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  • Grace Jenkins

    By Grace Jenkins, Faculty Member, School of Professional and Continuing Education
    Published July 2014

    Investing in real estate for some is second nature, while others are just starting to build their real estate portfolios. It is true, real estate doesn’t have the liquidity of stocks and bonds. However, real estate’s longevity is the gem in the investment jewelry box. Some say the time for investing in real estate has expired due to rising interest rates. Keep in mind the rates are not high like they were in the 1980s. 

    Back then, investors purchased properties at 14 to 18 percent. Those properties are now slowly being paid off, and retirement without the reliance on social security is now in sight for those same investors. Real estate market values are also expected to rise as inflation increases. The stock market, now near its all-time high, could correct to lower levels, possibly leading to more favorable perceptions about the risks of real estate investment.

    Potential investors are also looking at the Dodd-Frank regulations as a possible roadblock, particularly regarding the stipulations for seller financing. For example, the investor who seller finances can’t gouge the borrower with interest rates. However, the investor still has the potential for receiving an interest rate above what is available from bonds or other savings vehicles. There is also a limit of properties that can be seller financed per year by the investment entity. Becoming familiar with the guidelines will keep both sides of the transaction in check. This does not sound like that big of a deal-breaker. Look at investment like any other business. Using ethical and fair management practices builds your business’s integrity. What could be better than basing a business on these principles?

    The rise and fall of real estate should also be considered when discussing real estate investment. Remember that every investment has risks. The savvy investor gives little consideration to the increase in interest rates in today’s market. Remember the 1980s investor? The beginning rates were truly high; however, those investors took advantage of refinancing when the interest rates dropped. Today is no different. Yes, the rates are rising a little, but they are rising from historically low rates, so keep that in perspective. Here’s the deal: 

    • Purchase a property that is in need of updating. This is a property that real estate professionals might classify as a diamond in the rough. Know the real estate value trends in the area of situs. 
    • Reside in the property 2 of the last 5 years prior to selling. 
    • By utilizing the capital gains tax exemption, take the profit and put it into the next property. Do this until you have enough profit to purchase two properties.Keep in mind the regulatory gains amount associated with the primary residence sale. A single person has $250,000 and a married couple has $500,000 of gain without having to pay taxes. 
    • While one property remains an investment, another one is purchased as the investor’s primary residence. This can be done indefinitely unless the laws change or until the investor grows weary of moving.
    • Should the investor decide to sell the investment properties, there are two choices at this point. Take the money, pay Uncle Sam the capital gains tax amount, and choose the next investment. Or, follow the guidelines under the 1031 exchange, continue to purchase one or more investment properties, and have a treasure chest of gems!

    Grace Jenkins is a faculty member at Kaplan University. The views expressed in this article are solely those of the author and do not represent the view of Kaplan University.

    _____________________________________________________________________________________________

    We encourage you to share this article if you learned anything (#TIL) or found this useful information. 

    If you are interested in other related financial topics, we invite you to take a look at Kaplan University's Center for Excellence in Financial Services and our Career Moves site, each of which periodically publish new articles and other content on this subject. 

    And if you are considering a business degree we invite you to find out more about our School of Business and explore Kaplan University's undergraduate and graduate degree offerings.

     

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