What is Real Estate Investing?

The question, “What is real estate investing?” cannot be answered without considering first, it’s textbook definition and then it’s conceptual definition.The Academic DefinitionReal estate has been defined as land (or immovable property) along with anything permanently affixed to the land such as buildings, and investment is the act of using money to purchase property for the sole purpose of holding or leasing for income. It is safe to say then (combining both definitions) that real estate investing involves the acquisition of real estate (or investment in real estate) for purposes of generating income, making a profit, and acquiring wealth.The Conceptual Definition

Leverage In contrast to stock investments (which usually require more equity from the investor), it is possible to leverage a real estate investment (heavily). With a real estate investment, you can use other people’s money to magnify your rate of return and control a much larger investment otherwise not possible.

Tax Shelter Real estate investing provides tax benefits. There are yields on annual after-tax cash flows, equity buildup through appreciation of the asset, and cash flow after tax upon sale.

Non-Monetary Returns Real estate investment provides pride of ownership, the security that you control ownership, and portfolio diversification.
Real estate investing is not a bed of roses, though. Real estate investment does require capital, there are risks, and rental property can be management-intensive. On the other hand, the car you drive required capital, it involves risk driving, and it certainly requires management. The difference is that a car is not a source of wealth.How to Become a Real Estate Investor

Develop a real estate investment goal. What do you want to achieve, and by when do you want to achieve it? What rate of return do you expect to want to receive on moneys you pull out of your home or bank account to purchase an investment property given the risk?

Learn what returns you should look for, and how to compute them. You cannot succeed in music unless you can read music. Invest in a good real estate investing course or real estate investment software where you can learn how to run the returns and compute the formulas.

Be wary of Get Rich schemes. There are many so-called gurus ready to teach you how to make millions with real estate investment property. But let logic be your guide; we believe that nobody who finds a gold mine publishes a map.

Create a relationship with a real estate professional that knows the local real estate market and understands rental property. It will not advance your investment objectives to spend time with the “agent of the year” unless that person knows about investment property and is adequately prepared to help you correctly procure it. Find an agent that understands real estate investing.
What is the conclusion? That real estate investing is a business about owning a piece of ground that, when researched and purchased sensibly by impartial numbers and careful management, and with reasonable goals and caution, will likely be more valuable tomorrow than it is today.

Why the Real Estate Crisis Had to Happen

We cannot understand the present unless we understand the past. The first question to be asked is when did the real estate crisis become inevitable? The correct answer is in the time period between 1980 and 1982. It has been forgotten today but the last real estate crisis in this country were the twin real estate crises of the 1980s. In the early 1980s the first crisis was brought on by double-digit mortgage interest rates. Then in the late 1980s there was the savings and loan crisis, which in those days provided most of the nation’s mortgage capital. In response to these twin crises congress passed two laws that made today’s real estate crisis inevitable.After these acts were passed it was only a question of time until the stars aligned correctly for the volcano to erupt. In 1980, congress passed the DIDMCA Act. Prior to this time, it was illegal to charge less credit worthy customers a higher rate of interest on their mortgage. Then in 1982, congress passed the AMPT Act, which allowed adjustable rate mortgages or ARMs for the first time. Prior to this act adjustable rate mortgages had been illegal.If you go back to 1896 when reliable housing records first began to be kept you will find that from 1896 to 1996 housing prices tracked the rate of inflation. Then suddenly from 1996 to 2006 housing prices doubled. The problem of course in that the income of the American people did not come anywhere near to doubling in that time period. When you stop to think about it, you will realize that it is impossible for the price of housing to exceed the rise in the income of the American people for any sustained period of time. Unless there is an enabler, a speculator’s tool that allows this to happen. What was the speculator’s tool or device that enabled this process to occur? What was the enabler?In the whole of American history there has only been one prior real estate bubble that resembles the real estate boom and bust that we are now witnessing. It was the great Florida land boom of the 1920s. Real estate has always been expensive. What has always held real estate prices in check was that people just did not have enough money to bull prices up for very long. The money is just not there. The device that enabled the Florida land boom to occur was the “binder.” This is a real estate term that has gone out of use today. In the manner in which it was then used it was essentially an option payment on the down payment if you can conceive of such a thing.What it boiled down to is that people thought they were speculating on real estate but in reality they were speculating on real estate options.The stock market has long been the ultimate proving ground for speculative tools. Those of us who are stock market speculators are very familiar with stock options. The only thing that the reader has to know about options is that they are speculating tools that possess tremendous leverage. In other words, you can make a killing on a chump change investment.Both the binder of the 1920s and the ARM are in reality real estate options. All options expire worthless if they are not exercised prior to their expiration date. Most ARMs were written to expire in two or three years, the fixed interest rate period. At that moment the option had to be exercised or rolled over because the option would become worthless. People were deluded into believing that they were buying real estate. When in reality they were speculating in real estate options. As we have seen, the tools for the bubble were in place by 1982. the only thing lacking now was the mania. The boom years from 1991 to 2007 provided the mania. Real estate prices rose relentlessly. It was a boom that seemed like it would never end. You couldn’t lose in real estate because no matter how much you over paid because rising prices bailed out everyone.Today in the aftermath of the boom, we are already discounting the impact on the human psych that manias and bubbles produce. To put it bluntly by the end of the boom almost no one could believe that real estate prices could fall. This nearly universal belief gradually eroded prudent behavior. The more risks you took the more you were rewarded. There was no down side.In the early 90s the use of sub prime mortgages and ARMs were limited-since almost all sub prime mortgages were also ARMs they will be considered as a unit- but as the boom progressed their importance grew and grew. Mortgage brokers just could not stay away from sub prime mortgages. They were three to five times more profitable than standard mortgages. Once they had sold one they didn’t want to sell anything else. The caution that lenders had originally shown toward the new mortgage products was relentlessly ground away as the endless boom continued. Caution wasn’t being rewarded, it was being punished. There was a Gresham’s Law in effect- Gresham was an economist-in which bad or reckless behavior which was constantly being rewarded by lush profits drove out good or cautious behavior because the profits were inferior. In the final years of the boom, conservative firms could not even keep their mortgage brokers from bolting to subprime lenders.Then around the year 2000 Minsky’s Law kicked in. Hyman Minsky was a Noble Prize winning economist.Minsky’s Law Over periods of prolonged prosperity the economy evolves from financial relationships that engender a stable financial system to financial relationships that produce economic instability. The longer the trend persists the more violent the correction when the trend reverses.As the boom rolled on the most important factor was that almost everyone was a winner. This was true in spite of the fact that subprime mortgages were constantly defaulting at the higher rates that had been predicted. Not only was the higher default rate not a problem but everyone was making out like a bandit with subprime mortgages. This included the subprime borrower. As soon as he fell behind his friendly subprime mortgage broker would be there to write him a new subprime mortgage. In fact he often got to take out new money when he refinanced the mortgage. It was not unusual to have subprime borrowers take out new mortgages every two or three years during the boom.If there wasn’t enough equity to suit the lenders, real estate speculators would be pounding at his door offering to take the property off his hands as soon as the notice of default had been published. Often at a profit over his purchase price.The banks were the greatest winners of all. They were making a killing. It is obscene how much money a bank can make during the foreclosure process as long as someone buys the foreclosed property. Not only do they receive all the back payments but the brutal penalty fees as well. Indeed the most profitable scenario that can be imagined for a mortgage lender is to make nothing but high profit subprime loans and then to have them all default. Their profits would be enormous. That is, so long as the lender never has to take back the property.When the boom ended, things became incredibly ugly for the banks with amazing speed. One of the most important favors that real estate speculators did for the banks when they bought a foreclosed properly was that in addition to paying the obscene penalty fees they also paid the nearly as obscene attorney foreclosure fees. Not to mention repairing the often seriously vandalized property. An angry homeowner can easily do $20,000-$30,000 in damages. When the boom ended all these expenses landed on the banks head like a falling safe. The banks never knew what hit them. I am sure that they still think that they were run over by a Mack truck.