Whether directly or indirectly, real estate investors purchase the rights to a stream of future income that will be generated from real estate properties (land and buildings).  The income might come from rental income, from using the property as loan collateral, from cash savings by offsetting or deferring otherwise taxable income (with tax deductible losses from the real estate property), or from net profits upon resale of the particular piece of property.

The price an investor is prepared to pay for a defined property interest depends in part upon the amount and timing of this future expected income; how much and when the income will be received.  The price also depends upon the degree of certainty of the expected income and the real estate investor’s tolerance for risk.  Lastly, the price is dependent on the attractiveness of any alternative investment opportunities.

Practically any investment goal can be met with a sound real estate investment strategy.  And the positions investors take don’t have to be limited to taking physical possession of the property itself.  Speculators can (and do) deal in real estate futures (the buying and selling of purchase options).   Developers can (and do) reduce risk exposure by using standby loan commitments or by taking a position in interest rate futures.  And investors can buy fixed income assets such as mortgage loans or net leased properties.

Real estate may be at its most attractive when it is approached as a potential business opportunity - as opposed to a simple investment.

When it comes to real estate investment, the possibilities are constrained only by the limits of an investor’s ability to conceive of the alternatives.

Investing in a single family home is a great place to start your real estate investment career.

The main reason is that if the transaction is handled properly, you can get in with very little down, thereby being able to take advantage of leverage.

But don’t count on this type of investment being too profitable in the beginning.  You can expect a fair rate of return, a tax shelter and a good chance for capital appreciation over the long term, but you might have to settle for a negative cash flow in the beginning.

So what are some of the guidelines for investing in a single-family house?

1. Take you time and don’t rush in.  If you see a house at what you think is an attractive price, you should still shop around the neighborhood and compare sales prices of similar houses.  You should also look at the sales prices of similar houses in other neighborhoods that are similar to the one you are looking at.  This is one approach to determine the value of a house used by real estate appraisers.
2. Think about the house that you want to invest in the same way you might if you were going to purchase it for your own home.  This is especially important if you plan to hold on to the property for the long term.  Consider the location of the house and the trend in the neighborhood.  Make sure the house is something a potential renter will find attractive.
3. Find out what the rents are for similar houses in similar neighborhoods.  This information will give you an idea of what you will probably be able to get for the one you have in mind.  Also find out if it is customary for the tenants or the landlord to pay utilities.
4. Determine the monthly payments.  This might sound stupid but the real point is to find out if the mortgage is a so-called budget mortgage or not.  In many cases, monthly payments are expressed as PITI (Principle, Interest, Taxes and Insurance).  If its not a PITI payment then you have to figure out what the additional expenses of the taxes and insurance will be.
5. If the down payment is relatively high, ask yourself whether you can pick it up by having the seller take back a second purchase-money mortgage.  Using a second mortgage may be advisable if you think there will be rapid capital appreciation in the neighborhood.
6. Are you prepared to manage the property yourself?  Or will you want a property manager to handle the month-to-month details?
7. Do not get personally involved with your tenants.  Personal involvement makes it difficult both to collect rents and to raise them when necessary.
8. Do as much maintenance as you possible yourself.  If not, you’ll need to determine the cost of routine repairs and maintenance into your cash flow.
9. Whatever you do, don’t forget about liability insurance.  Make sure you get yourself a good landlord insurance policy - you need to make sure you protect yourself from lawsuits.
10. Make sure you have enough cash flow to cover vacancies as well as marketing for tenants.  An empty investment property doesn’t bring in any income, yet the mortgage payments will still need to be made.

One of the first questions that comes up when people start talking about real estate investments is the tax advantages of being able to depreciate the property year after year. Most people question why you can depreciate an investment property, since real estate as a whole generally appreciates (goes up in value) over time.

The short answer is that when you own a piece of real property, whether as an investment or as a principle residence - you actually own two individual assets: the land, and any improvements (buildings). The land - goes up over time and generally carries the improvements with it. But since they are susceptible to wear and tear, maintenance, upkeep, etc. - the buildings will depreciate over time, and the government allows you to write this off on your taxes to reflect this.

So what exactly is depreciation?

In the strict sense of the word, it is a loss of value from any cause. Generally it is referred to as a percentage figure of the total initial value of the property (the value at the time of acquisition - most of the time this is the purchase price of the whole property, less the value of the land only). For example, you might say that a building is 20 percent depreciated.

On a real property, the loss of the value comes from three main causes - or a combination of the three:

• Physical Depreciation: This comes about from natural wear and tear on the building itself. Shingles need replacing, metal tends to rust, paint tends to crack, water damage can occur. etc. As these items wear, they will need to be replaced.
• Functional Obsolescence: This is an impairment of the desirability of the property. For instance, a house with only one bathroom isn’t as desirable in a neighborhood where everyone else has added a second bathroom or more. Or maybe the house is of a different style, or has an interior or exterior that is no longer in fashion. It can also occur due to changes in building processes - for instance if one house is still on a well or septic, while all the other houses in the area are on public water and sewer. All of these will reduce the over all value of the house and depreciation will reflect this.
• Economic Obsolescence: This is very similar to functional obsolescence, but is usually due to outside forces - and thus has nothing to do with the age or design of the home. An example of this is a change in zoning around your property that will make it less desirable for the use it is intended. You could have a home in like new condition that is immaculate in every way. But if the county just announced they are going to put a prison on one side of the property and a dump on the other, then your property will go down in value.

Depreciation is a way of accounting for the expected repair or replacement of an asset due to its reduced value for any of the above reasons.

So why can you depreciate an investment property but not a personal residence?

Well, when you buy a property for investment purposes, you are actually buying a business asset. The land and its improvements are to you - what a factory and an assembly line are to General Motors. Or what a brand new computer server is to Microsoft or Google. Or what an oil tanker is to Exxon. And just like those business assets, your property is going to depreciate in value.
Since depreciation of an asset (any asset) is a legitimate and real business expense (since all assets will eventually have to be repaired or replaced) the IRS allows you as the investor to deduct it from your taxes as a business expense - even though you never actually paid out any cash for that expense.

This is one of the biggest tax advantages of an investment property, especially during the first few years. Depending on the interest you’re paying on your mortgage, the depreciation method you choose, and the rent you’re collecting - it is usually possible to make money on the rental property, but not show any income from the property.

We’ll discuss all the tax implications of real estate investing at another time.

In real estate investing, leverage is simply using borrowed money to increase your return on investment.

It is the key to almost all real estate investments and is based on the assumption that the borrower can earn more in income from borrowed money than what he or she pays to actually borrow the money (interest).  This of course is a fairly easy and simple concept to understand - and a wonderful investment vehicle when it works.

For instance, lets say I borrow money from a bank at 7% interest.  I then turn around and lend that money out at 10% interest.  In essence I am making 3% interest on the money (less closing costs, etc.).  Borrowing and lending in this circumstance can be risky at best, and illegal at worst.

However, if I was to use that money to invest in a piece of property, and I was collecting rent that covered my principal and interest payments - then I’d be making money.  Or if I borrowed the money to buy a house, and then resold that same house for more money - if the difference in the two prices is more than the interest I paid - then I come out ahead.

Leverage also allows us to maximize our return on investment, by allowing us to invest less, but earn more.

I usually like to use real-life cases and examples, but for the sake of simplicity and to get my point across - I’m going to use nice simple round numbers (albeit unrealistic).

Let’s say you have $50,000 to invest in some real estate.  If you were use that $50K to buy one house valued at $100,000, your Loan-to-Value ratio would be 50% (50/100).  If the house went up in value over the course of a year by 5% to $105,000 and then you sold it, you would make $5000.  This would be a 10% return on investment (ROI).

The example above is actually a very good example of the use of leverage.  By borrowing money from a bank, you were able to use less of your own money.  So even though the property itself only went up 5%, your money actually grew by 10%.

Now, let’s say instead of buying one house with the $50,000 - you decide to buy two houses.  Most banks and lenders will allow a 75% to 80% LTV on investment property, so you could buy two $100,000 houses using $25,000 of your own money on each.  Now, if you held on to both houses over the course of a year and they went up by the same 5% and then you sold them - you would make $10,000 in profit ($5,000 each).  So you’ve now made $10,000 off the same initial sum of $50,000 - a 20% return on investment!!

Of course the two examples above don’t take into account a whole host of issues:  taxes, closing costs and sales commissions can eat into your money at both ends of the deal, you need to make sure your rental income is a positive cash flow (meaning it covers the mortgage payments) and if not you have to factor that into it, and of course you might have to put money into the deal to fix the house up, advertise for tenants, etc.

But the point is the same the less of your own money - and the more of Other People’s Money (OPM) - you can put into the deal, the bigger the return on your own money at the other end.

Always invest as little as possible and buy as much as possible within your own tolerances for risk and your own knowledge of the situation.

No hard and fast rules exist for the describing and labeling of undeveloped land, but to understand land investment adequately, you need to become familiar with the investment categories of land and their respective attributes.
Land is usually categories by either its location or its use - this way the descriptions are broad enough to encompass most land and clear enough to differentiate its use among parcels.

Some commonly used categories of undeveloped land are…

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Investing in land is not an exact science.

Success and failure have come to all types of people and organizations that have tried their hand at real estate speculation - especially where land is concerned.   Sometimes land investment results from not much more than a hunch - or gossip - without any research being conducted beforehand.  At other times the investment only happens after exhaustive research and due diligence.

Some transactions have been executed with a handshake or on the back of a napkin, while others have had contracts so lengthy and cryptic that it might take an army of lawyers and judges to decipher them should a disagreement arise.

There is no correct method to investing in land and there is certainly no shortage of formulas for determining the probable success - or failure - of a speculative real estate investment.  Yet that hasn’t stopped people - or countries - from trying.

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One of the best things about current market conditions for real estate investors is the abundance of motivated sellers.

A motivated seller is someone who is desperate to part with their property.  They may be over-extended on their mortgage, they may need to move due to a job or family situation, maybe they invested in a property themselves and they’ve decided it just isn’t for them.

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