Real Estate as an Investment

by Tedd Oyler, JD

www.teddoyler.com

We all think we know about real estate, don’t we?  After all, we’ve all at least WALKED on it, if not rolled around on it, inherited some of it, or even bought and sold some of it.  It’s all around us, and there seem to be people making money on it every day.  So why shouldn’t I get in on the money-making machine?

Good question – and here’s the simple answer: YOU SHOULD get in on it.

Heck, there’s plenty of real estate for sale – even in our little community, maybe especially in our little community.  Houses, stores, inns, galleries, vacant land (all just a “short walk to beach”, too) are listed in the paper every week – plus there are all those FSBO’s (“for sale by owner”), which must be even better deals because there’s no realtor’s commission being scraped off the top, right?

Yes, invest in real estate, but don’t fall in love with the property. Use the bank’s money – cheap – to buy your investment; the interest is tax deductible, real estate values generally appreciate and you are using the mortgage as a hedge against inflation. So what real estate should you buy?

Primary residence

Start with the most house you can reasonably afford - the greater the value of your house the more dramatic the appreciation.  When you get ready to sell your house, the government will give you up to $500,000 of “profit” tax-free.  Yep – tax-free, so long as certain conditions are met.  All the profit stays in your pocket, ready for the next, much bigger, home purchase, or as a retirement nest egg.

Business rental property

Once you have the best house you can be in, then you can “dabble” in other things.  If you are a professional (dentist, e.g.) you should look at owning the building you practice out of – the tax benefits are astounding plus you are landlord to a great  tenant.

Investment rental property

If that option is unavailable to you, then become a licensed real estate professional and work on owning other rental properties (the licensing opens up all sorts of tax deduction possibilities). Rental properties should at least pay for themselves (rent received = mortgage, taxes, utilities, insurance, licenses, repairs). If the cash flow is negative then don’t make the deal.

Vacation home

Now, you’ve filled in the most reliable and beneficial real estate investments levels, so you can become a little more adventuresome and go hunting for a vacation home. Is there really a place out there that you want to go to every year?  If so, then buy a house there – of course, you should plan to use it at least 13 weeks a year to justify the expense. If you will not use it that much, then don’t buy it. Remember, this is non-productive real estate – you are buying it to use it, not to rent it out. If you rent it out for more than 14 days per year, then you run into some negative tax consequences (despite what the realtors may tell you).

Vacant land

Now that you have your maximum home, your business rental, your other rental property and your dream vacation home, you are able to take some risks, so let’s dive into the “vacant land” market. If you buy vacant land hoping to hold it while it appreciates, you are going to have annual out-of-pocket expenses. Also, you must understand that the real estate market for vacant land is utterly inefficient – land is very easy to buy and difficult to sell. Please remember that the professionals, the realtors who are approached to list a property, snap up the limited number of desirable and cheap parcels, leaving you the amateur to be the chump.

Time share

Please do not tell me about the great deal you got on a time share, unless you bought it at a stunning discount from the schmuck who bought it from the developer.