Investing in Real Estate
The American Dream
A home of your own and a place at the beach… This cornerstone of the American Dream evokes memories of children playing, families spending time together, a prosperous and fulfilling life. But, what about the investment potential of real estate?
While the average homeowner may not consider himself an investor, homeownership provides many financial benefits and is a great first step to building wealth.
- Paying a mortgage builds equity
- Homestead exemptions, mortgage interest, and taxes provide valuable tax breaks
- Most property will appreciate over time
- Homeownership provides a hedge against inflation
Resort properties are usually places for the family to vacation and enjoy. They provide an escape from stressful jobs, a gathering place for extended family, a place where families can connect and have fun. By also using the property as a resort rental, owners can enjoy the benefits of a vacation home while others pay the costs. While the personal reasons are important, these properties are significant real estate investments.
How do I know if I’m ready to invest in real estate?
You don’t have to be Donald Trump to invest in real estate. Because most people do not pay cash for their investment property they can leverage the investment with other people’s money. With a mortgage you can put a relatively small amount down and allow the income from the property to help pay off the mortgage. The key is to be in a position to purchase, operate and maintain and eventually dispose of the property.
If you are living from paycheck to paycheck real estate is not a good option. You need to be financially stable, have good credit, and enough disposable capital to purchase and maintain your investment. Most investors establish savings and retirement accounts before investing in real estate. Don’t buy something you can’t afford. Always hope for the best but plan for the worst. Even with adequate insurance you may be required to support your investment for extended periods.
Real estate is not a liquid asset. Once you buy a property you may not be able to get your money back quickly in an emergency. In addition, the upfront cost of closing the transaction, initial maintenance, furnishing and equipping, prepaid insurance and taxes may take time to offset before a profit is in the picture. Tax rules require that you hold the asset for extended periods to qualify for preferential tax treatment. You should plan on holding a property for a minimum of 5 years.
How do I know if I’m making a good investment?
Once you have examined your own personal situation and family needs you need to decide the type of investment you want to make. All properties have a market value. Market value is the amount someone is willing to pay for the property. Each property in the entire world is unique. Appraisers use similar sales in the local area to estimate the market value of a property. When you evaluate a single family home in a similar subdivision in a specific area of the country, you can establish a value. Realtors can compare one property to another and add and subtract the value of amenities to establish a Market Value. Market value is not an absolute value and like securities it changes on a daily basis. Most appraisers consider sales in the area for the past 6 months in establishing a market value. It’s not as volatile as the stock market but there are trends and as an investor you need to consider this in your purchase decision.
Investment Property Options
There are many types of investment properties. Each has its own advantages and disadvantages that should be considered in the decision process. Lots, raw acreage, single family homes, condos, townhomes, duplexes, multi-family complexes, apartments, strip malls, marinas, high rises, etc. The list goes on and on. Selecting the right type depends on individual preferences, expertise, and the amount of time you have to manage the investment. Most professionals are fully engaged in their careers and do not have time to materially participate in the management of their real estates. Others become fully engaged in the management of their investments and participate full time.
Lots or raw land can be held for extended periods with little investment cost. Most land investments do not produce income. The only cost is the mortgage (if financed) and taxes. Many people purchase a lot in a desirable neighborhood with the intention of building a home in the future. The location of land is the most important consideration in selecting the best property. Check the county’s Future Land Use Maps (FLUM) to find out what is planned for the surrounding area when considering a land purchase. These can usually be found online at the county’s Planning and Zoning department. You should also know how the property is zoned when considering a purchase. Don’t assume you can rezone a parcel of land after you buy it.
Improved residential properties offer the best option for the production of income for the average investor. Houses, duplexes, multi-family complexes, condos, townhomes, and apartment buildings all fall into this category. Management of these properties can be vary labor intensive and may require professional management to be profitable.
Personal management of investment property requires the landlord to be familiar with state laws concerning the concerning the relationship of landlords and tenants. Even managing a single family house requires the landlord be able to prepare the house for rent, screen tenants, prepare leases, manage deposits, maintain the property, collect rent, enforce rules, and evict bad renters. There are many good books detailing the ins and outs of rental property management. I would recommend anyone considering managing rental property to read Richard H. Jorgensens "No-Nonsense Landlord” prior to getting into the business. There are also several good books dealing with state laws usually termed “Landlord/ Tenant Act” which cover state requirements for escrow deposits, leases, collections, and evictions.
Real estate investors who are active professionals in other fields or absentee landlords should consider professional management. Management companies usually charge a fee as a percent of rent for their services. Property owners can contract for the level of service they need. Most management companies will offer a range of services from simple finder fee to complete management of all rental activities.
Management of resort rentals and commercial property requires a greater investment in labor and marketing, thus property managers charge a higher percentage for these services. However, these properties can also offer much greater income potential, making the investment in professional management well worth the price. Investors should be aware that each property is unique and offers different income opportunities. Investors should discuss their options with a real estate professional who is active in the local market.
Gulf Properties Is a full service real estate company. We are Members of the Florida Association of Realtors and the National Association of Realtors. We fully adhere to and support the Code of Ethics and the Standards of Practice of the National Association of Realtors. Management supports regular professional training and expects all of our employees and associates to keep abreast of current market and industry trends. We are here to serve the public and welcome the opportunity to help you in purchasing and managing real estate investments.