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An Investment To (Still) Consider

Feb 07, 2012 06:32PM ● By Anonymous
If you don’t think you can invest in real estate during a challenging economy, chances are, you already have. If you currently own a home, you have invested in real estate.

While your home may not be considered an investment by some, the bottom line is that anything you own—be it a car, a boat, or property—has value that may decrease or increase depending on the item, and, thus, is considered an investment. Most cars and boats tend to depreciate or go down in value, unless you purchase one that becomes a desirable collector’s item. Real estate, on the other hand, usually appreciates—increases in value—long term.

Over a twenty year period, homes have been known to double, even triple, in value. According to the U.S. Census Bureau, the 1990 average home price in Maryland was $148,000. In January of 2011, according to the Maryland Association of Realtors, the average home sale in Anne Arundel County was $376,390 and in Talbot County was $399,300. Seeing your investment gain at such a rate (about 160 percent) is reason for giving real estate investment a closer look.

While a home purchased within the last five years, depending on price and location, may have gone down in value, if you borrowed money to purchase the house, the interest portion of your mortgage payments are being deducted from your taxable income, translating as tax savings. Currently interest rates are at an all time low, making real estate an even more attractive investment according to several real estate brokers and investors in our region.

Three additional factors—supply and demand, property tax rates, and cost of insurance—can affect price, so take them into consideration when it is time for you to buy. Currently, in some parts of the country there is a surplus of houses on the market due to high unemployment and foreclosures, which has increased supply and thusly driven down values. When a community raises property taxes, unless they are increasing services in an appreciable way, the increased tax burden tends to lower value of a home because it increases the monthly payment for the new prospective buyer. Higher insurance rates, adopted due to recent disasters such as hurricanes and floods, can also impact the property buyer’s budget. This is all useful information when evaluating where and when to purchase.

So is real estate a good investment? It can be, particularly in times when stocks and bonds are unstable and interest rates on CDs and savings accounts are negligible. Currently, because of the unstable economy causing many to forego home ownership and to move around the country in pursuit of employment, there is a large demand for rental units. This has made investments in apartment complexes and rental houses more attractive to investors. Example: If you have $37,000 for investing and you use it to purchase a house for $150,000 with closing costs of $7,000 and a mortgage of $120,000 at a commercial rate of six percent, your monthly mortgage payments will be about $850 a month. Add another $350 a month to cover insurance, taxes, and upkeep for an outlay of $1,200 a month. Rent the townhouse for $1,400 a month and you are $200 a month in the black.

When it is time to pay income taxes you can deduct the interest on your $120,000 loan (plus depreciation on the townhouse structure ($110,000) divided over 27 years. If you are handy with doing small repairs yourself, and can handle the rental arrangements you can have a positive cash flow, save money on income taxes, and ultimately make a profit on your $37,000 investment as the value of the house goes up. According to one landlord, who has been renting investment properties for over 25 years, once you’ve established a positive cash flow you can purchase another house and the more you manage the easier it becomes.

Or, purchase a house rental in the community where you’d like to retire. Your new retirement home is partially paid for by the time you are ready to move in. Either way, you are financially ahead.

But not everything has a silver lining. Uncollected rents, plus monies paid to a management company to handle the leasing and repairs if you don’t have the inclination for management, may cause your expenses to fall into the red. A different type of real estate investment may be more appropriate.

Real estate investment groups and real estate investment trusts (REIT) marry the two concepts of group buying power with professional management. Read the sidebar to learn more.

As with any investment, professional advice from experts well versed in tax issues and financial risks can help you determine what type of real estate investment is appropriate for you.

The REIT Investment?

A Real Estate Investment Trust (REIT) can be privately or publicly held and may be listed on the stock exchange. Set up in a similar manner to a mutual fund, it is required to have at least 100 shareholders. The REIT designation was created to avoid corporate income taxes. Ninety percent of taxable income must be distributed to the shareholders and 75 percent of revenue must come from real estate investments. A REIT enables smaller investors to reap the benefits of real estate investing on a large scale.

A real estate investment group marries the two concepts of group buying power with professional management using a slightly different model. A company either buys or builds a group of apartments, condominiums, or commercial building and then offers shares to investors. Often the investor’s name is on a specific unit or units, but resources are pooled to cover the mortgage at all times, even if some units are not rented.

Both REITs and other types of group investments provide less labor-intensive means of investing in real estate. Be cognizant that both require managers that charge for their services and to examine management fees when evaluating potential purchases.