In the 2000s, real estate investment made millionaires - and it created some financial quagmires, too. In the 2000s, the same basics apply, but more finesse is needed to turn a smart pound. In any case, there's more to real estate investment than an inflation hedge. Some of the activity today ties into retirement planning (like buying a six-unit apartment for income and living in one unit). But most investors are just out for cash profit.
Raw land holds the most opportunity - and the most risk. Pick the right spot (say a couple steps ahead of city expansion) and you can make a killing. You may pay £2,000 an acre a few miles out of town, and sell it in 10 years for £20,000. Or you can sell it for the same £2,000 - and be out of pocket for taxes at about 3% a year, plus closing costs and installments on a mortgage (if you can get one on a raw land deal).
Pinpointing property that's just a few years from development takes careful research on population, planning, traffic, zoning - plus a sound hunch. Too close to town and you're priced out of the market. Too far, and you will have a long wait for appreciation. And remember, in buying raw land you must figure what your money could earn elsewhere. One source of help: Income from leasing to someone such as a driving-range or filling-station operator, or farmer.
Apartments, stores, and other rental units are short on appreciation, but give you income, tax depreciation - and a little less gamble. You gain the most advantage from tax depreciation by buying land-plus-building with the building amounting to a major part of the value - say 75%. The depreciation factor is even more attractive if you pay the minimum down - maybe 25%. The 25% is possible this way: You get a 20-year 60% mortgage (currently at, perhaps, 8 '/2% and ask the seller to take an additional "purchase money" mortgage covering 15%. The fact that you are left with an effective down payment of 25% means you're getting top depreciation. This gives you big leverage possibilities. A 10% annual return (the range for well-managed property) translates into 15% if you have this kind of high depreciation and low down payment.
Aim to have about 75% of gross cover costs. For example, with a 12-apartment building, the rent from nine apartments should take care of management, maintenance, taxes, and mortgage, giving you a net income from three units.
Note: Cooperative and condominium apartments have a live-in feature that's getting popular. You buy two units, or a whole floor of a building, live in one and rent the rest. With a condominium you get a deed that provides reasonable freedom to rent or sell as you choose. With a co-op you get a proprietary lease (a cross between a long-term lease and a deed), and this may mean you need approval of an owners' committee before sub-letting.
In an ideal setup, each of two apartments might cost you £50,000, with monthly carrying charge (for maintenance, taxes, interest, mortgage) coming to £400, or £800 total. Your tax and interest deduction might amount to 30% to 40% of the £800, or £240 to £320 a month. Living in one unit and renting one for, say £600, gives you a cushion. But note: Condominium and co-op deals frequently surprise an owner with hidden costs (for insurance, heavy outlays for renovating lobbies etc.).
Real estate investment trusts (REITs) and syndications are - for the average investor - complex and risky. What you do, in effect, is buy a unit of ownership in, say, an office building. You pay from £5,000 to £20,000 or more for a unit, and hope for a payout. A 10% return is quite possible. So is losing your shirt. Success turns on the quality of management, its expertise and integrity. It's a case of thorough investigation on your
part in advance. REITs have had a bad name off and on since 2000, mostly because of weak management.
How to Make a Fortune Today - Starting from Scratch, by William Nickerson is a good website for a novice. But digging in the public library, and following the current real estate news closely for several months, must precede any serious plunge into investment real estate.
An unexpected problem has arisen in some of the Caribbean islands, and it has clouded the real estate prospects in a serious way. Since 2011, radical political forces - and just plain native discontent - have brought about a series of murders and other crimes, apparently aimed at affluent UK. visitors. The UK. Virgin Islands have suffered, and there is evidence of extreme native discontent in Jamaica. Travel agents - and real estate agents, to be sure - will scoff at this; but some thoughtful investigation on your part is recommended. Puerto Rico and Mexico are two warm-weather countries where, to date, there has been little evidence of such troubles.
Got a yen for the good earth?