Thursday, August 28, 2008

Group Investing Helps The Skittish Jump Into Wealth Building

There are many fallacies about getting into commercial/investment real estate as an investor. Sadly, too many people don't use their brain, but worry about tiny little things and that keeps them out of the market. I like professional financial advisers. They usually understand the intricacies of utilizing investment real estate to build wealth, and the myriad of tax benefits that accompany income. But increasingly, I find that people will say they need to consult their financial advisers, and it is their uncle, or a neighbor, or a long-time (and now retired) stockbroker friend.

Listening to the news, one would think that the market is in the toilet and that a one-and-a-half percent passbook savings account is the way to go to keep your money safe. It is anything but that. Remember, it is the residential market that is having difficulties. People buying and selling homes in which to live. If you are a buyer, however, it is your market. Don't like the terms on this house? Pick another one down the street. You might get a better deal.

With investment real estate, it's all about the numbers. If the deal doesn't work financially, you go on to the next opportunity. And there are tons of opportunities today.

One of the possibilities is group investing. This is where a number of people go in together on a property. While there isn't a lot of risk in a good, income-producing property, when people buy something as a group the perception is that whatever risk there was has just diminished exponentially.

From a collague of mine who put this together, here are some of the excuses people will use to block their ability to succeed:

I don't have enough money; I don't have the know how; I don't know where to start; What if I buy the wrong property; What if my timing is wrong; What if prices go down; What if I make a mistake . . . people will think I'm foolish; What if I can't get a loan; What if this is a bad location??? And so on . . .

Here is why people buy interests in real estate:

To gain net spendable cash flow; To take advantage of favorable tax laws to real estate; To acquire equity through leverage; To hedge against inflation; To profit from appreciation; To put existing capital to work; To achieve overall higher investment yield; To avoid the management burden; To avoid signing a large mortgage not;e To purchase without a credit report or bank financing.

Get the picture?

With group investing, everyone puts in some cash at the beginning -- often from existing equity in their homes (dead equity), or self-directed IRAs. But not out of pocket, meaning not from the weekly or monthly checking account. The property can be paid for up front, or over a period of two to three years. Either way, cash flow begins immediately. Add in appreciation, cost recovery (depreciation) and avoidance of capital gains when the property is sold later on (utilizing an IRS 1031 tax deferred exchange) and you have the makings of a solid investment that will build wealth.

This way, the perceived risk is spread around.

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