Have you seen this headline in your local paper, or in the financial press? 

Headline: "The big run-up in real estate values is now over."

Chances are you have gotten this news, and that you will hear it again—many times. At least once each decade, the experts advise us that we have missed the boat. These experts, though, fail to realize one important fact about real estate: that there are as many "boats" in the future as there were in the past. if not more. Real estate is not a one time opportunity, and potential can and will arrive many times. Many factors shifts in the job market, population growth rates, regional popularity, interest rates, and more—all mean that real estate opportunities occur not just once, but repeatedly and in very predictable cycles.

The many advantages of owning real estate are difficult to beat with other forms of investment. Real estate comes with the usual investment risks, but some very special risks related to real estate should also be kept in mind when you compare it to alternatives. With real estate, you gain lax advantages, direct control over the asset, and the ability to borrow money to purchase a property without being taxed on the money borrowed (in fact, by refinancing it is possible to keep your capital working while still owning the property). In exchange for these advantages, you need to buy an expensive property, place yourself in debt, and in most cases, be unable to get your cash out through a quick sale. You also cannot sell part of your investment as you can when you own stock or shares of a mutual fund.

Real estate provides you a combination of benefits and control. You can influence the value of a property with landscaping, roofing, a new coat of paint, and interior design, for example. When you buy stock in a corporation, that does not give you the right to go to corporate headquarters and sit in on management meetings, and you cannot own the specific assets represented by your shares. Stock ownership gives you a portion of ownership in an intangible unity called "equity,"' which collectively owns the company and appoints executives and managers. This is an important distinction.

One of the risks that many first-time real estate owners do not consider is that if you become a landlord, you will have to interact with tenants. That means they might call you in the middle of dinner or while you're trying to watch the game on Sunday. These problems keep many would be investors out of the business entirely But with careful screening of applicants and by the proper use of a telephone answering machine, you can achieve a relatively comfortable balance, while still acting as a responsible and fair landlord. Ail you really want as a landlord is a tenant who will pay the rent on lime and do a reasonable job of caring for your property.

Looking beyond the potential problems of dealing with tenants, the potential gains from investing in real estate make it worth a serious look. Let's begin by establishing a few important distinctions. Real estate is land plus permanent improvements, which most often means buildings. You might also become involved in the rights attached to the ownership of real estate, broadly called real property. Also be aware of the important difference between the full value or price of real estate, as opposed to equity, which is the portion you own after deducting debt. Equity is the purchase price (or current value of the property), minus all outstanding debt balances.

Some investors buy real estate for the long-term appreciation and tax advantages it provides. In comparison, the speculator is an investor who attempts to make the greatest possible profit in the shortest possible time, and is willing to take higher risks than long-term investors, because short-term profits will be much greater. Speculators often are accused of being opportunists in the market, but that characterization is not always accurate. The speculator is simply taking a different approach to investing. The same distinctions can be seen in the stock market. Some investors buy long-term growth stocks, while others try to guess where short-term price run-ups will occur. In all such instances, speculators chase after higher profits, but they also assume considerably higher risks. With that in
often do not achieve as much in the long run, because real estate, by its nature, is a long-term investment. Both approaches have their good and bad features. 

 

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