Foreclosure Crisis Likely 5 More Years

Despite a decline in the total number of foreclosures across the U.S., the foreclosure crisis is likely to last another 5 years as it takes lenders that long to formally take back homes tied up in legal squabbles, according to a leading real estate research firm.

Lender Processing Services (LPS) found major differences in foreclosure pipelines in states with judicial and non-judicial foreclosures. Judicial foreclosures require courts to approve foreclosures before property can be formally repossessed by a lender.

“On average pipeline ratios – the rate at which states are currently working through their existing backlog of loans either in foreclosure or serious delinquency are almost twice as high in judicial states than non-judicial states,” said LPS analyst Herb Blecher. “At today’s rate of foreclosure sales, it will take 62 months to clear the inventory in judicial states as compared to 32 months in non-judicial states.

“A few judicial states – New York and New Jersey in particular – have such extreme backlogs that their problem-loan pipelines would take decades to clear if nothing were to change.”

CoreLogic counted 767,000 U.S. foreclosures in 2012. Formal foreclosures were down almost 30% than a year ago at the end of February, according to RealtyTrac, the lowest since 2007. Some 45,000 homes were foreclosed in February, less than half when the foreclosure crisis peaked in March 2010.

Financial incentives provided by the federal government to banks to cooperate with mortgage holders in short sales, growing employment levels, lower home prices and near record low mortgage rates are helping to push the housing recovery forward.

However, delays related to Congress approving a new mortgage financing system to replace or redesign Freddie Mac and Fannie Mae and more than 2-million homes that are in the shadow inventory but not yet formally repossessed trouble the housing market. Seven years after the housing market bubble bust, the foreclosure crisis, still stands as the largest block to a full-fledged economic recovery in housing.

Before the bust, formal foreclosures averaged 21,000 each month from 2000 to 2006. But since the financial crisis hit its peak in the summer of 2008, an estimated 4.3 million foreclosures have taken place across the nation, according to CoreLogic. Although the total number of foreclosures varies between real estate research firms tracking the totals, foreclosures are still the major problem hurting the housing market.

Five states account for almost half of all foreclosures in CoreLogic’s tabulation of foreclosures during 2012. The hardest hit states in the crisis include California, estimated to be more than 100,000 residential properties. Florida was second (98,000), followed by Michigan (74,000), Texas (57,000) and Georgia (49,000).

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First time buying a home? Avoid these 4 pitfalls

Buying a home and taking out a mortgage is a complex process with major financial and emotional consequences.

All buyers are subject to certain critical mortgage mistakes, including the five biggest ones we recently highlighted.

But there are particular pitfalls you should maneuver around if this is your first time buying a home.

Avoid these mistakes, and you'll save yourself some heartache, if not time and money, too.

Mistake 1. Succumbing to false pressure.

First-time home buyers often set arbitrary deadlines for buying a home, like "before the wedding," "before the baby is born" and "before our lease expires."

But the excitement of meeting your goal will wear off quickly. Then you’ll be left with the day-to-day reality of living in a house that isn’t quite right because you rushed into your purchase.

Getting out of a lease early is less expensive than buying the wrong house. And trying to buy a home while pregnant or planning a wedding adds unneeded challenges to an already stressful time.

Mistake 2. Settling for a home that’s not right for you.

Besides arbitrary deadlines, there are other reasons why first-time buyers may settle for a home that isn’t right for them.

The desire to buy a home is so great, and the fear of failure is so high, that buyers will often buy a house that works instead of one that is truly right for them, says mortgage broker Todd Huettner of Huettner Capital in Denver, Colo.

"The results can be costly," he says.

You might think you’ve found the best option in your price range because everything you’ve seen so far is junk. Or you might feel rushed by the fear the real estate or mortgage markets will suddenly change and price you out.

If you can’t shake your impatience, there is a way to minimize the potential damage.

"The key is not to buy a house with a fatal flaw," says Michael F. Levy, principal broker of Grand Lux Realty in Armonk, N.Y.

Avoid any home that is next to a highway or railroad tracks, has road noise or is on a double yellow line street, is in a bad school district, or doesn’t have a flat, usable backyard, he says.

"If the house doesn’t have a fatal flaw, and the buyer hasn’t overpaid for it, they should be able to sell it again and find something better," he says.

Mistake 3. Being afraid to back out.

After investing countless hours shopping, then paying for a home inspection and putting down earnest money, first-time buyers may be afraid to walk away when they finally have a home under contract.

"People will overlook big problems if they think it is the only house for them," Huettner says.

Whether you don’t like something in the home inspection report, or you’re second-guessing how much you can afford to pay, if you have doubts, step back and reevaluate your purchase, says Erica Ramus, broker/owner of Ramus Realty Group in Schuylkill County, Pa.

"Backing out and losing your deposit — for any reason — can be cheaper and less traumatic in the end than buying the wrong house or buying a house that is wrong for any reason at all," she says.

If you see something on the inspection report that causes alarm, contact an expert to get the full scope of any problems, says Mike Canning, vice president of Delaware-based XONEX Relocation. A pro can help you decide which home inspection problems mean it’s time to walk away and which are minor fixes.

Mistake 4. Trying to time the market.

It’s natural to question when it's the best time to buy after so many people have been seriously burned by the housing market over the last decade.

But with home prices still depressed and mortgage rates as low as they've ever been, waiting longer now makes little sense for most buyers.

"Unless you are an investor looking to quickly flip a home for profit, your timing should only be dependent on your own circumstances," Canning says. "If home value is dropping when you purchase, then you are getting a bargain from where it was. If the market is improving, you are getting it today at a bargain as compared to tomorrow."

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In Miami, Using the South American Playbook

Outside the United States, many real estate developers have less of an appetite for risk than their counterparts here.

MyBrickell, a condo that the Related Group is building in Miami, is mostly being financed by its buyers.

In South America, for instance, developers typically ask buyers to pony up a big chunk of the total price of an apartment in a new development long before it’s finished.

So South Americans pay huge installments — often 50 percent or more of the cost of the unit by the time the building is completed. It’s a system that most Americans, accustomed to financing at least 80 percent of a property with a bank loan, would consider unworkable.

I remember being shocked to learn from the owner of the apartment I rented in São Paulo, Brazil, where I lived as a foreign correspondent, about the schedule of huge payments — totaling 57 percent — he had had to deliver to the developer as the condo building went up. It was all nonrefundable, he told me.

But what if something went wrong, I asked him, like the developer going bankrupt? Or if the economy suddenly exploded into crisis, which is certainly not unheard of in South America?

He just shrugged. That’s simply how things are done down south, where interest rates are much higher, and where historically high inflation made financing riskier and more expensive than in the United States. The practice is especially common in Brazil and Argentina, but also in smaller countries like Uruguay, where Donald Trump has a licensing agreement for a new residential tower in the beach resort of Punta del Este that will require down payments of 40 percent from buyers before construction begins.

That perspective offers a different lens on the risks that developers are taking in Miami’s recent condo boomlet.

The Miami of today is not the Miami of 2004, when property prices were still rising in large part on a wave of speculation, with buyers putting down, at most, 20 percent and then flipping properties before construction was done.

This is post-bubble Miami, where banks are still skittish about backing new condo projects.

So Miami developers have taken a page from the South American playbook — a handy strategy, given how many willing buyers are flocking to Miami from that continent. Developers of several condos downtown and at the beach are requiring initial deposits of 40 percent or more, and more as they get closer to completion. By the time the building is finished, buyers are forking over as much as 80 percent of the total price of their apartments.

“Essentially, the buyers are helping developers build their buildings,” said Ann Nortmann, senior project director for Palau at Sunset Harbor, a 50-unit development planned for South Beach that requires a total deposit of only 40 percent because the developer, SMG Management, expects more American buyers.

Jorge M. Pérez, chairman of the Related Group of Florida and a chief architect of the new strategy, defends it as necessary to get developments off the ground, and to prevent speculators from flocking back to Miami, hoping to flip apartments as they did in the old days.

“Financing died during the recession,” Mr. Pérez said. “We all were awakened by the things that happened. We said, ‘If we don’t have the buyers that will pay for the majority of the price in the building upfront, then we don’t want to take the chance of building these buildings.’ ”

Related has employed the financing strategy in three buildings now under construction in South Florida (Apogee Beach, MyBrickell and Millecento) and in three others where sales, but not construction, have started (Beachwalk, Icon Bay and One Ocean). A 3,200-square-foot penthouse at One Ocean is listed for $8.5 million.

For all six towers, Related is requiring buyers to pay 40 percent by the time construction begins, and even more during construction. By the time they move in, buyers will have paid 50 percent to 80 percent of the total apartment price.

The strategy isn’t exactly keeping buyers away. MyBrickell and Millecento, both in downtown Miami, have all their units under contract, while Apogee Beach has only two apartments out of 49 still available, according to a Related spokeswoman.

“People said there is no way people would pay that, and people have,” Mr. Pérez said. That’s in large part because South Americans are South Florida’s biggest condo buyers right now. Argentines are “by far” the top buyers, he said, followed by Brazilians, Colombians, Venezuelans, Mexicans and Peruvians. Argentines concerned about high inflation in their country have seen Miami real estate as a stable place to park their money.

The site where the Related Group
is to build the Millecento.

Wealthy Europeans, including some from economically distressed countries like Greece and Italy, are also flocking to Miami real estate, as are Americans from the Northeast and Chicago. Many of those buyers are willing to pay all cash for the condos.

Related is sitting on another 20 or so pieces of land from Palm Beach to Miami where it is considering beginning sales for developments “when we think the market is ready,” Mr. Pérez said.

South Florida’s real estate industry has been buzzing about more than 80 planned residential developments. But Mr. Pérez said he saw that as mostly hype.

“There is not that much development going on right now,” he said. “There are a lot of projects that have been announced. But I don’t know where they are going to get financing from.”

For now, with buyers assuming more risk, they don’t have to worry as much. Still, “South Americans are not stupid. They are not going to give money to someone they don’t think is going to deliver the building.”

The new financing strategy is great for developers, who can reduce their risk, but it carries some downsides. For one, it has motivated developers to build more towers for the rich — mostly with foreigners in mind, though they rarely want to admit that — and not for middle-class Americans who simply cannot afford the big down payments, real estate lawyers said.

That could keep lenders from returning to more traditional lending practices, which some appraisers believe is necessary for Miami’s bifurcated real estate market to become truly healthy again. As it is, luxury residences are breaking price records even as tens of thousands of foreclosure cases clog the courts.

Inspections are also an issue. Normally banks require regular inspections during construction to ensure that the buildings are meeting standards. With banks out of the process, developers won’t face the same level of scrutiny, real estate lawyers said.

“Will a developer cut corners?” said Avi Tryson, a lawyer with Beloff Parker Jacobs PLC in Miami Beach. “I am sure they might.” It will fall to government authorities, which require some inspections of their own, to police developers, he said.

And buyers, of course, will have more nonrefundable skin in the game. If they cannot close for whatever reason, developers don’t have to refund the big down payments. “But we will work to help you sell your unit,” Mr. Pérez said.

For now, Related will stick to the high down-payment strategy in its new planned developments. At some point, Mr. Pérez predicted, developers will loosen rules to require 30 percent down.

“The world is going to change,” he said. “I just hope we don’t go back to the past, when we had very highly leveraged buildings” that attracted speculators.

Mr. Tryson, the lawyer, sees the big-money spigot — still flowing so strongly from South America especially — eventually shutting off.

“I don’t know how long it can continue,” he said. “There is only so much foreign money. There is only so much domestic money. At some point there has to be a breaking point where they implement a more mixed model or go back to 20 percent.”

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Upshot of the Foreclosure Backlog

FORECLOSURES are taking significantly longer in states where lenders must go through the courts, and the delay may or may not be good for borrowers, depending on their circumstances. But some researchers say that dragging the process out hurts society at large.

About half of the 50 states have judicial foreclosure systems. The housing market crash so bogged down the systems in New York and New Jersey that foreclosures there have routinely dragged on for two or three years; their timelines are among the longest in the country. The national average, which factors in nonjudicial states, is about one year, according to RealtyTrac, which monitors foreclosures nationwide.

The sluggish process has caused a backlog of loans in foreclosure and is slowing the housing market recovery in judicial states, says Michael Fratantoni, the vice president for research and economics at the Mortgage Bankers Association. As of the end of the third quarter, according to the association, 6.6 percent of all loans were in foreclosure in judicial states, compared with 2.4 percent in nonjudicial states.

A study released last summer by researchers at the Federal Reserve Banks in Boston and Atlanta found that the longer properties languish in delinquency or under a bank’s ownership, the greater the negative effect on the value of surrounding properties.

“The best outcome is to prevent the foreclosure,” said Paul S. Willen, an economist and policy adviser at the Boston Fed. “But if it’s clear that can’t be done, it’s in society’s interest to get the foreclosure done as soon as possible.”

In a separate study last year, Mr. Willen and his colleagues question the basis for giving borrowers more time to try to fix mortgage problems. The study found that avoiding foreclosure was no more likely for borrowers subject to either judicial foreclosure, or laws forcing lenders to wait 90 days before beginning foreclosure proceedings, than it was for other borrowers.

Consumer advocates agree that foreclosures are taking too long in some states. High concentrations of vacant properties have taken a heavy toll on certain neighborhoods, said Michael D. Calhoun, the president of the Center for Responsible Lending in Washington. “We agree that borrowers should be considered quickly for loan modifications,” he said. “They’re more successful if they’re done early on.”

But in his estimation, the delays aren’t a result of the protections provided to consumers under the judicial process, because the court process has worked fine in “normal times.” The problem now, he said, lies with the mortgage servicers. “We had a servicing system that was totally overwhelmed by the housing boom and even more so by the housing crash,” Mr. Calhoun said. “The backlog is due to servicer errors and lack of capacity.”

Communication gaps are also a factor, says Mark S. Cherry, a lawyer who represents borrowers in the state-sponsored foreclosure mediation program in New Jersey. His clients must sometimes return to mediation sessions five or six times before finally getting a loan modification. “Persistence breaks resistance,” he said.

Courts, too, have been overwhelmed. In New Jersey, a typical year brings about 24,000 residential foreclosure filings; in 2009 and 2010, annual filings surpassed 60,000.

The courts have since had time to adjust, especially because lenders have halted the processing of thousands of old cases while they work with federal regulators on improving their practices, said Kevin M. Wolfe, the assistant director of the Civil Practice Division of New Jersey’s Administrative Office of the Courts.

New foreclosure cases are moving much more quickly, and there is no backlog, Mr. Wolfe said. The average time for foreclosures filed this year is 6.4 months.

By the time lenders begin processing those old cases, the court should be far better prepared, he said, adding, “We’re not going to be caught up short this time.”

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There's a Home Price Recovery ... But It's Really, Really Slow

Just about everybody agrees that the housing market is finally recovering - but don't expect big price gains.

Nearly two-thirds of the nation's housing markets will see price declines for the year through next June, according to analytics firm Fiserv. Overall, the gains will be just 0.3%.

One big factor that could weigh on prices: The fiscal cliff.

If Congress can't agree on a deal to halt a series of tax increases and spending cuts, a recession is likely, and that would hit the housing recovery hard.

In addition, if the Bush-era tax cut on capital gains is allowed to expire -- allowing the rate to increase to 20% from 15% on Jan. 1 -- it would take a significant bite out of the profits high-end sellers would realize and give them less to spend on buying a new home, said Celia Chen, an economist and housing market analyst for Moody's Analytics.

"Even people who do have the resources to buy homes will be more nervous," she said.

But even if we avoid the fiscal cliff, there are other factors weighing on home prices.

In order to raise more tax revenue, Congress is considering putting a cap on the mortgage interest tax deduction, a key tax break aimed at encouraging homeownership -- mainly among the upper-middle class.

Most of the benefit of this deduction goes to wealthier households. Mortgage borrowers with incomes of $250,000 or more realize an average annual tax savings of $5,460, according to the Tax Policy Center. Meanwhile, those making less than $40,000 a year, save just $91.

Capping the deduction would discourage buyers from buying bigger, more expensive homes, said Chen.

But it's not just the high-end of the market that could get squeezed.

With Congress distracted by the fiscal cliff, there is a real chance that the Mortgage Debt Forgiveness Act of 2007 could expire come January 1. If the act were to lapse, struggling homeowners will have to start paying income taxes on the portion of their mortgage that is forgiven in a foreclosure, short sale or principal reduction.

That means homeowners will be on the hook for thousands of dollars in taxes that they likely can't afford. That will force more people who could have sought a less damaging alternative, like a short sale, to choose foreclosure instead.

Fiserv's estimates assume that about half of the fiscal cliff tax hikes and spending cuts will occur, said Stiff. The forecast does not take into account any change to the mortgage interest deduction. Should that deduction expire, Stiff said home prices might be even weaker over the short-term.

Fiserv expects home prices to start heating up again next fall. Between June 2013 and 2014, it expects prices to climb 3.4% and to continue to grow at an annual rate of about 3.3% over the five years through June 2017.

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Home Prices Rise 6.3% in October, Most in 6 Years

A measure of U.S. home prices rose 6.3 percent in October compared with a year ago, the largest yearly gain since July 2006. The jump adds to signs of a comeback in the once-battered housing market.

Core Logic also said Tuesday that prices declined 0.2 percent in October from September, the second drop after six straight monthly increases. The monthly figures are not seasonally adjusted. The real estate data provider says the decline reflects the end of the summer home-buying season.

Steady price increases are helping fuel a housing recovery. They encourage more homeowners to sell their homes. And they entice would-be buyers to purchase homes before prices rise further.

Home values are rising in more states and cities, according to the report. Prices increased in 45 states in October, up from 43 the previous month. The biggest increases were in Arizona, where prices rose 21.3 percent, and in Hawaii, where they were up 13.2 percent.

The five states where prices declined were: Illinois, Delaware, Rhode Island, New Jersey, and Alabama.

In 100 large metro areas, only 17 reported price declines. That's an improvement September, when 21 reported declines.

Mortgage rates are near record lows, while rents in many cities are rising. That makes home buying more affordable, pushing up demand.

And more people are looking to buy or rent a home after living with relatives or friends during and immediately after the Great Recession.

At the same time, the number of available homes is at the lowest level in 10 years, according to the National Association of Realtors. The combination of low inventory and rising demand pushes up prices.

Last week, an index measuring the number of Americans who signed contracts to buy homes in October jumped to the highest level in almost six years. That suggests sales of previously occupied homes will rise in the coming months.

Builders, meanwhile, are more optimistic that the recovery will endure. A measure of their confidence rose to the highest level in six and a half years last month. And builders broke ground on new homes and apartments at the fastest pace in more than four years in October.

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How to Be a Real Estate Investment Mogul - With Less Risk

Want to be a real estate mogul but without the hassle of directly owning property?

Real Estate Investment Trusts, or REITs, offer a simpler -- and safer -- way to reap the benefits of a diversified real estate portfolio through owning shares of a portfolio of property.

REITs, which are publicly traded on stock exchanges, are trusts that own properties like apartments, office buildings, hotels, warehouses, shopping centers, and health care facilities (such as hospitals and nursing homes). Most, but not all, operate these properties, too. About 10 percent of REITs are mortgage REITs that invest in mortgages rather than real property.

REITs were created by Congress in 1960 so that average investors could invest in large-scale, income-producing real estate. Instead of joining a real estate partnership, investors can buy REIT shares without any minimum investment requirements.

REIT Rules

As of Jan. 1, 2012, there were 166 REITs registered with the SEC, the majority of which trade on the New York Stock Exchange. There are also REITs that are not publicly traded, which is why, according to the IRS, there are about 1,100 REITs in the U.S. that have filed tax returns.

In order to qualify as a REIT, companies must meet IRS provisions and have the majority of their assets and income tied to real estate investment. REITs must distribute 90 percent of their taxable income to shareholders every year. REITs can deduct dividends paid to shareholders from their corporate taxable income, so most REITs avoid paying corporate tax by simply sending all of their taxable income to shareholders.

If you own REIT shares, you pay federal and state taxes on the dividends you receive, and any capital gains distributions that the REIT makes if it sells property. REITs are usually eligible to be held in tax-deferred retirement accounts such as an IRA, a 401(k), or a pension plan.

REIT Sectors

Most REITs specialize in one or two property types and achieve diversification by owning these properties in various parts of the U.S. or around the globe. Some REITs choose instead to keep their portfolio focused on one geographical area but include several types of property.

Among the property owned by publicly traded REITs as of July 31, 2012, the major property types owned are:

• Regional shopping malls: 14 percent
• Apartments: 13 percent
• Health care facilities: 11 percent
• Offices: 10 percent
• Home financing: 9 percent
• Shopping centers: 7 percent
• Lodging and resorts: 5 percent
• Self storage: 5 percent
• Timber: 5 percent

Performance Matters

In the past several decades, REITs have had a good run. According to the National Association of Real Estate Investment Trusts, "During the period from January 1978 through December 2010, equity REIT performance exceeded both the broad equity market and other forms of real estate investment by more than 1 percentage point per year, producing an average annual return of nearly 12.3 percent."

While REITs were damaged along with every other financial sector during the recession, REITs were notably stronger. According to Zacks Equity Research, REITs took on less debt than private real estate investors between 2007 and 2009, and many sold property at the top of the market.

During the downturn, REITs were able to purchase deeply discounted property from private investors to add high-quality assets to their portfolios. REITs were also able to raise capital to pay off debt in recent years because investors turned to them for safety and reliable dividends.

While all REITs are affected by macroeconomics -- and supply is a major factor for every property type - performance in different REIT sectors is affected by varied influences. For example:

• Retail. The retail sector is heavily affected by consumer confidence and employment. NAREIT shows that from October 2011 to October 2012, this sector earned 24 percent in total returns.
• Lodging. The lodging sector reacts more than any other sector to the domestic economy because rental rates change daily. Business travel is particularly important to this sector. Few new hotels are under construction now, so this sector is expected to improve over the next few years. NAREIT shows that from October 2011 to October 2012, this sector earned 3 percent in total returns.
• Health care. This sector is positively affected now by demographics, with an aging population expected to need more medical facilities and assisted living in the future. In addition, medical facilities typically have long-term leases that reduce volatility in this sector. NAREIT shows that from October 2011 to October 2012, this sector earned 16 percent in total returns.
• Office/Industrial. The recession led many companies to reduce their staff and their need for office space. At the same time, technology allows more people to work remotely. Office owners have focused on cost-cutting, efficiency, and acquiring undervalued assets. NAREIT shows that from October 2011 to October 2012, this sector earned 16 percent in total returns.
• Apartments. Demographics, consumer confidence, employment and supply all influence performance in the multifamily sector. NAREIT shows that from October 2011 to October 2012, this sector earned 6 percent in total returns.

The NAREIT All Equity REITs Index showed returns of 16 percent year to date from October 2011 to October 2012.

To browse through the variety of REIT investments out there, check out NAREIT's REIT directory.

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Types of Real Estate Investments

Many new investors are already inherently comfortable with real estate investing, even if they need a few pointers on how to invest in real estate. In fact, whether or not you've owned a stock or bond in your entire life, the chances are good that you simply get real estate investing. After all, at some point in your life, it is likely that you or someone you know has rented a house or apartment.

In real estate investing, there is no mysterious "Wall Street" to consider, only two parties: A landlord who owns a building and a tenant who wants to rent that building. For the right to use the property, the tenant is willing to pay cash to the landlord. As long as the hot water works and the rent arrives on time, both people are happy.

As a new investor, it is natural that you would consider real estate investing as one of your first choices. The opportunities are much more plentiful than simply buying a house, upgrading the kitchen cabinets and finding a tenant.

Before We Talk About Real Estate Investments ...

Before we dive into the different types of real estate investments that may be available to you, I need to take a moment to explain that you should never buy investment real estate directly in your own name. If someone hurts themselves and sues you, you are on the hook for anything above and beyond the insurance settlement. This could lead to personal bankruptcy or at the very least, significant financial hardship.

To avoid this, virtually all experienced real estate investors use a special legal structure known as a Limited Liability Company, or LLC for short, or a Limited Partnership, or LP for short.

These special legal structures can be setup for only a few hundred dollars, or if you use a good attorney, a few thousand dollars. The paperwork filing requirements aren't overwhelming and you could use a different LLC for each real estate investment you owned. This technique is called "asset separation" because if one of your properties got in trouble, you may be able to put it into bankruptcy without hurting the others (as long as you didn't sign an agreement to the contrary).

There Are Many Different Categories of Real Estate Investment

There are several ways investors can earn passive income from real estate investments:

• Residential real estate investments are properties such as houses, apartment buildings, townhouses, and vacation houses where a person or family pays you to live in the property. The length of their stay is based upon the rental agreement, or lease agreement.
• Commercial real estate investments consist mostly of office buildings. If you were to take some of your savings and construct a small building with individual offices, you could lease them out to companies and small business owners, who would pay you rent to use the property.
• Industrial real estate investments consist of storage units, car washes and other special purpose real estate that generates sales from customers who temporarily use the facility. Industrial real estate investments often have significant "fee" and "service" revenue streams, such as adding coin-operated vacuum cleaners at a car wash, to increase the return on investment for the owner.
• Retail real estate investments consist of shopping malls, strip malls, and other retail storefronts. In some cases, the landlord also receives a percentage of sales generated by the tenant store in addition to a base rent to incentivize them to keep the property in top-notch condition.
• Mixed-use real estate investments are those that combine any of the above categories into a single project. I know of an investor in California who recently took several million dollars in savings and found a mid-size town in the Midwest. He approached a bank for financing and built a mixed-use three-story office building surrounded by retail shops. The bank, which lent him the money, took out a lease on the ground floor, generating significant rental income for the owner. The the other floors were leased to a health insurance company and other businesses. The surrounding shops were quickly leased by a Panera Bread, a membership gym, a Quiznos, an upscale retail shop, a virtual golf range, and a hair salon. Mixed-use real estate investments are popular for those with significant assets because they have a degree of built-in diversification, which is important for controlling risk.
• Real Estate Investment Trusts or REITs trade like stocks and own a portfolio of underlying real estate or real estate mortgages. Understanding the differences, advantages, and drawbacks of REITs is so important that I wrote a five page article, Real Estate Investing through REITs to hep you understand them.

Technically, lending money for real estate is also considered real estate investing but I think it is more appropriate to consider this as a fixed income investment, just like a bond, because you are lending money with property securing the debt. You have no underlying interest in the appreciation or profitability of a property beyond the interest income to which you are entitled.

Likewise, buying a piece of real estate or a building and then leasing it back to a tenant, such as a restaurant, is more akin to fixed income investing rather than a true real estate investment. You are essentially financing a property, although this somewhat straddles the fence of the two because you will eventually get the property back and presumably the appreciation belongs to you.

For More Information on Real Estate Investing

Now that you know some of the basic categories available for new real estate investments, you can further research how to get started.

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U.S. Mortgage Rates Little Changed Close to Record Lows

Mortgage rates were little changed, keeping borrowing costs near record lows as home prices extend a recovery from a six-year slump.

The average rate for a 30-year fixed mortgage was 3.32 percent in the week ended today, up from the the all-time low of 3.31 percent, McLean, Virginia-based Freddie Mac (FMCC) said in a statement. The average 15-year rate rose to 2.64 percent from 2.63 percent.

Low mortgage rates are spurring home purchases, while a tightening supply of listings helps drive up prices. The S&P/Case-Shiller index of home prices in 20 U.S. cities rose 3 percent in September from a year earlier, the most since July 2010, the group said this week.

“Housing is experiencing a sustainable upturn,” Paul Diggle, property economist for Capital Economics Ltd. in London, said in a note to clients on Nov. 27, after the Case-Shiller report. “The fundamentals of very favorable housing valuations and affordability argue for further price gains in 2013.”

Contracts to buy previously owned U.S. homes rose 5.2 percent last month from September, the National Association of Realtors said today.

The Mortgage Bankers Association’s measure of purchase applications climbed 2.6 percent in the week ended Nov. 23 to the highest point this year.

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Norway Wealth Fund to Spend $11B Adding U.S. Real Estate

Norway’s $660 billion sovereign wealth fund, the world’s largest, plans to invest about $11 billion as it enters the U.S. real estate market.

Norway, Europe’s second-biggest oil and gas exporter,
generates money for the fund from taxes on oil and gas,
ownership of petroleum fields and dividends from its
67 percent stake in Statoil ASA , the country’s
largest energy company.

The fund, mandated by the country’s finance ministry to eventually put 5 percent of assets in property, wants one-third of that, or 1.7 percent, to be in the U.S., said Yngve Slyngstad, chief executive officer of Oslo-based Norges Bank Investment Management, which oversees the pool. The fund held 0.3 percent in real estate, 60.3 percent in stocks and 39.4 percent in bonds as of the end of September, according to its quarterly report.

“The U.S. is the next real estate market to invest in,” Slyngstad said yesterday in an interview at Bloomberg LP’s headquarters in New York.

Sovereign wealth funds, or state-owned investment pools, are seeking to diversify their risk by expanding investments beyond stocks and bonds. China Investment Corp., which oversees about $482 billion in assets, in 2010 helped refinance a Manhattan office tower co-owned by private-equity firm Carlyle Group LP. (CG) Norway, seeking higher returns and lower risk after record losses in 2008, gave approval in 2010 for its fund to invest as much as 5 percent of its value in real estate over several years.

The fund is focusing on conservative property investments, such as large office complexes in major cities and developed malls, Slyngstad said in the interview. It has already bought commercial property in London, Paris, Frankfurt, Berlin and Sheffield in the U.K., and on Nov. 29 made its first real estate investment in Switzerland, buying a Zurich office complex from Credit Suisse Group AG (CS) for 1 billion Swiss francs ($1.08 billion).

Higher Yields

As sovereign wealth funds become more active buyers of real estate, investors such as Blackstone Group LP (BX) expect to increase sales of property holdings. New York-based Blackstone, the largest alternative-asset manager, has $54 billion of real estate assets, including office developments, shopping centers and hotel chains such as Hilton Worldwide Inc.

“The other trend that will be helpful for us to exit some of the larger things we own, particularly the higher-quality assets in the gateway cities, is the rise of the sovereign wealth fund,” Jonathan Gray, Blackstone’s global head of real estate, said last month at the Bloomberg Commercial Real Estate Conference in New York. “Sovereign wealth funds are enormous pools of capital around the world,” and real estate offers higher yields than government bonds, along with a hedge against inflation.

Largest Funds

More than 60 percent of sovereign wealth funds invest in real estate, either directly or indirectly through other funds, according to Preqin Ltd., the London-based research company. Larger government pools are more likely to make property investments, Preqin said in an April research note, with 83 percent of those managing at least $250 billion being active in the asset class.

Norway, Europe’s second-biggest oil and gas exporter, generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67 percent stake in Statoil ASA (STL), the country’s largest energy company. The fund last month said it returned 4.7 percent in the third quarter, after a decline of 2.2 percent in the previous three months.

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US property prices up 2% over the last quarter, data shows

Residential property prices in the US increased by 2% in the last quarter despite the country’s overall economic outlook still being stunted, the latest analysis from Clear Capital shows.

One third of the top metros posted double digit yearly gains, while the bottom 15 metros generally saw prices stabilise, it says in its July Home Data Index.

‘July home price trends continued to show promise at a time when the strength of the broader economy is in question on many fronts,’ said Alex Villacorta, director of research and analytics at Clear Capital.

‘The national housing market defied the drag of a softening economy with increasing gains of 2% over the last rolling quarter. Housing gains in the West continued to lead the nation, and more importantly, for the second month in a row, the price rebound has broken out of the low price tier segments into higher priced homes. As the pool of buyers expands, the West continues to position for the next phase of recovery,’ he explained.

‘While significant risks remain at large, housing now has the potential to enter a positive feedback loop. Price increases could lead to increased confidence. This could motivate buyers, propelling the recovery in spite of the potential economic slowdown outside the housing market. Of course it’s still possible that housing could experience a pull back if contagion from other economic sectors bleeds through, but right now there appears to be a healthy level of resilience,’ he added.

The 2% price increase comes on top of a 1.7% gain in the previous quarter. The West and Midwest saw 4.4% and 2.1% quarterly growth, respectively. Meanwhile, the South held its ground with quarterly gains of 1.5%, and the Northeast saw price growth of 0.4%, a slight step back from last month’s 0.8% quarterly gains.

Villacorta said that quarterly growth across regions hasn’t been this robust since October 2011 when prices experienced a short burst in gains. He also pointed out that two out of four regions have now seen rolling quarterly growth over the last two months, and three out of four regions have experienced quarterly gains over the last five months, fuelling yearly gains.

Yearly growth for the broader national market expanded to 2.2% in July, 0.5% higher than June. Boosting growth at the national level, the West saw home prices roll up an impressive 6.2% over the previous year. The South and the Northeast also contributed to national price growth, with 1.8% and 1.6% yearly gains, respectively. While the Midwest has yet to post long term growth, the slight decline of 0.1% improved over last month’s yearly losses of 0.6%.

July marked the third consecutive month of national yearly gains, with longer term price trends at the national level last seen this strong in September 2010, when the First Time Homebuyer Tax Credit temporarily drove prices higher.

‘Confidence in housing will be key to future progress, giving buyers a reason to get off the sidelines, resulting in higher demand that could feed additional gains, and creating a positive feedback loop. Certainly the alternative is still possible, where a hiccup in consumers' outlook could stall progress, further diminishing the willingness of a homebuyer to make a purchase,’ the report concludes.

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Wealthy Unmoved by U.K. Tax Hike as Luxury-Home Sales Surge

The British government’s plan to raise a tax on luxury-home purchases sparked a last-minute dash by real-estate brokers to wrap up deals before the deadline hit in March. They needn’t have bothered.

Brokers including Savills and Knight Frank define prime real estate as homes in the most expensive central London neighborhoods such as Belgravia, Kensington and Knightsbridge.

Sales of homes valued at 2 million pounds ($3.2 million) more than doubled in May from a year earlier, according to the most recent data available from the Land Registry. After a 40 percent decline in April, sales rebounded as investors from mainland Europe and the Middle East took advantage of the U.K.’s status as a haven from economic and political turmoil.

“Money is leaving the euro zone and being spent on a safe asset,” Matthew Pointon, an economist at researcher Capital Economics, said. “Safe-haven flows outweigh the increase in the stamp duty.”

Luxury homes have held their value better than cheaper residential properties in the U.K. because of a scarcity of prime real estate for sale, particularly in London. That has led to record prices paid for homes in the city’s Mayfair, Kensington and Knightsbridge districts.

Chancellor of the Exchequer George Osborne’s annual budget targeted luxury-home purchases to help narrow Britain’s record deficit. He raised a transaction tax known as stamp duty on homes sold for more than 2 million pounds to 7 percent from 5 percent. The use of corporations set up in offshore tax havens such as the Cayman Islands to avoid the tax spawned a 15 percent levy on purchases of homes by companies.

European Investors

In May, 113 houses and apartments in the U.K. sold for more than 2 million pounds, up from 45 a year earlier, according to the Land Registry. In London, sales jumped to 97 from 40 led by overseas buyers.

Homes valued at 10 million pounds or more gained 2.9 percent in price in the three months after Prime Minister David Cameron’s Conservative-led coalition increased the stamp duty, London-based Knight Frank LLP estimates. Home prices in London’s most expensive areas have gained 49 percent since a March 2009 low point and are now 14 percent higher than the previous peak in 2008, the property broker said in a Sept. 3 report.

“London has been extremely hot,” Yolande Barnes, head of residential research at broker Savills Plc (SVS), said in a phone interview. “This was a record quarter, but it’s been pretty strong even before that.”

Negligible Impact

Small tax increases for the ultra-wealthy individuals aren’t likely to deter them from buying luxury residences in central London, according to Charles Leigh, a director at broker CB Richard Ellis Group Inc. (CBG)

“A percent here or there isn’t a major threat,” Leigh said in an interview.

There are 10,760 ultra-high net worth individuals living in Britain, according to Wealth-X, which works with luxury brands and banks to build a database of people who collectively hold $10.7 trillion of wealth. They’re defined as U.K. residents with net worth of at least $30 million, and together they have combined assets of $1.3 trillion.

The U.K. capital is home to 5,955 “ultra-wealthy” people, more than twice as many as Paris, which has 2,820, according to Wealth-X. Zurich ranks third among European cities with 1,775.

Aldine Honey, proprietor of her own luxury real estate brokerage, handled the sale of a 28.1 million-pound home in London’s Mayfair neighborhood in May, the last month for which U.K. Land Registry was published.

‘Extraordinarily Positive’

“It’s extraordinarily positive considering the 7 percent stamp duty,” Honey said in an interview. “Wealthy people still consider London a safe haven.”

Britain’s government is weighing an extension of a capital- gains tax on homes valued at more than 2 million pounds held by unnaturalized non-residents. Some brokers, such as W. A. Ellis, aren’t sure that overseas investors can withstand further taxes on the U.K.’s luxury homes. Some property owners may want to get out while they can, said Richard Barber, a partner at the firm.

“You’re not going to want to get stumped for capital gains,” Barber said.

Doubts about whether luxury-home prices can maintain upward momentum have arisen amid a predicted wave of new building. Builders plan to complete more than 15,000 houses and apartments in London over the next decade to keep up with demand for properties in the city’s traditional prime neighborhoods, according to consulting firm EC Harris LLP.

‘Downside Risk’

Prime Minister David Cameron is loosening requirements on homebuilders to allow them build projects that are presently unprofitable as he seeks to pull Britain out of a double-dip recession. The U.K.’s economic growth slowed in the three months through August and “significant downside risks” remain, the National Institute of Economic and Social Research said today.

The 10-year development pipeline increased 70 percent from a year earlier and companies now expect to construct homes with a sales value of 38 billion pounds, EC Harris said Sept. 3. About 3,800 units are expected to be completed in 2016, more than seven times this year’s total of 500.

“There may be a question mark about the sustainability of some of the price growth we’ve seen in the last year or two in certain areas of super-prime London, which has been phenomenal,” said Mark Farmer, head of residential at EC Harris, in an interview.

Brokers such as Savills are making contrary forecasts. The market will regulate the supply of prime central London homes to a greater extent than has been predicted, according to Savills’ Barnes.

No Overhang

“There will be no vast overhang of stock by 2015 because developers will provide a variety of product in different locations and at different price points, tapping into different market segments,” Barnes said in a statement. Not all projects with planning permission will be built immediately, she added.

About 830 hectares (2,050 acres) of land were released for residential development by planning authorities in London over the four years through 2009, a drop of 10 percent from the same period through 2004, broker Jones Lang LaSalle Inc. (JLL) said in February. That’s prompted developers to renovate older office buildings as homes as buyers hold on to prime London residences for longer and help drive up prices.

Brokers including Savills and Knight Frank define prime real estate as homes in the most expensive central London neighborhoods such as Belgravia, Kensington and Knightsbridge.

An apartment at One Hyde Park, the U.K.’s most expensive residential complex, was put up for sale Sept. 3 with an asking price of 65 million pounds. The 9,000 square-foot (836 square- meter) property in Knightsbridge has four bedrooms and takes up an entire floor of the building, according to a statement by Aylesford International, the broker managing the sale.

“The main feature of any of these deals and the prices they’re achieving is that there’s such little stock” of luxury homes available, Honey said.

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Home prices signal recovery may be here

A sharp boost in home prices during the spring could signal a recovery in the long-suffering U.S. housing market, according to an industry report issued Tuesday.

Home prices rose 6.9% in the second quarter, a signal that a housing rebound may be underway, according to S&P/Case-Shiller

The S&P/Case-Shiller national home price index, which covers more than 80% of the housing market in the United States, climbed 6.9% in the three months ended June 30 compared to the first three months of 2012.

"We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change," said David Blitzer, a spokesman for S&P, in a statement. "The market may have finally turned around."

Two other key indexes covered in the S&P/Case-Shiller report also showed gains. The 20-city index was up 6% for the quarter and the 10-city index rose 5.8%.

National prices were up 1.2% compared with a year earlier, and the 20-city and 10-city indexes also gained year over year. It was the first time all three measures showed positive annual growth rates since the summer of 2010, when generous tax credits for homebuyers were in place.

There have been several positive industry reports over the past several weeks. In July, new home sales were 25% better than a year earlier; existing home sales gained 10% year over year; and developers applied for 30% more residential building permits.

The steep increase in home prices "feels really good after six years of straight down," said Mark Zandi, chief economist of Moody's Analytics.

He cautioned that the results may overstate the case for the housing recovery a bit. The mix of homes being sold has changed lately, with fewer repossessed homes on the market. Those sell at big discounts to conventionally sold homes and had been propelling prices downward.

The home price improvement is expected to have a positive impact on foreclosure rates, according to Michael Fratantoni, vice president for research and economics for the Mortgage Bankers Association.

Foreclosures have already been falling and could drop some more if the upswing in home prices continues.

As home values increase, home equity rises, and fewer mortgage borrowers will be underwater, owing more than their homes are worth. That will give them an asset to tap should they run into a tight financial patch.

An improving housing market will also give homeowners more confidence in the investments they've made in their homes.

"There has also been a lot of concern about strategic defaults," said Fratantoni. "That should ease now. When home prices go up, people have a financial incentive to hold onto their homes and they're less likely to walk away."

Rising prices are likely to push potential homebuyers off the fence, where many have been waiting out the price decline, according to Doug Duncan, chief economist for Fannie Mae.

"Their perception that we hit the bottom takes out the risk of buying into a falling market," he said. "That should increase demand, particularly if they also believe that mortgage rates have reached a bottom as well."

Each of the 20 cities covered in the report recorded a gain in June, compared with a month earlier. Detroit prices jumped 6% for the month, the most of any city. Minneapolis prices climbed 4.8% and Chicago prices rose 4.6%.

In Phoenix. home prices were 13.9% higher in June than 12 months earlier, the highest gain of any of the 20 cities covered.

Several cities were still in negative territory year over year, including Atlanta, where they were off 12.1%. New York prices were down 2.1% on an annual basis, and Las Vegas prices were 1.8% lower.

For Zandi, all the positive news on housing carries over to the rest of the economy.

"Housing is beginning to act as a tailwind for the recovery," he said.

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SNB’s Jordan Repeats Franc Pledge, Sees Property Threat

Swiss Central Bank President Thomas Jordan

Swiss central bank President Thomas Jordan reiterated his commitment to defend the franc ceiling and warned of signs of overheating in the residential property market.

“In the current situation, a further appreciation of the Swiss franc would constitute a very substantial threat to the Swiss economy, and would carry with it the risk of deflationary developments,” Jordan said at a conference in Zurich today. “With this in mind, we will continue to enforce the minimum exchange rate with the utmost determination.”

The Swiss National Bank has purchased billions of euros to defend the franc ceiling, which was introduced a year ago to protect the economy from the impact of an appreciating currency. With borrowing costs at zero, Jordan called today on banks to use “prudent credit standards,” saying there is a risk of a “further buildup of imbalances followed by a significant price correction” in the real-estate market.

Jordan is turning his focus to potential threats from the property market after the SNB said in its Financial Stability Report in June that there is a need for “corrective measures.” Home loans have increased by almost 300 billion francs ($314 billion) in a decade and gained 5.2 percent last year to 797.8 billion francs. That’s about 140 percent of Swiss gross domestic product.

Lending Rules

The government toughened lending rules earlier this year, forcing borrowers to provide at least 10 percent of the value of the property from their own funds without using pension assets. Under the measures, mortgages will have to be paid down to two- thirds of the lending value within 20 years.

In addition, the Swiss government can force lenders to hold additional capital of as much as 2.5 percent of their domestic risk-weighted assets to counter threats to financial stability following a request from the SNB for activation.

The Zurich-based SNB said on Aug. 27 that given “indications of a possible slowdown” in the second quarter of the “exceptionally strong” momentum in the domestic residential mortgage and real-estate markets, the so-called countercyclical capital buffer won’t be be activated this year. Still, the central bank is “observing closely” all developments to see whether the buffer is necessary, Jordan told Swiss television in an interview on the same day.

“This is far from an all-clear for the real estate market,” Jordan said. The measure “serves two purposes -- strengthening the resilience of the banking system by increasing its loss-absorbing capacity and helping to lean against the buildup of excesses. It is a very flexible instrument and may be activated for specific sectors of the credit market only.”

There are signs that residential properties are already “overvalued” in the regions of Zurich, Geneva and Zug as well as other parts of the country, Jordan said. Residential mortgages account for about 70 percent of assets of domestically oriented Swiss banks, according to the SNB.

The SNB will hold its next monetary assessment on Sept. 13.

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Lloyds Said Planning To Sell $2.5 Billion Of Mainly Irish Loans

Lloyds Banking Group Plc (LLOY) plans to sell about 2 billion euros ($2.5 billion) of mainly Irish real- estate loans, the latest phase in extricating itself from Western Europe’s biggest property crash, according to a person with knowledge of the transaction.

The U.K.’s second-biggest government-aided bank will probably have to take discounts on the sale, said the person, who declined to be identified because details of the sale are private. Ian Kitts, a Lloyds spokesman, declined to comment.

Lloyds, based in London, moved in 2010 to close and run down the Irish unit it acquired two years earlier as part of its takeover of HBOS Plc. The bank has taken 11.8 billion pounds of impairment charges on Irish loans since the nation’s real-estate market collapsed four years ago, according to data compiled by Bloomberg News. That equates to 40 percent of its end-2008 Irish loan book.

Two years ago, the bank largely handed management of its Irish portfolio to Certus, a company set up by members of its former Irish management team. Lloyds said in July its exposure to Ireland is “being closely managed, with a dedicated U.K.- based business support team in place to manage the winding down of the book.”

Some 86 percent of Lloyds’ 16.1 billion-pound Irish wholesale portfolio, mainly commercial real-estate loans, was impaired, or unlikely to be repaid in full, at the end of June, the group said on July 26.

Loans Sold

Kennedy-Wilson Holdings Inc. and Deutsche Bank AG agreed to acquire 360 million euros of non-performing commercial property loans from Lloyds at an average 83 percent discount to par value, CoStar Group Inc., the commercial real-estate information company, reported in June. Lloyds said in July it sold 300 million pounds of gross Irish wholesale assets during the first six months without giving further details.

Irish commercial real-estate prices have plunged by two- thirds from its 2007 peak, according to Investment Property Databank Ltd., while residential property has halved in value, the Central Statistics Office said Aug. 30.

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Real Estate Outlook: New Home Sales Rise

The sales rate of newly built, single-family homes was on the rise during the month of July: this is welcome news to builders all across the nation.

According to the latest figures from HUD and the U.S. Census Bureau, sales of newly built homes rose by 3.6 percent for the month to a seasonally adjusted annual rate of 372,000 units.

"Sales of new homes in July returned to the same solid pace they set in May, which was the fastest sales rate we'd seen in more than two years," said Barry Rutenberg, chairman of the National Association of Home Builders (NAHB) and a home builder from Gainesville, Fla. "This is further evidence that consumers are becoming more confident in local housing markets as they look to take advantage of today's very favorable prices and interest rates."

Noting that the three-month moving average of new-home sales has been edging up consistently since last September, NAHB Chief Economist David Crowe said, "Today's good report is the latest indicator of a gradual, upward trend that we expect to continue through the remainder of this year." However, he added that "The fact that the inventory of new homes for sale reached an all-time low in July is a worrisome signal that ongoing, unnecessarily tight credit conditions are keeping builders from being able to replenish supplies as consumer demand improves."

Will this trend continue into our current month? The Mortgage Bankers Association (MBAA) reports that this week mortgage applications declined by 7.4 percent. Refinance activity also decreased by 9 percent. This is the lowest level since July.

Mortgage Refinancing now makes up 80.0 percent of total applications, down just slightly -- one percentage point -- from the week prior.

Affordability remains a hot topic in today's market. While affordability rates remain near record lows, will they remain so? And what about the low-income portion of the population?

A new report from HUD indicates that since its inception, the nation's low-income housing Tax Credit Program has helped produce more than 2.2 million affordable apartments. Now that the initial 15-year required "affordability period" has passed, the vast majority of theses LIHTC properties remain affordable for working families.

The HUD-commissioned report cautions, however, that this could all change as state and local use restrictions expire. Over a million units could become market-rate properties out of the reach of low-income households.

"This report is a wakeup call to all of us interested in preserving our nation's affordable housing," said HUD Secretary Shaun Donovan. "As LIHTC properties age, especially in high-cost areas with escalating market demand, State Housing Finance Agencies must do everything they can to protect the opportunities for working families to live in neighborhoods they might otherwise not be able to afford."

The study's authors suggest that Housing Finance Agencies should place the highest priority on the developments that are most likely to be repositioned in the market -- as higher-rent housing or conversion to homeownership or another use.

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Types of Real Estate Investments

A New Investor's Guide to the Types of Real Estate Investments

Many new investors are already inherently comfortable with real estate investing, even if they need a few pointers on how to invest in real estate. In fact, whether or not you've owned a stock or bond in your entire life, the chances are good that you simply get real estate investing. After all, at some point in your life, it is likely that you or someone you know has rented a house or apartment.

In real estate investing, there is no mysterious "Wall Street" to consider, only two parties: A landlord who owns a building and a tenant who wants to rent that building. For the right to use the property, the tenant is willing to pay cash to the landlord. As long as the hot water works and the rent arrives on time, both people are happy.

As a new investor, it is natural that you would consider real estate investing as one of your first choices. The opportunities are much more plentiful than simply buying a house, upgrading the kitchen cabinets and finding a tenant.

Before We Talk About Real Estate Investments ...

Before we dive into the different types of real estate investments that may be available to you, I need to take a moment to explain that you should never buy investment real estate directly in your own name. If someone hurts themselves and sues you, you are on the hook for anything above and beyond the insurance settlement. This could lead to personal bankruptcy or at the very least, significant financial hardship.

To avoid this, virtually all experienced real estate investors use a special legal structure known as a Limited Liability Company, or LLC for short, or a Limited Partnership, or LP for short.

These special legal structures can be setup for only a few hundred dollars, or if you use a good attorney, a few thousand dollars. The paperwork filing requirements aren't overwhelming and you could use a different LLC for each real estate investment you owned. This technique is called "asset separation" because if one of your properties got in trouble, you may be able to put it into bankruptcy without hurting the others (as long as you didn't sign an agreement to the contrary).

There Are Many Different Categories of Real Estate Investment

There are several ways investors can earn passive income from real estate investments:

Residential real estate investments are properties such as houses, apartment buildings, townhouses, and vacation houses where a person or family pays you to live in the property. The length of their stay is based upon the rental agreement, or lease agreement.

Commercial real estate investments consist mostly of office buildings. If you were to take some of your savings and construct a small building with individual offices, you could lease them out to companies and small business owners, who would pay you rent to use the property.

Industrial real estate investments consist of storage units, car washes and other special purpose real estate that generates sales from customers who temporarily use the facility. Industrial real estate investments often have significant "fee" and "service" revenue streams, such as adding coin-operated vacuum cleaners at a car wash, to increase the return on investment for the owner.

Retail real estate investments consist of shopping malls, strip malls, and other retail storefronts. In some cases, the landlord also receives a percentage of sales generated by the tenant store in addition to a base rent to incentivize them to keep the property in top-notch condition.

Mixed-use real estate investments are those that combine any of the above categories into a single project. I know of an investor in California who recently took several million dollars in savings and found a mid-size town in the Midwest. He approached a bank for financing and built a mixed-use three-story office building surrounded by retail shops. The bank, which lent him the money, took out a lease on the ground floor, generating significant rental income for the owner. The the other floors were leased to a health insurance company and other businesses. The surrounding shops were quickly leased by a Panera Bread, a membership gym, a Quiznos, an upscale retail shop, a virtual golf range, and a hair salon. Mixed-use real estate investments are popular for those with significant assets because they have a degree of built-in diversification, which is important for controlling risk.

Real Estate Investment Trusts or REITs trade like stocks and own a portfolio of underlying real estate or real estate mortgages. Understanding the differences, advantages, and drawbacks of REITs is so important that I wrote a five page article, Real Estate Investing through REITs to hep you understand them.

Technically, lending money for real estate is also considered real estate investing but I think it is more appropriate to consider this as a fixed income investment, just like a bond, because you are lending money with property securing the debt. You have no underlying interest in the appreciation or profitability of a property beyond the interest income to which you are entitled.

Likewise, buying a piece of real estate or a building and then leasing it back to a tenant, such as a restaurant, is more akin to fixed income investing rather than a true real estate investment. You are essentially financing a property, although this somewhat straddles the fence of the two because you will eventually get the property back and presumably the appreciation belongs to you.

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