability eases their access to investment capital. Investors recognize that their assets held outside of the corporation cannot be seized as lawsuit or bankruptcy settlements. Corporate profits, however, are subject to double taxation. Income is taxed at both the corporate and personal level.
Mortgage loan structure significantly affects your bottom line profits. Mortgage loans may be categorized as either fixed- or adjustable-rate notes. Fixed mortgage rates charge level interest rates throughout maturity, and are ideal for conservative long-term investors. Adjustable-rate mortgages, however, feature variable rates that shift along with economic conditions. Some ARMs offer low and fixed introductory rates for three years, before interest payments increase significantly. Short-term investors leverage ARMs to buy large homes, and sell them off quickly, before the introductory period expires.
Real Estate Scams
Criminals prey on inexperienced real estate investors who are eager for quick profits. Unethical contractors may demand large sums of money up front, before abandoning your job site. Prospective investors should work to verify references before entering into any costly real estate agreement.