Introduction to Real Estate Investment in The New Economy
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Real estate investments are not what they used to be.
Just a few years ago the cost to purchase most properties was much higher and the cash flow and passive income that could be achieved from income producing real estate was much lower. The game has since changed after the real estate market crashed in the years leading up to 2008.
Since that time there have been massive opportunities available for those that are in a position to participate.
We will be discussing many different aspects of real estate investment throughout this article series. This will include investment strategies, reviews of real estate markets and analysis of real estate segments. The InvestorMillionaire.com team is composed of investors that actively participate in real estate investments, equity/bond investments, private equity investments and alternative market investments. The opinions and analysis presented in these discussions is based on our experience investing in multiple segments with our own funds.Before jumping into any real estate investment it is important to have a clear understanding of the different real estate investment segments and strategies. There are two primary real estate investment segments:
1) Residential Real Estate
2) Commercial Real Estate
Residential real estate consists of any real estate with 1-4 total living units. This could be a single family home, duplex, condominium, town home, triplex, quadplex, etc. It also includes land that is undeveloped if it’s intended purpose is residential in nature with 1-4 total living units.
Commercial real estate consists of several other real estate classes. First it includes residential real estate with 5 or more living units. This means apartment buildings are generally considered commercial real estate (as long as they contain 5 or more living units). Commercial property also includes office buildings, retail stores, restaurants, hotels, mixed-use properties, warehouse property, industrial property, strip malls, shopping centers and undeveloped land when it’s intended purpose is commercial in nature.
Real estate investment strategies are very similar for both real estate segments. Usually the investment property is used for generating rental income (cash flow) or it is renovated/developed to sell for a profit. While additional strategies exist they are not used as often as rental or development/renovation for profit.
Using investment property to generate rental income is one of the best strategies available for investors in the current market. Rental income is an excellent source of passive income and it can give you the opportunity to continue living well even when you are unable to keep working.
The main risks with the rental investment income model relate to the tenants and economy. Tenants present inherent risks that must be considered by all investors: they pay slowly at times or do not pay at all, eviction can be required, they can damage property. The economy also impacts rental investment income in that bad economic times can result in a greater number slow paying or non paying tenants. Filling vacant units also presents challenges in bad economic times. These risks are present for all real estate investments that focus on rental income.
These risks give investors a good reason to closely consider the use of financing when purchasing investment real estate. Prices have been reduced significantly and cash buyers are eligible for additional discounts that are often unavailable to those that are financing. We believe most newer investors are better off paying cash for a discounted property, even if repairs are required, because the risks from slow paying tenants and poor economic conditions are then minimized.
The potential for lawsuits is another risk that affects almost all real estate investment opportunities. Owning real estate tends to result in being labeled as ‘wealthy’ which can attract people that use frivolous lawsuits to thrive. A strong asset protection plan is recommended for anyone investing in real estate. We will be discussing asset protection planning strategies in future articles. Basic strategies include using limited liability companies (LLC) and trusts to minimize your exposure to such lawsuits. A good insurance policy is also strongly recommended for all real estate investors. The main premise for good asset protection planning is to maintain privacy and anonymity by keep investments out of your personal name.
Developing or renovating real estate property to sell for a profit is another commonly used real estate investment strategy. This strategy can be used with almost any type of real estate investment property however it tends to work best in the residential sector.
Development or renovation does come with significant risks in the current real estate market. The lack of available financing eliminates many potential buyers for each property. Any investor with development or renovation plans should be prepared for a long wait before a qualified buyer can be found. Secondly any property developed or renovated will be competing with a large pool of distressed real estate. These distressed properties are selling at significantly reduced prices. This can be very challenging for those using development or renovation to sell for a profit as their real estate investment strategy. The outlook for real estate development or renovation will improve as distressed real estate inventories decline; however that could be several years away.
Using development or renovation to generate rental income is a very viable strategy in the current market. For those with the capital or loans to do so this can result in increased rental income (and cash flow). The lack of real estate development (and renovation) due to distressed real estate results in a lack of higher-end rental property. Those that own and operate renovated or newly developed rental real estate may be in a position to set their own profit margins due to a lack of other comparable properties in many markets.
Regardless of which real estate investment segment or strategy you choose to employ we strongly encourage you to use caution when selecting each property and extra caution when using financing to acquire investment property. The new real estate market is a completely different landscape than anything we have experienced.
We will be discussing many additional real estate investment topics in the weeks to come. Stay tuned for more information.
© Copyright www.InvestorMillionaire.com 2011 All Rights Reserved