Basic real estate investing disclaimer

No need for vast experience or a vivid imagination. Personal explanations. We cannot and will not make any claims as to particular earnings or income. The objective is not only to explain to the investor the nature of the risks involved in the particular kind of investment being offered, but also to ensure that there can be no lawsuits if things go badly.

When you think about buying real estatethe first thing that probably comes to mind is your home. But physical property can play a part in a portfolio too, especially as a hedge against the stock market. In this article, we’ll examine the leading options for individual investors, listed in approximate order of how direct a real estate investment they are, and reasons to invest. This is an investment as old as the practice of land ownership. A person will buy a property basic real estate investing disclaimer rent it out to a tenant. The owner, the landlord, is responsible for paying the mortgagetaxesand maintenance of the property.

Investing in real estate is one of the oldest forms of investing, having been around since the early days of human civilization. Predating modern stock markets, real estate is one of the five basic asset classes that every investor should seriously consider adding to his or her portfolio for the unique cash flow, liquidity, profitability, tax, and diversification benefits it offers. In this introductory guide, we’ll walk you through the basics of real estate investing, and discuss the different ways you might acquire or take ownership in real estate investments. Real estate investing is a broad category of operating, investing, and financial activities centered around making money from tangible property or cash flows somehow tied to a tangible property. The purest, simplest form of real estate investing is all about cash flow from rents rather than appreciation.

Investing in real estate is one of the oldest forms of investing, having been around since the early days of human civilization. Predating modern stock markets, real estate is one of the five basic asset classes that every investor should seriously consider adding to his or her portfolio for the unique cash flow, liquidity, profitability, tax, and diversification benefits it offers.

In this introductory guide, we’ll walk you through the basics of real estate investing, and discuss the different ways you might acquire or take ownership in real estate investments. Real estate investing is a broad category of operating, investing, and financial activities centered around making money from tangible property or cash flows somehow tied to a tangible property.

The purest, simplest form of real estate investing is all about cash flow from rents rather than appreciation. Real estate investing occurs when the investor, also known as the landlord, acquires a piece of tangible property, whether that’s raw farmland, land with a house on it, land with an office building on it, land with an industrial warehouse on it, or an apartment.

He or she then finds someone who wants to use this property, known as a tenantand they enter into an agreement. The tenant is granted access to the real estate, to use it under certain terms, for a specific length of time, and with certain restrictions — some of which are laid out in Federal, state, and local law, and others of which are agreed upon in the lease contract or rental agreement.

In exchange, the tenant pays for the ability to use the real estate. The payment he or she sends to the landlord is known as «rent».

For many investors, rental income from real estate investments has a huge psychological advantage over dividends and interest from investing in stocks and bonds. They can drive by the property, see it, and touch it with their hands. They can paint it their favorite color or hire an architect and construction company to modify it. They can use their negotiation skills to determine the rental rate, allowing a good operator to generate higher capitalization ratesor «cap rates.

From time to time, real estate investors become as misguided as stock investors during stock market bubbles, insisting that capitalization rates don’t matter. Don’t fall for it. If you are able to price your rental rates appropriately, you should enjoy a satisfactory rate of return on your capital after accounting for the cost of the property, including reasonable depreciation reservesproperty and income taxes, maintenance, insurance, and other related expenditures.

Additionally, you should measure the amount of time required to deal with the investment, as your time is the most valuable asset you have — it’s the reason passive income is so cherished by investors. Once your holdings are large enough, you can establish or hire a real estate property management company to handle the day-to-day operations of your real estate portfolio in exchange for a percentage of the rental revenue, transforming real estate investments that had been actively managed into passive investments.

There is a myriad of different types of real estate investments a person might consider for his or her portfolio. It’s easier to think in terms of the major categories into which real estate investments fall based on the unique benefits and drawbacks, economic characteristics and rent cycles, customary lease terms, and brokerage practices of the property type.

Real estate properties are ordinarily categorized into one of the following groups:. On top of all of this, you can actually invest in real estate through something known as a real estate investment trust, or REIT.

REITs are unique because the tax structure under which they are operated was created back during the Eisenhower administration to encourage smaller investors to invest in real estate projects they otherwise wouldn’t be able to afford, such as building shopping centers or hotels. One downside of investing in REITs is that, unlike common stocks, basic real estate investing disclaimer dividends paid out on them are not «qualified dividends», meaning the owner can’t take advantage of the low tax rates available for most dividends.

Instead, dividends from real estate investment trusts are taxed at the investor’s personal rate. On the upside, the IRS has subsequently ruled that REIT dividends generated within a tax shelter such as a Rollover IRA are largely not subject to the unrelated business income tax so you might be able to hold them in a retirement account without much worry of tax complexity, unlike a master limited partnership.

For all the real estate investing options available to investors, the average person is going to get his or her first real estate ownership experience the traditional way: By purchasing a home. I’ve never viewed the acquisition of a home quite the same way most of society does. Instead, I prefer to think of a person’s primary residence as a blend of personal utility and financial valuation, and not necessarily an investment. To be more direct, a home isn’t an investment in the same way an apartment building is.

At its very best, and under the most ideal of circumstances, the safest strategy is to think of a home as a type of forced savings account that gives you a lot of personal use and joy while you reside in it.

On the other hand, as you approach retirement, if you take a holistic view of your personal wealth, outright ownership of a home without any debt against it is one of the best investments a person can make. Not only can the equity be tapped through the use of certain transactions, including reverse mortgages, but the cash flow saved from not having to rent generally results in net savings — the profit component that would have gone to the landlord effectively stays in the homeowner’s pocket.

This effect is so powerful that even back in the s economists were trying to figure out a way for the Federal government to tax the cash savings over renting for debt-free homeowners, considering it a source of income.

This is a different type of investment, though — something known as a «strategic investment. Even if you had to grow your own food in a garden, there’s a level of personal safety there that matters. There are times when financial returns are secondary to other, more practical considerations. Whatever you do, though, don’t sacrifice your liquidity to try and build equity in your real estate investments too quickly, as that can lead to disaster including bankruptcy.

If you are saving to acquire a home, one of the big mistakes I see is new investors putting their money into the stock market, either through individual stocks or index funds. If you have any chance of needing to tap your money within five years or less, you have no business being anywhere near the stock market.

Instead, you should be following an investment mandate known as capital preservation. Here are the best places to invest money you’re saving for a down payment. One of the most common questions I encounter involves the relative attractiveness of investing in stocks versus investing in real estate. The short version is that it’s somewhat akin to comparing vanilla and chocolate ice cream. They are different, and as your net worth grows, you may even find that both have a role to play in your overall portfolio.

Your personality will also inform your decision, as some people are more temperamentally geared toward stock ownership or real estate ownership, respectively. A substantial percentage of real estate returns are generated due to the use of leverage. A real estate property is acquired with a percentage of equity, the remainder financed with debt. This results in higher returns on equity for the real estate investor; but if things go poorly, it can result in ruin far more quickly than a portfolio of fully-paid common stocks.

Billionaire Charlie Munger talks about a friend of his prior to the real estate collapse. This friend, a very rich landlord in California, looked around at the high valuations on his properties and said to himself: «I’m wealthier than I would ever need to be. There’s no reason for me to take risks for the sake of. As a result, when the economy collapsed, the real estate markets were in turmoil, people were losing their properties to foreclosure, and bank stocks were collapsing — he didn’t have to worry about any of it.

Even as rents dropped due to tenant financial difficulties, it was all still surplus cash and he was armed with funds that kept replenishing themselves, letting him take advantage of buying up the assets everyone else was forced to sell.

Stop trying to get rich so quickly, and be content to do it the right way. You’ll have much less stress in your life, and it can be a lot of fun. Of course, this is only the beginning of your journey to understanding the topic, as we’ve barely scratched the surface. Real estate investing takes years of practice, experience, and exposure to truly appreciate, understand, and master. Best cities to invest in real estate.

Investing for Beginners. Investing in Real Estate. By Joshua Kennon.

If the print warning does not meet your criteria, seek personal advice. Investing Basic real estate investing disclaimer. Rather, individual claims on our website are purely anecdotal. Although this is not always possible, investors should have some idea as to the proportion of their money that they could lose. Related Articles. As an investor, it’s crucial to know how much of your money you could lose and what circumstances could cause this to occur. On the internet, it is all too easy to click away a warning and carry on with the deal.