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Basic Elements of All Investing
| | Tuesday, November 04, 2003 @ 12:00 PM EST
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Contributed by: Gregg Fous
Gregg Fous Properties
Read more archived articles about Buying
The seven Elements of Investing or
What is investing and what factors should I consider in Real Estate?
WHAT IS INVESTING?
The general understanding of the term is to commit money to earn a financial return or profit.
What follows are the common factors in ANY investment:
1. RISK. This a personal and an ever changing factor. Some people have a higher tolerance for risk. Sometimes during an investment the risk increases or decreases due to market forces
and sometimes the investor’s tolerance for risk changes within a specific investment. The birth of a child or the loss of a job may make the same investor more risk adverse. My advice to accept enough balanced risk that allows you to sleep at night. Examine the “worst case scenario” and if you can sleep with that – then you are with in your tolerance zone.
2. LIQUIDITY. This refers to your ability to convert your investment to cash. Real estate is generally considered have very poor liquidity compare to stocks and bonds. Liquidity is price sensitive, however, and most all real estate can be sold quickly AT A PRICE. For example, if your holding has a market value of $500,000 but you need to sell quickly to raise cash, you need only lower the price to move the product quickly. Investors can also raise cash quickly by borrowing against their real estate assets.
3. LEVERAGE. Generally refers to moving a large object with a small one. Leverage in real estate generally means a small amount of money can allow you to purchase a large investment by borrowing dollars to fund a portion of your investment. Real Estate is an area where leverage works absolute wonders and can dramatically increase your internal rate of return. Leverage can also provide tax benefits for the interest portion of the loan. But be careful, it can also present problems if the interest rates are high if and when the property has to be refinanced.
4. MANAGEMENT. How much time do I need to handle this investment? Is professional management available? What will it cost? The higher the involvement by the investor, the higher the rerun. Condos are a great way to go to minimize management. The less management and control you have, the lower the returns (Like a REIT).
5. TAX IMPACT. Real estate perhaps has some of the best tax advantages to the investor. Some investments have income that is taxed at an ordinary rate (CD), some no taxation until money is withdrawn (IRA). Real estate offers tax shelters and can allow taxation at capital gains rates and deals properly structured can allow the investor to defer taxes.
6. CHANGE IN VALUE. Appreciation of the asset is critical to the investor, especially if the investment throws off little or no income during its life. Investors must look at historical as well as forecast rates of appreciation.
7. HOLDING PERIOD. Investments need to be evaluated often. Examine market trends and prices. Generally the longer the holding period, the better the returns on real estate investing.
Buying a condo or home is South West Florida need not be a logical, calculated investment decision. But it helps to know that you can make money while enjoying the breezes off of the water, seeing the sun set from you porch, etc. etc etc.
Note:
As always – if you have questions or comments – please check out my user profile.
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