Real estate investments can be lucrative, if planned correctly

Kirk A. Heyle, owner of Heyle Realtors & Counseling Services LLC, is a Certified Commercial Investment Member and Counselor of Real Estate.

Real estate investments are not liquid like stocks or bonds. They are not readily convertible into cash and, when under pressure to make a quick sale, an investor may have to sell a property at a diminished price.

Real estate investment's disadvantages are that real estate can be expensive and may require a large amount of capital and considerable risk when leveraging through a mortgage loan.

Although there are a number of TV shows, tapes and workbooks constantly floating around about investing in real estate, promoted by people purporting to be making millions of dollars, the facts are that it is hard work, and it takes a lot of experience and savvy to be a solid real estate investor.

Investment real estate requires property management and capital to keep the properties upgraded and in good repair. The property managers must make decisions every day to be conservative on cost and expenses, while spending enough in repairs and maintenance to keep the property in solid shape, constantly rented and producing income.

Real estate investments are not a sure thing, and in fact, there is a risk in every investment. There is a possibility that an investor's property could lose value during a period of time as opposed to the usual thought process that real estate only grows in value.

The advantages of owning real estate investment property are outstanding and the rewards are significant. Unless an investor only buys vacant land and holds it with only minimum management decisions and capital and is successful, then income-producing property would be the normal, paramount choice.

Income-producing property means landlord and tenants, and therefore, that means property must be leased, maintained and nurtured through a series of years to enjoy the appreciation and growth that go with the ownership of investment grade real estate.

Examples of investment real estate can be initiated by a single-family rental unit, going into a duplex or four-plex, or an apartment complex on the residential side, versus a small commercial block or metal building with a tenant, and then compounding or pyramiding that into a series of commercial or retail buildings, strip centers, office buildings, or multiunit flex space, light industrial buildings, and/or warehouses.

Investment real estate offers investors control over their investments as opposed to securities in the stock market. Real estate investors receive certain tax benefits, as well as being able to leverage a great deal of the cost of the investment, and will certainly have some income tax advantages with the ownership and management of the property.

Income and investment type property is held for potential profit in the future based on appreciation, and the appreciation may happen from inflation as well as overall urban growth and demand.

As in any kind of real property investment, location is all-important and will further solidify one's ability to obtain a profit and make the investment positive for the investor. Since most investment real property is leased and therefore income-producing, the essential term that is utilized here is cash flow.

Cash flow is the goal of the investor to have a net return on his investment, after all expenses have been paid out, including mortgage payments, taxes, insurance and other operating costs.

With enhanced modern construction and a more desirable location, the real estate investor is able to command the greatest amount of rent and the most favorable terms with the lessee, therefore, resulting in reasonably low operating expenses and high net rental.

The fact that the property is of more modern construction and has a desirable location usually means that the initial purchase was rather expensive and was possibly leveraged through a lender in order to pay for the building improvements.

Many other factors come into consideration, including utilities, zoning, variances, plats, subdivision, covenants, buffers, use permits, and other city/county rules and regulations that affect the value and use of the property. Water retention, real estate taxes, property insurance, other major development items and control items come into to the overall plan in regard to the potential for cash flow and return on investment.

There are a number of methods of measuring a rate of return on the investment including capitalization rate, cash-on-cash, internal rate of return and financial management rate of return.

After-tax returns are the best ways to measure the real return on real estate to the sophisticated investor.

In considering leverage, or the ability to finance a real property investment, the investor must consider whether a modest down payment and extensive mortgage is desirable, or whether more cash equity into the transaction and a more judicious mortgage loan would most beneficial.

Interest rates on borrowed money and terms of those monthly payments that go along with these interest rates can affect the ability to retain a positive cash flow or run into a problem of negative cash flow, where the operating expenses exceed the income.

In order to have a constant flow of income, the capabilities of the lessee in the form of national credit, average credit or high-risk credit tenants are a factor and must be considered by the investor. An investor must consider his competition in regard to leveraged property and the mortgage on investment property.

As the loan amount pays down, more of the monthly payments go toward principal reduction instead of interest and the mortgage continues to drop until it shrinks to nothing.

Real estate investors can use the principal of pyramiding, which is completely legal and appropriate for certain investors. It is a method by which they are able to acquire additional properties through refinancing or using equity of one property to help purchase a second property. The entire goal, of course, is to enlarge the overall portfolio and have a number of major properties that are producing cash flow for the investors.

There are investors who find a number of income tax benefits come with real property ownership, including capital gains treatment, where a percentage of the overall profit in the property is taxed at a set maximum rate. This can be beneficial in the final sale/disposition of investment real estate.

Depreciation or cost recovery also is a way to help the investor acquire some tax benefits and there are certain deductions that an investor can take in addition to depreciation which includes certain tax credits for renovation of older or historical building. Low-income housing also can be very beneficial to certain investors.

Some of these tax credits and benefits of Enterprise Business Zones are passing through to older areas, including downtown and midtown Springfield, which are actively being reinvested in and revitalized.

Finally, if investors are unable to afford to invest in a piece of property on their own, then a real estate investment trust and other joint forms of real estate partnerships, such as general partnership and limited partnership, limited liability companies and joint venture, are ways for a small group of common investors to share in the purchase of larger real estate investment.

When investing in real estate, the use of a competent real estate broker with experience, education and background in investment real estate is critical. The use of accountants and real estate attorneys is very important in both analyzing and structuring tax decisions and limiting legal exposure from the initiation of the investment through the maturation and completion of the investment.

In order to avoid potential conflicts of interest between a real estate investor and a traditional real estate broker, there are alternatives available. The "buyer's agent" can be beneficial. This is when the real estate investors have their own real estate brokerage person looking out for their best business interests in locating and reviewing alternatives.

Real estate consultants and counselors that have experience in handling investment real estate and have professional certifications and extraordinary educational knowledge in commercial and investment real estate are excellent sources of professional advisory services for locating and understanding investment properties.

Clients/investors should be referred for specific legal and tax questions to competent tax accountants and lawyers.

Real estate counseling functions include planning, forecasting, zoning advice, sale/leaseback decisions and potential bankruptcy problems in relation to real estate ownership and investment.

Real estate counselors also advise on real property matters much as estate planning evaluations, market feasibility studies, lease verses purchase decisions, site analysis, evaluating and negotiating real estate financing, structuring tax deferred exchanges and assisting client in establishing investment goals.

The greater Springfield area is still a ripe area for successful real estate investing. A potential investor or investment group should not hesitate to use their tax, legal, and real estate advisory team to snag a productive, income-producing real estate investment.