REAL ESTATE--STILL THE GOLDEN OPPORTUNITY?

Real estate investing is still one of the most attractive alternatives available to the investor at any level of expertise. Let's count the ways, keeping in mind that the aggregate layering of these benefits makes them all the more appealing.

INCOME POTENTIAL

Where can you find an investment that pays you in predictable and (for the most part) controllable installments, month in and month out?

You can, of course, invest in the stock market and speculate on the ability of the blue chips--or the more risky issues--to give you a regular return. But the performance of the stock market over the years is not without its roller-coaster qualities. And with stocks and bonds you relinquish control over your funds totally--except for going in and coming out.

By contrast, when you have a solid piece of income property in place, together with the management controls you need, that income stream, like Ol' Man River, just keeps on flowing. Yes, some mutual funds have done well, and may continue to do well. But in the hierarchy of needs, housing is basic. We all need a place to live. If you want the security of servicing a need that will never decline, then housing has got to be near the top of the list--if you follow certain basic rules outlined in this course of study.

DEPRECIATION (TAX BENEFITS)

Congress changed the tax rules pertaining to real state four times during the 1980's. That decade was not particularly kind to real estate investing. The 1986 reformation was particularly damaging.  Moreover, capital gains lost its special treatment and further depressed

the real profit potential. And the new passive-loss rules were designed to prevent you from offsetting income from normal sources (salaries or investments in stocks and bonds) by expenses from passive sources such as real estate or limited partnerships. In other words, you could

only use "passive losses" to offset "passive income," but not "regular income."

To pass the "passive test," you had to "materially" participate in your business and satisfy tough criteria such as:

• You had to work in your business at least 500 hours per year (around ten hours per week).
• If you worked less than the 500 hours a year, you had to be the primary person involved, almost to the exclusion of anyone else.
• If you put in at least 100 hours a year, it had to be more time than anyone else put in, including employees.

This kind of sophistry forced investors to look at real estate through different eyes. The old rules of writing off real estate losses against salaries and wages vanished into thin air. 

Was there nothing left of value?

Fortunately, yes. 

• Legitimate expenses within your passive activity (such as interest, depreciation, property taxes, insurance premiums, management fees, advertising, legal or accounting fees, repairs, etc.) can still offset income from that passive activity. Uncle Sam only exacts his pound of flesh from the net profits.
• Any excess loss from a passive enterprise can be used to shelter income from other passive enterprises.
• Any unused loss can be carried forward to future years where you will have passive income that needs to be sheltered.
• Your losses from passive enterprises could make it attractive for you to plan to find "passive income generators" (known as "PIGS") in the future--such as the new breed of real estate limited partnerships designed (heaven help us!) to make profits rather than generate losses through high debt-levels.
• You still can play the imaginary game of "depreciation" where Uncle Sam pretends that your real estate property loses all of its value in 27.5 years (for residential) or 31.5 years (for commercial), and let's you write it off over time as an expense. (For properties placed in service before 1987, the more favorable rules of the "Accelerated Cost Recovery System" applied.)
• If you qualify as an active participant in your business activity, you can still use up to $25,000 of losses against other income (such as salary or interest and dividends). However, this $25,000 bonanza is reduced by 50% in stages when your adjusted gross income exceeds $100,000, and evaporates altogether at $150,000 AGI. (Keep in mind that this policy applies only if you own 10% or more of a rental property or limited partnership.)

Thus Uncle Sam still left some valuable crumbs on the table

even though the banquet was over--enough to make it still fairly tempting to enter the real estate field from the tax point of view, provided you treated your investment with the care of an astute business person. Tax laws change. Be sure to check current laws and regulations.

EQUITY BUILDUP

When your tenants make their payments, part of the money stream goes to pay interest on the debt, and part goes to retire the principal amount. This unique feature means that every payment causes your equity position in the property to improve. As the debt is serviced, your net worth increases. This simple characteristic makes real  estate unique. You make money while you sleep--because someone else is servicing the debt in exchange for the privilege of using your property.

APPRECIATION

In some parts of the country, real estate is appreciating at a respectable rate. At the same time, other regions of the country are experiencing flat or declining values. What is the implication of this? It is that you can make real estate work for you--wherever you live--if you structure transactions to emphasize those elements of the I-D-E-A-L

formula that will give you the highest return in your area.

At the same time, if you are fortunate enough to live in areas of the country where property values are rising, then you have that profit "booster" of appreciation to add to the other factors of profitability that pertain to your investment.

Keep in mind that real estate (despite regional fluctuations) is still a "forgiving" undertaking, in that eventually real estate values in most areas of the country will recover from occasional corrections and declines. The reason for this is tied inseparably to the market forces of

supply and demand.

"They aren't making land anymore" is a phrase that real estate investors are fond of quoting. And it is true. There is indeed only so much land to be developed; that fact, coupled with the fact that housing is a necessity, will cause most real property to rebound after market declines. But you must either have the staying power to wait it out in those cases, or you must use combinations of creative acquisition techniques that make it prudent to invest in those areas despite a lack of appreciation. In any case, the street-smart investor can always target properties that lend themselves to profit-taking on a quick turn-around

transaction. More on this later.

LEVERAGE

There is no more exciting or stimulating factor about real estate investing than the concept of "leverage."

It means, simply put, that you can control an entire piece of real estate and benefit from its full slate of cash favors, even if you don't pay for it all at once. In fact, even with

a nothing down transaction where you don't put a dime into a property, you can still reap the harvest of the entire property as if you had paid it off entirely. This, coupled with the principle of using "other people's money" when a down payment is called for in a given transaction, makes real estate leverage so powerful.

The yield through leverage can be very high indeed.  By contrast, try buying stocks and bonds with nothing down.

Try starting up a franchise with nothing down. Try opening up a retail store with nothing down.

With real estate, you can sit on the throne of profit without

having royal blood flowing through your veins. In fact, in many respects, real estate is the "little guy's" only chance to make it big without a fat wallet. And it works.

These five factors of profitability;

• income generation
• depreciation and tax advantages
• equity build-up
• appreciation
• leverage

make real estate still one of the most attractive opportunities for the average person, provided the action plan for real estate is followed with care.

This course of study outlines in considerable detail what that action plan is, and how you can put it to work profitably.