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Real Estate Investment Primer

According to one study 23 percent of all homes sold in 2004 were purchased as investments. Considering the historical returns, and the high percentage increase in prices over the last few years, this shouldn't be surprising. But there are several ways to profit from an investment in property.

'Flipping' is the practice of buying property, then selling for — hopefully — quick profit. The flip side to flipping is keeping property for the long term to take advantage of tax incentives and capital appreciation. Calculate the total costs vs amount saved from tax write off. Don't forget to include interest charges, property taxes, insurance, repairs, etc., along with the regular monthly payment.

Remember that property values have risen in most markets for several years. But with interest rates increasing no one can predict how much higher they'll go nor for how much longer. No gain without risk!

Apart from gains from a tax write off and appreciation, some costs can be offset by renting the property. But, consider the amount of time and cash you have to find tenants, manage the property, and pay for or perform repairs.

Foreclosures are another investment avenue, but also not without risk and often requiring substantial cash outlay. A foreclosure occurs when a property owner is no longer able to make payments on a mortgage, usually over a period of several months. But seldom are foreclosed properties all gain and no pain.

Foreclosed properties tend to be in need of repair — someone about to lose their home isn't usually incented to maintain it in pristine condition. Be prepared to spend time and effort bringing the home back to salable condition, if you have the skills, or laying out cash, time, and effort to find a reliable contractor.

Similar considerations apply to investing in abandoned property, with some possible additional legal hoops to jump through. Foreclosed properties usually have clear title. The lender (a bank, mortgage company, or other financier) reclaims title as a part of the foreclosure process. In the case of abandoned properties, it may not be clear who has title. Factor in the additional time and cost for title searches and possible legal action.

For those who want to take advantage of profit opportunities in real estate, but without actually laying out cash, signing dozens of documents, or worrying about the physical property, there are purely paper investments. As a result of computerization and the explosive expansion of investment options in the 1980s, several types of 'monetization' of real estate came into existence. REITs (Real Estate Investment Trusts) are one type. There are others — mortgage backed securities, property bonds, trusts, mutual funds, and stocks oriented specifically toward real estate. Before investing in any of these 'non-property' options, talk to a broker.