INVESTORS - HOW TO INVEST IN TODAY'S REAL ESTATE MARKET

Investing in real estate is not for everyone. But if you're looking for a way to increase your personal wealth, purchasing a rental property may be for you-especially in today's real estate market.

We're not talking sky-high appreciation rates-like the late 1970s or mid-1980s-which virtually guaranteed a solid return for many real estate investors regardless of
what they purchased. What we are talking about is a residential market in which a well-chosen, well-managed rental property of 1 to 4 units can be the "shining star" in an investor's portfolio.

What's happened? Today's availability of fairly priced-and even some undervalued-homes combined with outstanding low-payment interest rates and a solid rental market have boosted sales. Once again, opportunity-driven investors are finding a great value, financing the purchase and keeping it rented much easier than in recent years.

Keep in mind any opportunity has a downside risk. Real estate is complex and each property is different. But right now experience shows rental property investors can benefit from informed real estate professionals who can find the right property in the right location with the right financing. The key to success today is doing your homework and making sure the numbers work.

If you've bought your own home, you already know many of the financial advantages of real estate ownership. Here's a brief overview of the many ways you can profit from owning rental real estate today.

Four Ways Residential Real Estate Investors Build Wealth

Lower Your Taxes
Investor tax incentives can be substantial. Some investors can use deductions from rental property to offset some of their wage income. Other investors, while not eligible for the offset, can avoid owing taxes on their rental income by showing adequate expenses and deductions. Even if rental payments do not cover the investor's expenses, tax breaks may actually make up the difference - or more.

As an investor, you can claim deductions for actual costs you incur for financing, managing and operating the rental property. That means mortgage interest payments, real estate taxes, insurance, maintenance, repairs, property management fees (if any), travel, advertising, and utilities (if the tenant doesn't pay them) may be subtracted from your adjusted gross income when figuring your personal income taxes up to the amount of real estate income you receive.

Also, don't forget deductions for depreciation. The tax code assumes buildings and improvements "wear out" over time. These "losses" are deductible from income, regardless of the property's actual market value. Depreciation is a "non-cash" expense; that is, no actual payment needs to be made out of pocket. Although the government collects deferred taxes on the income sheltered by depreciation when you eventually sell, you've gotten "free" use of the money in the meantime. And if you do a tax-deferred exchange by purchasing a replacement property, you can defer taxes on the depreciation and on any profit (Ask your tax advisor about Section 1031 of the U.S. Tax Code.)

Have A Positive Cash Flow
A positive cash flow results when the rent you receive exceeds the total you pay for the mortgage, taxes. insurance, maintenance and other carrying costs. That's not as hard as it sounds. First, decide whether you need a positive cash flow before or after taxes. A pre-tax positive cash flow translates into current income, a goal of many retired investors and others with current expenses. Properties yielding a pre-tax positive cash flow are harder - but certainly not impossible - to find.

If this is your goal, you need to buy wisely. Not all properties will yield high enough rental income to cover expenses. Make sure you know how much rent to expect by finding out about rents for similar units nearby, the property's current rental fee, and date of last rent increase. Keep in mind you may need to purchase with a large down payment so your mortgage payments are smaller.

A positive after-tax cash flow can come from a negative pre-tax cash flow. Generally, the depreciation deduction makes the difference. If you meet the eligibility test, you'll be able to use the depreciation to shelter some of your taxable income and reduce your tax bill.
Second, you'll want to ensure your tenants make timely rental payments and take care of the property. Of course, a positive cash flow is impossible without rental income. A thorough credit, employment, and landlord check on applicants will help you find good renters, and a strong lease combined with a required security deposit will help put you ahead.

Use Leverage
As an investor, you magnify the return on your investment by borrowing a large part of the purchase price. That is, by limiting the amount of cash you invest. you make your cash go a long way.

Leverage means using borrowed money to increase equity. And equity - the difference between what the property is worth and the balance owed on the mortgage - is what's important when figuring whether your dollars are invested wisely.

Assume you bought a $100,000 rental property with a 30% down payment and after several years the home is worth $135,000. The $35,000 return on your $30,000 investment is more than 100%. (Several factors will actually lower your profit, but to illustrate the principle of leverage we're keeping the numbers simple.) If you bought that same $100,000 property with ;dl cash, the return on your investment would be 35%. Leverage puts other people's money to work for you.

Benefit From Growing Equity
Even at a modest rate of appreciation, real estate may well yield a higher return on the cash investment than would some other financial investments, such as bonds or long-term CDs. Each mortgage principal payment you make is a payment to yourself. You build equity as your mortgage principal shrinks, even if your investment property doesn't change in value.
Although homes in different parts of town may appreciate at entirely different rates, the key is shopping carefully for a purchase guided by knowledgeable professionals. Review your expectations and think about how long you plan to hold onto your investment. When you reach your predetermined "equity target," it's time to sell or refinance - and perhaps use the cash you receive for other investment properties.

10 Proven Secrets To Success
There are nearly as many investment-hunting strategies as there are investors. Yet experience provides some universal truths that pay off.

Compare Comparables
Fast-and-loose rules of thumb to estimate value, such as 6 or 8-times annual gross rent or 10-times net operating income or 100-times monthly rent, may not reflect an area's values. Use comparable sale prices of nearby properties to get the truest sense of market value. Do the same for area rents. A low price can be supported by a reasonable rent; remember, renters who can afford a high rent can afford to buy instead.
Tax Laws Change
A good investment is a good investment before it's a good tax shelter. Tax laws change. The right property in the right place with the right financing and management will weather inevitable tax code changes.
Specialize
Start in a market segment you know. Whether you focus on fixer-uppers, foreclosures, starter homes, low down payment properties, condominiums, or small apartment buildings. you'll benefit from experience by specializing in one aspect of investment real estate properties.
Run The Numbers
Operating expenses from repairs and maintenance, loan payments, taxes, vacancy costs and more will determine the difference between smooth sailing and a sinking ship. Up-front number crunching is your best strategy. Run before- and after-tax cash flow statements with confirmed figures.
Determine Last Rent Increase
If the rents were recently increased, your future income may be limited and, worse still, tenants might move. Check the date of last increase to know where you stand. Also, make sure the current tenant doesn't have a short-term lease, living there simply to tempt the unsuspecting buyer. Examine existing leases and be sure to get tenants' security deposits from the seller at closing.
Check Tax Assessment
A current assessment that will increase after your purchase - because it is old or doesn't include unrecorded improvements - could change your property tax expenses.
Investigate Insurance
If seller's coverage is based on lower-than-current replacement value, your insurance cost may increase when you pay a higher purchase price.
Confirm Utility Costs
Ask the local utilities to verify recent utility expenses, especially if any of these costs are included in your tenant's rent.
Ask Your Accountant
Especially on the tax questions, as well as your basic investment analysis, be sure to get a second opinion from your tax advisor or CPA.
Inspect, Inspect, Inspect
Never buy a property sight unseen. Nothing replaces on-site inspection and nosing around the property like a blood hound. Hire professional inspectors for structural and mechanical system opinions.

What To Look For
You'll want to look for what's good-a good property in a good neighborhood with a good price and good financing. Your real estate agent has the hands-on experience to help you find what's good. As an investor, you may start looking in or near your own neighborhood so you can "keep an eye" on the property. That doesn't mean, however, investors should look for the best home in the best neighborhood. You'll find rents often don't cover the higher mortgage payments. Look for a home in a neighborhood where renters want to rent, not where you want to live.
Look for:

a well-maintained neighborhood\
ready access to public transportation, highways
a style of home that appeals to the most renters in the price range
a property that fits comfortably into the neighborhood, is "typical" rather than unusual
a property that doesn't require a lot of maintenance or repairs, unless your objective is to find a "fixer-upper"
a property whose carrying costs you can afford during a temporary vacancy preferably an undervalued home listed by motivated sellers

Consult Professionals
Your best asset in choosing investment property-whether a rental property or a vacation home-is your real estate professional. Knowledgeable realty agents can locate prospective properties. provide information and perform a market analysis, investigate local ordinances and regulations, and present your offer to the seller. Agents can also assist in finding the best available financing.

Remember, you'll also need the professional assistance of a real estate attorney. a tax advisor. and possibly a property manager.