Why real estate?
By: J. David Chapman/February 17, 2022
People invest in real estate for different reasons. It’s the real estate professional in sales and property management’s responsibility to listen to clients’ desires and needs and try to help fulfill their goals. As a real estate investor, the key to success, in my opinion, is to identify the person or firm that can accomplish this for you. Whether your goal is locating and purchasing property or outsourcing property management for a property that you have owned for a while.
Some people invest in real estate to meet a specific objective for that property. Julie and I invested in real estate to build a business. These two goals are very different. I’ve both worked with and respect the goals of both types. I teach my college students to evaluate and identify several different types of real estate goals and how to satisfy each type.
The first thing that nearly all investors require is cash flow. Most real estate investors that we work with require the investment to pay for itself. They don’t want to continuously feed cash into the property. To achieve this, the financing and down payment become very significant variables in reaching their goals.
The next thing that interests our investors is appreciation. We have looked like heroes over the last few years. Our normal expectation of annual appreciation has been less than 4%. The last couple of years, we have well exceeded that number.
The third item we hear from them is that they want to eventually gain equity in the property. We call this equity gain and basically this is the secret, in my opinion, to real estate. It is simply holding the asset long enough for other people (tenants) to pay off your mortgage. My advice is to disregard the temptation to leverage that equity and continue paying it off.
Next, we explain the concept of value gain. Value gain is the increase in value that is achieved by properly and creatively managing and modifying the property. Unlike appreciation, value gain comes from work in and on the property.
Finally, many off our investors come to us because they are fed up with taxes and looking for a way to defer or eliminate a tax liability. The good news is there are still legal and ethical options to limiting tax liabilities by understanding opportunity zones and 1031 exchanges.
J. David Chapman is a professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).