Business Times of Edmond, Oklahoma February 2020 - Page 24

BUSINESS MATTERS
JIM DENTON
L edger L ines
Real Estate Investing Options
H
aving overheard investors speak
of certain tax advantages, young
clients will often ask us about
investing in real estate. It is true that real
estate investing comes with some tax
advantages, but such breaks should not
be the sole reason for putting up your
hard-earned cash and your credit rating to
experience a stress test.
Successful real estate investing involves
strategy, vision and planning.
My rule with clients is: “I never want
you to invest in something you don’t
understand.”
This holds very true with real estate. If
you do not understand how a return on
your money is generated, what the goal is
and how to exit the investment, do not
invest! For example, general partnerships
in real estate developments can be tricky
and expensive if you do not understand
the risks associated with ownership and
partnership debt. You could unknowingly
find yourself paying a debt for someone
who, at best, misjudged marketability or at
worst was fraudulent. Either way, you’ve
lost your money!
Investing in real property is usually a
big, long-term commitment. Anyone who
has signed loan documents when buying
a first home knows as much. On a 30-year
mortgage loan, there are payment dates
that many young people have not even
contemplated as to what they will be doing
at that point in their lives. By signing the
documents, they’re committing to making
a payment on or before that date to satisfy
their written obligation.
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February 2020 | The Business Times
Why do people invest in real estate?
There are benefits. I’ve summarized a few,
as follows:
Housing — A big part of investing in
a personal residence is to no longer be
subject to rental agreements for personal
housing costs. Homeowners can also
benefit from interest deductibility on
their tax return. (Such a deduction may
be of little consequence currently, due to
the higher standard deduction allowed
starting in 2018). Buying your own home
provides a great initial investment in the
real estate market. It educates young buyers
on real estate terminology, financing
and marketability issues early in life. My
advice is not to overbuy on your personal
residence. Save your money for other
investments.
Appreciated value — When you buy low
and sell high, you have realized a gain in
the value of your initial investment. There
is an ever-present risk when this is your
primary strategy: The risk of a downturn in
the economy where the pool of potential
buyers of your property is reduced. When
that occurs, your property’s value will
correspondingly sink. The risk associated
with poor choices of your property’s
location can also cause your market value
to decrease. Due to marketability or other
factors, you may need to hold it longer
than initially planned. Such is the primary
risk associated with house-flipping activities
often glamorized on cable television.
Nevertheless, when you have the right
vision, strategy and some luck, appreciated
value can work to your benefit.
Income generation — Rental property
can produce rental income when you
contractually allow others to use the
property. Such arrangements come with
some risks as well. There is the risk of
non-payment or delayed payment of rental
payments. People have been known to
stiff the landlord. When this occurs, be
ready to assert your legal rights under your
well-crafted rental contract. Additionally,
it is critical to know the rental rates in the
area and be able to keep your property
occupied. Rental income provides
necessary cash flow to reinvest in the rental
property, pay property expenses, buy other
properties or use as you see fit.
There are various ways to invest in real
estate but no set way for all investors.
Home ownership — Owning your
home is a great way to get started in real
estate investing. Paying off your mortgage
would be a solid first step to start investing.
If you have a 5% mortgage note, it’s like
making 5% on your money. I tell people:
“It’s like getting a big pay raise!” You’re
no longer paying interest and now you are
generating monthly cash flow to potentially
invest in your next venture. I consider
this to be the first step before investing
elsewhere. This is a sure winner for a
homeowner. Invest in yourself first!
Residential rental properties — As for
buying and renting houses, having the
time and the handyman talent helps.
That, paired with the ability to handle
calls late at night as well as the skills to
market your property for renters, makes
your experience doable. Apartment houses