Weigh factors carefully before investing in real estate beyond your home

May 09, 1993|By Steve Kerch | Steve Kerch,Chicago Tribune

In a sense, we are all investors in real estate.

Real estate is, in many ways, the economic foundation on which all of society is constructed. Every building in which we live or work or play, every street on which we tread, even every piece of open ground we enjoy is there as a result of one real estate decision or another.

Owning a single-family home, town house or condominium is the most common form of real estate investment for Americans. Renters, too, are investors, only any returns on their multifamily property revert to a landlord.

Most of us may never move beyond the purchase of shelter in our lives as real estate investors. But those who do find a cornucopia of opportunities to pursue.

From the ownership of stock in a home-building firm or the setting up of a home office to the participation in a limited partnership or the buying of collateralized mortgage obligations, the ways in which individuals can invest in real estate are indeed numerous.

And they are growing as new vehicles are invented and old ones are made more accessible.

But before delving into anything from the simple to the complex in the world of real estate, it's probably wise to address the fundamental question of whether an individual should invest in real estate at all.

As with any form of investment, real estate offers its own set of risks and rewards. And, despite what some have thought from time to time, it always offers both.

How do you decide if real estate investing is for you?

For a solid, basic introduction to the area, try 1992's "The Real Estate Investor's Q & A Book," written by real estate attorney and broker Hugh Holbert with public relations consultant Ron Tepper (John Wiley & Sons, New York).

The book takes readers through the fundamentals of residential and commercial investment, listing questions that must be asked along the way at various points in the process. Negotiations, financing, contracts and taxes are also covered in the convenient question-and-answer format.

"In my years in the business, I have found that real estate is like a game . . . it can be fun and rewarding," Mr. Holbert writes in his introduction. "But like any game, you must know the rules,

practice and study before you play."

Here are a few of the areas of real estate investment open to individuals:

* Rental flats. Perhaps the most basic form of real estate investment, even more than just owning your own home. With a two-flat, you can have both shelter and investment, living in one unit and renting the other. Many of our most prominent developers got their start in real estate by purchasing an old two- or three-flat, rehabbing it and selling at a profit. Then they were hooked.

* Real Estate Investment Trusts. REITs, for short, are publicly traded corporations whose assets are properties and whose income is generated solely by those properties. In essence, they allow individual shareholders to buy into the cash flow from a large portfolio of properties that would normally be held only by big financial institutions.

* Stocks. There are both commercial real estate and home-building firms that are traded on the major exchanges. And, as with any stock grouping, there are analysts from most of the major brokerage houses who follow the industry.

* Funds. A number of publicly traded funds hold real estate in securitized form, particularly obligations of the Government National Mortgage Association. Ginnie Mae, as it is known, is the secondary marketer of government-insured residential mortgages issued through the Federal Housing Administration and the Veterans Administration.

* Partnerships. The most popular form of real estate investment in the 1980s, the real estate partnership lost its luster after the 1986 tax reform act did away with many breaks for investors. But partnerships do still form and buy real estate; the catch is today ++ they must find properties that actually generate income instead of tax losses.

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