Thursday, October 20, 2005


Investment Property

If you're like most of us, you've no doubt seen the infomercials on television that promise you can get rich buying real estate (usually with no money down). Like the various magic diet aids and wrinkle creams, we wish we could tell you this is absolutely true, but we can't. So what's the scoop? Is real estate a good investment vehicle? For some people it is, but for the large majority of us, the drawbacks may be too great.

The biggest drawback of any investment in real estate is that your investment is not liquid. With the exception of some very small or very desirable-at-any-price properties, you don't just up and sell real estate. Why should you care about how liquid an investment is? Well, because none of us has a crystal ball, and you never know when you might need to get your hands on some cash in return for your investments. Despite your best investment planning, you don't want to be in a situation where you're doing great on paper, but might have to sell at a loss (if you can sell at all) to get a hold of needed funds.

That being said, let's take a look at the different types of investment real estate you might contemplate owning.

Timeshares. If you had to pick the most enjoyable real estate investment, it would almost surely be timeshares. Timeshares are best defined as buying a set period of time (usually one or two weeks) during a certain time of the year at a certain location (for example, a condominium in Florida or a villa in France). What's the advantage for you if you buy a timeshare? You get a fixed vacation cost each year, and you can trade weeks and locations with other timeshare owners in the same company.

Fixer-uppers. You can make money through investing in real estate if you buy houses, condominiums, buildings, etc., that need some work at a bargain price and fix them up. You can probably sell the real estate for a higher price than you paid and make a profit. However, don't underestimate the work, time and money that goes into buying, repairing and selling a home when you are determining whether it will be profitable for you to invest. Also, remember that different tax rules will apply to the purchase and sale of a home if it is not your principal residence.

Rental property. You can buy real estate for rental purposes and receive an income stream from renters. You may also be able to eventually sell the property for more than you bought it for and make a good profit. Although, don't forget that you will now be a landlord who may have to deal with nonpaying tenants and destructive tenants. Even if you have the world's best tenants, you still have to deal with upkeep of the property and any problems that come up. Some investors hire a property manager or management company to manage their investment real estate. This is fine, but don't forget to factor in the management fees when you're calculating your profit from the investment.

Please remember that rental real estate is subject to different tax rules than the home you reside in. You may be able to take tax deductions for losses, capital expenditures and depreciation if you meet certain requirements, but other deductions specific to principle residences may not be available to you.

Unimproved land. Unimproved land is a difficult investment to make a profit in. Unless you manage to buy a piece of land that is extremely desirable at a good price and are certain that it is not barred from profitable use for the neighborhood it is located in (because of zoning or other issues), it will probably cost you more to own the property than you will ever make selling it. (Remember, you will still have to pay property taxes and will also likely incur other upkeep costs on the land, and you won't be receiving any income from rents.)

If you have some sort of inside scoop on a piece of land (for example, the person in the house on the lot next to the land is a wealthy recluse and does not want the property built upon so you can name your price to sell it to him) or plan on developing it yourself (building your home on a piece of property next to a lake), in that case it may be a good investment.

Second homes. Second homes or vacation homes should be purchased primarily for vacation purposes, not investment purposes. Most people end up with a loss on their vacation home properties because even if you can manage to rent the home, the costs of owning the home almost always exceed the rental income it bring in.

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