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Investing in real
estate
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Most people know that lots of money can be made
by investing
in real estate, but it's not easy and there are some real risks involved.
It's
a good idea to talk with an accountant if you
plan to buy property.
Real estate is a
"non-liquid" investment. That means that should you need
to sell for any reason, it sometimes takes a year or more to get your cash,
and more
than likely you'll be paying from 5 to 10 percent commission to your
broker, plus other costs of the sale, so your net profit will be
affected. Also,
you may be subject to a capital
gains tax on your profits.
On the other hand, there are some big tax advantages to investing
in real property. Real estate is usually more stable over
the long term
many other investments, and if you do buy a good property,
you can use it's equity and collateral to leverage other deals.
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Land
Most banks require a larger down payment for a land
purchase. In fact, a lot of land deals are for cash.
There's a lot of competition
to buy good build-able land,
so be prepared to act quickly. And be creative.
Many land parcels are odd shaped, wooded, wet, or have other
eccentricities. If you can work around those to create building
sites
you can often get a good deal.
Commercial land and residential land are very different markets.
If you plan to buy land, research the zoning trends in the community.
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BUY and HOLD:
Buying land on speculation can be risky. For one thing,
you'll have to pay taxes on the
land, even if there's no
dwelling on it. You should be very
confident of the steady rise of
land values in the area you buy in
because sometimes values go
down, not up.
Once you buy land
you should pay close attention to the
market and possible zoning law
changes. If you do decide to
sell,
it can take some time. On the plus side, many people
put excess
cash into a land purchase because in a good area, land
appreciates at a better rate than
many other investments.
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BUY and BUILD: Many people dream of
buying some land and building a nice home.
That's a great
idea but there are some things you should keep in mind.
For
one thing, most towns will require
that your home design be at least approved
by a qualified architect to be sure it meets local and state building codes.
Some
towns are very strict, especially in high end neighborhoods and
historic places.
Whenever you build
on raw land, you need a foundation, driveway,
landscaping, and perhaps a
well
and septic system. The land may need to be
cleared, too. There's a very long list
of things you need to spend money on
before you finally move in.
These items can be very expensive
sometimes.
Keep enough cash
on hand to handle them. Banks often provide construction
loans
if your credit is good. Be aware though, that if you take
their money your
building project will be closely supervised. The
money will be given out in stages.
Many people are better
off using their own cash to do as much as possible.
That
allows them much more flexibility in timing and construction.
If you're a builder, you'll need to make a good profit on your purchase
to
cover the large costs of developing it. That means you'll
have to very careful to
get a good price and buy a parcel that can
reduce or eliminate some of your costs.
Items that make a land deal sweeter:
cleared land, subdivision approval,
town road, nearby utility lines,
nice views, waterfront, septic approval test, close
to a good school,
etc.
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Apartment buildings
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Many aggressive investors seek out multi-unit buildings, so you have a
lot of competition.
You'll need to be sharp and ready to act
quickly when you find a good investment.
If you buy an
apartment building, you'll certainly have vacancies and some
tenant
problems.
You'll also have some legal liability to tenants, taxes, and maintenance.
Unless you live near your apartments, you might be better off hiring a
property
management company to deal with tenants and maintenance.
Also, make sure your "rent roll" covers your mortgage, taxes, and
maintenance.
If you're lucky you may have a small cash
flow, but don't count on just a build-up
of equity to compensate for a
negative cash flow. Be careful not to charge rents
that are
too high for your market, too. Many tenants start thinking of
buying
if the rent is too high, so your prospective tenants will
disappear. |
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Single family homes
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Some people invest in
single family homes because there's always a market.
The same
principles apply to home rents as to apartments. If the rent
is out of whack
with the market, qualified tenants may become buyers, or
you may end up with tenants
who are not good credit risks, because they
won't be able to buy a house.
You'll want to screen your prospective tenants carefully,
because they will be living in one of your most valuable possessions.
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"Fixer
uppers"
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Many people have made a
sweet profit by buying a run-down property
and repairing it.
Beware:
This is not for
everyone. Unless you have a good tolerance for
uncertainty
and a solid financial footing, you could be asking for
trouble.
Nothing is worse than trying to sell a home that's
half done,
one that the owner couldn't afford to finish.
A run-down property
can sometimes need so much work that it makes
no economic sense to fix
it up. Before you buy, get a builder or contractor
to
take a hard look at it and tell you the truth.
Even at best,
it's likely to cost more money and take more time than you think.
If you have lots of
energy, friends or family in the housing business,
a good builder
on your side, or if you personally have home renovation skills,
you are
in a good position to buy a "fixer upper".
The up side is
that it can be extremely rewarding,
and you'll end up with a home that
fits your needs perfectly.
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