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How to Invest in Real Estate

Real Estate investing

Investors invest in real estate for basically the same reasons they invest in anything. They have surplus cash, they want their money to work for them and they want to protect their dollars from erosion by inflation. Special features of investing in real estate include equity build-up, growth, good cash flow and the prime attraction to investors in the moderate to high income bracket, tax shelter.

Before a property is offered as a package for a limited partnership, or for across-the-board sale to share purchasers, it must undergo rigorous scrutiny by specialists. The property must be in a good location and the research and development team goes over it carefully looking at construction and physical layout. The property management division checks all tax records, real estate assessment records, cash flow receipts, rate of occupancy charts and operating costs to see what the potential of the property might be and what it actually costs to maintain it.

A performance projection is made based on these reports, with no “Pie in the sky” projections, and the responsibility of managing the property profitably becomes the responsibility of the property management division. A legal staff researches the deed, titles and handles the necessary legal work involved. They also arrange the financing to see that the best arrangements possible are made for mortgaging the property.

How to invest in real estate?

Several ways are open. The first and obvious way is for an individual to do it himself, by purchasing the property and becoming the sole owner. In doing this he also becomes the sole manager and is solely liable, and many investors do not wish this responsibility. That is one reason why the second method of investing, through limited partnership, or syndicates, is attractive.

An investor has the benefits of sole ownership, but the burden of management falls upon the general partner.

Another method of investing is through real estate trusts and real estate investment pools. Funds are collected from any number of investors and used when a good investment comes on the market. Or, the funds can be used to buy properties of unusual or high values. The properties involved can be undeveloped land, motels, apartment buildings, office buildings, housing developments, in fact, any area of real estate which has the potential of offering the investor any one or more of the prime features of real estate investing.

Of course there are risks involved in investing in real estate, but there are risks involved in any sort of investing. While there are short-term investments made in real estate, investors are usually encouraged to think of their real estate investments as long-term investments. The value of each individual investment property whether it is growth, cash flow or tax shelter, is carefully pointed out to each investor and the amount of money one invests is not as important as the financial needs and objectives of the investor. One must decide the objectives, whether the investor needs cash, growth or tax shelter, and if the need is for a short or longterm investment.

For example, a professional man with a high income might need tax shelter now, but have growth as an objective for retirement income later. His needs would be different, say, than for an older widow living on a fixed income. She would probably need cash, but also need the relative safety of principal with growth to overcome inflation.

Among the many specialized areas of real estate marketing, exchanging is perhaps one of the most exciting, yet one of the least understood methods of disposing of real estate. The real estate exchanger is truly a specialist among specialists. In fact, many otherwise well-qualified real estate brokers and salesmen do not fully comprehend the intricacies of this highly sophisticated specialty.

Through exchanging of real estate, however, an owner may legally defer all or a part of his federal taxes that otherwise would be payable on the profit arising from the sale of real estate. The effect of this deferment of federal taxes is that the owner then has the beneficial use of the deferred taxes to earn additional income for him until such time as the tax is paid in the future if indeed the tax ever has to be paid. There are methods under tax law by which the previously deferred tax need not ever be paid.

To qualify for deferment of federal taxes upon the disposition of real estate, certain criteria must be met. First, both the property given up and the property received in an exchange must be “investment property.” That is, the properties must be used in a trade or business or held for the production of income (either ordinary income or capital gains). Second, both properties must be of like kind. That is, the nature or character of both properties must be alike. It is still possible to exchange an apartment complex for vacant land, or an office building for a commercial building, and qualify for the tax deferred exchange.

Third, an actual exchange must take place. A sale and the subsequent reinvestment of proceeds, even the next day, will disqualify the transaction. Additionally, for full deferment of federal taxes, any mortgages on the property received in the exchange must equal or exceed any mortgages on the property given up. Also the equity in the property received must not be less than the equity in the property given up. The receipt of cash, stocks, bonds, or other non-qualifying property, will nullify the tax deferment to the extent of the market value of the nonqualifying property received in the transaction.

Realtors aid home buyers

There are advantages that a realtor can offer over a prospective buyer that an individual seller cannot. First of all the realtor saves you time, effort and headaches by trying to show you only the types of homes you want to see and those within your price range. A realtor can advise you about neighborhoods and his professional experience can be invaluable in analyzing future trends and the potential investment value of a home.

Owners who try to sell their own home often tend to overprice their house, but a realtor can help see through those inflated prices. The realtor can arrange for definite inspections and makes appointments for your convenience.

Full information on a house can be provided by a realtor. He will give essential facts about taxes, maintenance cost, quality of construction and adequacy of public services. The realtor also can act as negotiator, settling fine points of price and helping buyer and seller arrive at a mutually advantageous agreement. The realtor can help you stay within your budget, give you mortgage advice and then, after closing the contract, give you an exact record of insurance, taxes and other purposes.

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