All about investment

by Martin Chandra

In the '70s, real estate values increased dramatically, but not in the early '80s. In the '90s and 2000s, there were periods of both appreciation and decline in property value.

There are many investors who firmly believe that the appreciation rates of the '70s are normal and the low appreciation rates of these days were only a temporary aberration.

I doubt that low appreciation rates are a temporary aberration. It's more likely that the high appreciation rates of the '70s were the aberration. I, myself don't know that I don't have to hope the value of my property will go up. I can make it go up.

Almost all typical real estate investores are buy-and-hold guys. They buy a property, hold it for 5 to 9 years, then sell it. They expect to make their return from tax benefit, general appreciation, and cash flow. Since 1970, those three have produced decent returns.

But, you don't have to settle for only those returns. If you pursue a strategy of making the value of your property increase--instead of hoping that it increases--you can earn annual overall returns in the 50% to 100% range. Higher in some cases, of course.

I will give you a quickie course on real investment returns. There can be as many as four:

Appreciation: Increasing value of a property.

Tax shelter: Tax savings you get grom depreciation deductions--period. Depreciation is the only deduction which is tax shelter, because it's only a paper expense but it's a real deduction.

Cash flow: Before-tax difference between your income and outgo. In other words, rent and other income less operating expenses and mortgage payments.

Amortization: The paydown, if any, of the mortgage, if any.

Most very successful investores have a formula. William Nickerson, was an value-increaser, and his formula was:

• buy well-located, structurally sound building
• raise the rents
• exchange up to another, similar building

One of the underlying principles to make more money in real estate investment is find a property with unrealized potential, buy it, make the changes which are necessary to realize that potential, and exchange up to do it again on a bigger building.

You can divide properties into three categories:

• no unrealized potential
• unrealized potential but not economical
• unrealized potential which can be realized profitably

The third group is the smallest. The third group is also the only kind you can buy if you want to make serious money in real estate investment.

Then you have to further investigate over three variables:

• how much unrealized potential
• how easy it is to realize
• how probable realizing it is

Real estate investment is similar to the sponge game. You have a very limited amount of time. And you want the highest percent return. Like the sponge game, you want to accomplish as much as possible in each year.

In the sponge game, there's plenty of water to be had. But some water is harder to get than others. You get the most water in the time allotted by focusing on the easy-to-get water.

In real estate, you can increase the value of virtually every property. But some value increases harder to come by and smaller than others. You make more money by focusing on the easy-to-get value increases.

About the Author

Martin Chandra has over years experience in real estate investment. Go to http://martinchandra.com/lease-purchase.php to learn how to buy, sell, and invest in real estate