Archive for April, 2009

With the current state of our economy, many people are taking the ‘wait and see what happens’ approach to making many investments or financial commitments.  While lines of credit require a bit more than they once did in the times of zero-down financing, it is still a great time to invest, particularly in real estate.  Low interest rates, tax incentives, from first time home buyer (here) to energy efficiency credits (here), are not only available, but accessible.  

However, many people are still left wondering what they should be looking for when investing?  As a general rule, a good investment is one meets the objectives of a specific investor or investors, regardless of what the asset is.  Any investment has certain characteristics that include liquidity, marketability, and risk, each having higher or lower degrees of importance and impact on any given investment scenario.  For instance, if you want to invest in something that has high liquidity, meaning the ability to turn your investment into cash quickly with no loss to your principle, real estate may not be the best vehicle to meet your objectives.  Further, when speaking about real estate investments, you are speaking about an equity type investment, where the investor is placed in a position of ownership.   Three characteristics that favor, and should be considered when making a real estate investment are:

Rate of Return:  Referred to as ‘Yield’, it is simply the percentage return on each dollar invested for each period invested.  This can be done on a pre-tax as well as a post-tax basis.

Tax Impact:  See above, as well as capital gains taxes on certain types of income, and tax deferments

Leverage: The use of borrowed funds to finance some of the purchase price of an investment.  The ratio of borrowed funds to total purchase price is referred to as Loan to Value ratio, or LTV.  A higher LTV means a greater amount of leverage.  Real estate transaction can often be highly leveraged when comparing them to other investment types.

Depending on what your investment objectives are, generally speaking, real estate has real potential for a high rate of return and can in many scenarios have a favorable tax impact.  This coupled with the ability to finance a significant percentage of the cost, make real estate, commercial and residential alike, a great option for a long term investing.