Commercial Property

Investors typically choose real estate for a number of reasons: cash flow, appreciation, tax benefits, and leverage.  A real estate investor holds property for personal or commercial investment reasons.  This differs from real estate dealer who holds property primarily for resale to potential clients.  An active investor typically buys a property and then makes repairs or improvements with the intention of selling the property for a profit.  A passive investor usually hires an investing firm to find and manage potential profitable opportunities, and is not actively involved in any improvements or negotiations related to the property.  Unlike a professional realtor who has to pass a series of exams and be licensed by local and state agencies, an investor simply needs capital and confidence. 

By putting down payments on a real estate transaction, an investor can significantly increase his profit percent and better the terms of the financing loans.  By bettering the terms of the loan, an investor can increase his available cash for other transactions, thus increasing potential earnings exponentially.  This process creates a strong cash flow.  This cash flow is very enticing to real estate investors.

Barring any unforeseen declinations in quality, real estate, unlike a car, generally appreciates in value.  This means that once a property is purchased, the value of that property steadily increases over time.  Residential real estate is especially prone to this process.  This is so because residences are comparatively priced.  This means that the value of a property is largely dependent on the value of the surrounding properties.  Therefore, if one house appreciates in value, then the surrounding properties also increase in worth.  An investor can force appreciation by investing in repairs or improvements.

A somewhat lesser known reason that so many people are learning how to become a real estate investor is the beneficial tax rules governing such transactions.  State and federal governments try to encourage investment by writing financial rewards into the tax code.  There are two main rewards built in.  First, an investor can claim monthly mortgage payments as a tax deduction.  Secondly, tax deductions can be made through a process called depreciation.  Though a property may appreciate in value, an investor is allowed to make the assumption that it will actually depreciate over the projected useful lifespan of the unit.  He or she is then allowed to claim this theoretical loss as a tax deduction.

Another strong reason for becoming an investor is called leverage.  Leverage can best be explained through an example.  Say you bought a house for ten thousand dollars and then sold it for eleven thousand dollars.  Your profit margin would be ten percent.  However, if you get an initial loan for the purchase and make a down payment of only one thousand dollars, then your profit margin would be one hundred percent.  This method is called leverage and is a great way to maximize profits.

For all these reasons real estate investing is both an easy and very profitable business to get into.

Despite a recent slowdown, the U.S. real estate market continues to be a popular investment destination for foreign investors. Attracted by a desirable return on investment, many foreign nations continue to invest heavily in the U.S. residential and commercial real estate markets. In fact, in 2005, foreign investment in U.S. real estate reached 1.83 trillion.

To evaluate the impact of foreign investment on the U.S. real estate market, the National Association of Realtors (NAR) produced a 2006 report entitled ‘Foreign Investment in U.S. Real Estate: Current Trends and Historical Perspective.’ The report provides insights into the trends in foreign real estate investment, its impact on the U.S. economy, and the major countries that participate in U.S. real estate investment. Below are some highlights from the NAR report.

According to the U.S. Department of Commerce, the top seven countries that had significant holdings in U.S. real estate as of 2005 were:

Germany – 13 %

Latin America – 13 %

Australia – 11 %

Japan -10 %

United Kingdom – 10 %

Canada – 6 %

Netherlands – 6 %

The U.S. economy is wide open to foreign investors. Both investors and Americans significantly benefit from all this foreign investment. The NAR study estimates that without foreign investments in the securities market, the long-term lending rates would be four percentage points higher than the current rate, which would adversely impact the U.S. real estate market.

Foreign direct investment into the U.S. not only creates more jobs but also contributes to the demand for U.S. real estate. In fact, foreign investment may be responsible for creating two million U.S. jobs by the end of 2006, which further bolsters the demand for U.S. real estate.

Permanent and temporary immigration of foreign-born workers into the U.S. further bolsters the demand for real estate. According to the Joint Center for Housing Studies at Harvard University, 1.2 million net immigrants are expected to arrive in the United States annually. This immigration pattern is expected to offset the decrease in housing demand by post baby-boomer generations.

In summary, the impact of foreign investment and immigration into the U.S. will continue to play a major role in the U.S. real estate market.

People want to have their own house.  It is a common aspiration.  But in today’s extremely tight credit market (think US financial bailout), a potential home buyer may not be able to obtain financing from a traditional bank or a mortgage company.  In this case, a buyer may choose to purchase real property through a land contract.

A land contract sometimes known as a “contract for deed”, “trust deed” or an “installment sale agreement” is a contract between a buyer and a seller of a real property wherein the seller provides financing to purchase the property for an agreed-upon purchase price and the buyer repays the “loan” in installments.  The seller holds the title or the deed to the property until the buyer completes all payments stated in the contract.

Purchasing a property by way of a land contract can prove beneficial to the buyer.  He/She does not have to contend with hefty down payments, credit requirements or other tedious bank financing prerequisites.  Initial costs incurred with a land contract are also significantly lower than those through bank financing.  Likewise, the seller does not have to wait for lengthy bank processes.  Furthermore, property sold via a land contract can be priced higher than if sold through bank financing.  Since the buyer is not obligated to pay a large down payment, the seller can ask for a higher price or a higher interest rate enabling the latter to realize a considerable profit.

Under a land contract, the buyer and the seller enter into an agreement that stipulates that the seller shall only transfer the legal title of the real property until all agreed-upon payments have been paid in full.  During the duration of the contract, the seller allows the buyer to occupy/use the property for purposes other than legal ownership provided the buyer is not in default.  In most land contracts, the purchase price is typically paid with a modest down payment and then periodic installments for a set period of time.  At the end of the course of the payments, the buyer pays off the balance with a balloon or lump sum payment.  When the full purchase price inclusive of any interest has been paid, the seller tenders the legal title to the property to the buyer. 

If the buyer defaults on his/her regular installment payments or fails to make full payment at the end of the land contract, the seller may re-possess the property.  The buyer loses any payments made including the down payment and equity through his/her periodic payments.  Money and time spent on improvements on the property will all go to waste.  Thereafter, the seller is not required to transfer the deed to the buyer.

On the other hand, if the seller owes a mortgage on the property and has not settled the entire loan prior to the buyer’s final payment at the end of the contract, the latter may be forced to pay off the mortgage to prevent foreclosure on the property thereby losing his investment.  Aside from mortgage on the property, there can also be back taxes or other liens that the seller owes.