Wednesday, November 16, 2005

Real Estate #1

Wallet Talk Wednesday: Real Estate #1

Real Estate is a great asset to have as long as you can take care of the payments and ride it out through tough times. Common sense will tell you that people need a place to live, people will NEED to either rent or buy a house so it’s an investment that should always be considered. Right now being a “young” investor there are 3 plays that we see in real estate, these are:

Cash Flow from Rentals (though this could be a negative flow if the rent doesn’t cover the mortgage then the play is number 2.). If you’re one of the lucky ones who generate a positive cash flow from your property then that’s great. It’s basically paying itself for you so now you have 2 play, positive cash flow and possible future equity of the property.

Equity of the property which is the difference of the value of the house you purchased and the present value or future value of your house. It is speculative in a way but historically housing prices have steadily climbed up especially if you’re in a good LOCATION. AND you can leverage your equity for any emergency or other investments if you want to.

Tax Break and Tax Deferral of the property. Home owners have their interest payments refunded to them and as of today, if you stay in the house for 2 years out of 5 you will not get taxed up to $250,000/single or $500,000 gains on the sale of the property. For rentals, they can sell the house and do a 1031 exchange (get another investment property and put all the gains from the initial property to the new one) and defer the tax.

Our general rule of thumb for real estate:

Any real estate property relies on the location that it is in. It also depends on what type of property you are willing to get into and what you plan to do with it.

If you have a rental property which is a single family house and it’s located in the middle of the desert (lets say Las Vegas) do you think you’ll have a market to rent it out? Tourist use hotels/motels. Employees in hotels, casinos, theaters, bars, etc. probably own a place or are already renting in apartments/condos. There might be some demand but it will be limited compared to getting a rental close to business areas, school district that are good, and/or “exclusive” neighborhood where people want to live.

Good places to have property for rent:
Location where there is a strong Business presence and big companies with high paying jobs
Location where there are Universities, Colleges and/or great schools
Location that are very attractive for starting family like suburbs that is around 20-40 min away from the main city.

Your main house:
Close to work so commute time is reduced and road accidents can be avoided (less time on the road less chance to get into an accident)
Close to family and friends so you can still have a life other than work.
Accessible for clients if you are running a business at your property.

AND a good LOCATION normally will have higher demand of people moving in and they will be willing to pay a premium price for them.

You can still invest in real estate without buying a house though. You can buy REITS, they are like stocks which you can buy from companies that are involved in the real estate business.

BUT THE MOST IMPORTANT THING BEFORE BUYING A HOUSE FOR INVESTMENT OR AS A HOME IS TO MAKE SURE YOU CAN MAKE THE MONTHLY PAYMENTS. A good broker should be able to give you the numbers on monthly payments and terms of the house.

Research and Educate yourself for any investments. Good Luck.


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