Real estate investor
Encyclopedia
A real estate investor or a real estate entrepreneur to a lesser extent is someone who actively or passively invests
in real estate
. An active investor may buy a property
, make repairs and/or improvements to the property, and sell it later for a profit. A passive investor might hire a firm to find and manage an investment property for him. Typically, investors choose real estate
for several reasons: cash flow
, appreciation
, depreciation
, tax
benefits and leverage
.
A cash flow investor might opt to put 5% or 10% down when acquiring a property. This may allow the investor to obtain favorable financing terms and a lower mortgage
payment. This will often result in positive monthly cashflow, crudely derived by subtracting the monthly debt
service from the monthly rent
.
Appreciation occurs over time, generally, though an investor may "force the equity
" in a property by making enhancements to it or the surrounding environment to increase its value. In general, residential real estate is valued by the "comparable sales" method which estimates the value of property under the principle of substitution
. The method estimates property values by comparing a subject property to similar properties sold in similar locations within a recent period of time.
Depreciation is one of the many benefits afforded to real estate investors. Though the property is actually increasing in value, the government allows owners to systematically depreciate the property over its projected useful life span. Depreciation is an allowable tax deduction
. In addition to depreciation, an investor will usually claim the interest
portion of his monthly mortgage payment as a tax deduction.
Leverage is a powerful reason for investing in real estate. If an investor used 100% cash to acquire a house worth $100,000, and the house increased in value by $5,000 in one year, then the investor made a return of 5% (assuming no other costs in this case). However, if the investor obtained 95% financing, only $5,000 cash would be required at the closing table, and a bank
or other lender would loan the remaining $95,000 to acquire the property.
Assuming the same $5,000 increase in value, the investor's cash contribution of $5,000 would yield an increase in equity of $5,000 in one year, a 100% return. Of course, leverage works in the opposite manner as well. A $1,000 decrease in value would produe a negative 20% return on the $5,000 investment.
Real estate investing
has become quite popular in recent years due to rising property values and low interest rate
s. Deflation in property values or a sharp increase in interest rates would dampen the market
considerably, however.
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
in real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
. An active investor may buy a property
Real property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
, make repairs and/or improvements to the property, and sell it later for a profit. A passive investor might hire a firm to find and manage an investment property for him. Typically, investors choose real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
for several reasons: cash flow
Cash flow
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...
, appreciation
Appreciation
In accounting, appreciation of an asset is an increase in its value. In this sense it is the reverse of depreciation, which measures the fall in value of assets over their normal life-time...
, depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
, tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
benefits and leverage
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
.
A cash flow investor might opt to put 5% or 10% down when acquiring a property. This may allow the investor to obtain favorable financing terms and a lower mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
payment. This will often result in positive monthly cashflow, crudely derived by subtracting the monthly debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
service from the monthly rent
Renting
Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
.
Appreciation occurs over time, generally, though an investor may "force the equity
Ownership equity
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
" in a property by making enhancements to it or the surrounding environment to increase its value. In general, residential real estate is valued by the "comparable sales" method which estimates the value of property under the principle of substitution
Substitute good
In economics, one way we classify goods is by examining the relationship of the demand schedules when the price of one good changes. This relationship between demand schedules leads economists to classify goods as either substitutes or complements. Substitute goods are goods which, as a result...
. The method estimates property values by comparing a subject property to similar properties sold in similar locations within a recent period of time.
Depreciation is one of the many benefits afforded to real estate investors. Though the property is actually increasing in value, the government allows owners to systematically depreciate the property over its projected useful life span. Depreciation is an allowable tax deduction
Tax deduction
Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...
. In addition to depreciation, an investor will usually claim the interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
portion of his monthly mortgage payment as a tax deduction.
Leverage is a powerful reason for investing in real estate. If an investor used 100% cash to acquire a house worth $100,000, and the house increased in value by $5,000 in one year, then the investor made a return of 5% (assuming no other costs in this case). However, if the investor obtained 95% financing, only $5,000 cash would be required at the closing table, and a bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
or other lender would loan the remaining $95,000 to acquire the property.
Assuming the same $5,000 increase in value, the investor's cash contribution of $5,000 would yield an increase in equity of $5,000 in one year, a 100% return. Of course, leverage works in the opposite manner as well. A $1,000 decrease in value would produe a negative 20% return on the $5,000 investment.
Real estate investing
Real estate investing
Real estate investing involves the purchase, ownership, management, rental and/or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development...
has become quite popular in recent years due to rising property values and low interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s. Deflation in property values or a sharp increase in interest rates would dampen the market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
considerably, however.
Notable real estate investors/entrepreneurs
- Gordon CampbellGordon CampbellGordon Muir Campbell, is a Canadian diplomat and politician, who is currently serving as Canadian High Commissioner to the United Kingdom of Great Britain and Northern Ireland. He previously served as the 34th Premier of British Columbia from 2001 to 2011...
(Canadian diplomatDiplomatA diplomat is a person appointed by a state to conduct diplomacy with another state or international organization. The main functions of diplomats revolve around the representation and protection of the interests and nationals of the sending state, as well as the promotion of information and...
, politicianPoliticianA politician, political leader, or political figure is an individual who is involved in influencing public policy and decision making...
, teacherTeacherA teacher or schoolteacher is a person who provides education for pupils and students . The role of teacher is often formal and ongoing, carried out at a school or other place of formal education. In many countries, a person who wishes to become a teacher must first obtain specified professional...
, and former real estate developer) - Casey SerinCasey SerinCasey Konstantin Serin is a Uzbek-born American blogger and a former real estate investor. In a newspaper article, USA Today called him the "poster child for everything that went wrong in the real estate boom"....
(Uzbek-born American blogger and former real estate investor) - John T. ReedJohn T. ReedJohn T. Reed is an American author and investor. He is a former real estate investor who has authored and self-published books on real estate investing, football coaching, baseball coaching, success, and self-publishing...
(author and former real estate investor) - Barbara CorcoranBarbara CorcoranBarbara Ann Corcoran is an American businesswoman, investor, speaker, business consultant, syndicated columnist, author, and television personality. As a television personality, she is a "Shark" investor on ABC's Shark Tank.She graduated from St. Thomas Aquinas College with a degree in education...
(New Jersey based businesswoman and Shark TankShark tankShark tanks may be found in a number of large aquaria.The term “Shark Tank” also can refer to:* HP Pavilion at San Jose, an indoor arena in California* Shark Tank...
investor) - Robert KiyosakiRobert KiyosakiRobert Toru Kiyosaki, born April 8, 1947) is an American investor, businessman, self-help author and motivational speaker. Kiyosaki is best known for his Rich Dad Poor Dad series of motivational books and other material published under the Rich Dad brand. He has written 15 books which have combined...
(PhoenixPhoenix, ArizonaPhoenix is the capital, and largest city, of the U.S. state of Arizona, as well as the sixth most populated city in the United States. Phoenix is home to 1,445,632 people according to the official 2010 U.S. Census Bureau data...
based entrepreneur and author of the Rich Dad Poor Dad series of books) - Jared KushnerJared KushnerJared Corey Kushner is an American real estate entrepreneur and newspaper publisher. He is the principal owner of Kushner Properties, his family’s holding company, and the publisher of The New York Observer. He is the son of American real estate developer Charles Kushner.-Early life:Kushner is the...
(Boston based entrepreneur and newspaper publisher) - Louis LesserLouis LesserLouis Lesser is an American business magnate. He received frequent press coverage in the 1950s and 1960s for his ability to earn money and for his various business operations. He sold the Taj Mahal to New York real estate developer Donald Trump...
(California based real estate developer and businessman) - Donald TrumpDonald TrumpDonald John Trump, Sr. is an American business magnate, television personality and author. He is the chairman and president of The Trump Organization and the founder of Trump Entertainment Resorts. Trump's extravagant lifestyle, outspoken manner and role on the NBC reality show The Apprentice have...
(New York and Northeastern U.S. based real estate developer and entrepreneur) - Donald BrenDonald BrenDonald Bren is an American businessman who is Chairman of the Irvine Company, a US Based real estate developer, which he wholly owns.-Early Life and Education:...
(U.S. based Real estate developer) - Donald SterlingDonald SterlingDonald T. Sterling is an American real estate mogul, attorney, and the owner of the National Basketball Association's Los Angeles Clippers. Sterling acquired the Clippers in 1981 for $12.5 million, and as of the 2008 rankings, the team is valued at $297 million by Forbes magazine, ranking them...
(California based real estate developer and majority owner of the Los Angeles ClippersLos Angeles ClippersThe Los Angeles Clippers are a professional basketball team based in Los Angeles, California, United States. They play in the Pacific Division of the Western Conference of the National Basketball Association...
) - Jerry BussJerry BussGerald Hatten "Jerry" Buss Ph.D., M.S. is an American businessman, real estate investor, and a former chemist. He is the majority owner of the Los Angeles Lakers professional basketball team along with other professional sports franchises in Southern California...
(entrepreneur, former chemistChemistA chemist is a scientist trained in the study of chemistry. Chemists study the composition of matter and its properties such as density and acidity. Chemists carefully describe the properties they study in terms of quantities, with detail on the level of molecules and their component atoms...
, and Majority owner of the Los Angeles LakersLos Angeles LakersThe Los Angeles Lakers are an American professional basketball team based in Los Angeles, California. They play in the Pacific Division of the Western Conference in the National Basketball Association...
) - Bernard SpitzerBernard SpitzerBernard Spitzer is an American real estate developer and philanthropist in New York City who built several landmark buildings around the city including The Corinthian which was the largest individual apartment building in New York City when it was built. Spitzer is father of former New York...
(New York based real estate developer and father of lawyer and former Governor of New York Elliot Spitzer) - Robert G. Allen)Robert G. Allen (author)Robert G. Allen is a Canadian-American businessman, financial writer, real estate investor, and motivational speaker.Allen was raised as a member of the LDS Church and lived in Tahiti as a missionary for two years...
(Canadian-American based entrepreneur, speaker, and author of Multiple Streams of Income) - Arnold SchwarzeneggerArnold SchwarzeneggerArnold Alois Schwarzenegger is an Austrian-American former professional bodybuilder, actor, businessman, investor, and politician. Schwarzenegger served as the 38th Governor of California from 2003 until 2011....
(California based entrepreneur, actor in TerminatorTerminator-Science:*Terminator , the line between the day and night sides of a planetary body*Terminator , the end of a gene for transcription-Technology:*Terminator , a resistor at the end of a transmission line to prevent signal reflection...
series of films, former Governor of CaliforniaGovernor of CaliforniaThe Governor of California is the chief executive of the California state government, whose responsibilities include making annual State of the State addresses to the California State Legislature, submitting the budget, and ensuring that state laws are enforced...
, bodybuilder) - Jim Bob DuggarJim Bob DuggarJames Robert "Jim Bob" Duggar is an American former state legislator, who served in the Arkansas House of Representatives from 1999 to 2002. He also ran in the Republican Party of Arkansas primary election for the United States Senate in 2002, but lost to Tim Hutchinson...
(Arkansas based entrepreneur, author, and television personality, primarilty known for the television show 19 Kids and Counting) - Mort Zuckerman (Magazine editor, publisher, and real estate entrepreneur)
- Shaquille O'NealShaquille O'NealShaquille Rashaun O'Neal , nicknamed "Shaq" , is a former American professional basketball player. Standing tall and weighing , he was one of the heaviest players ever to play in the NBA...
(Retired NBA basketball player) - Mike MaloneyMike MaloneyMichael Maloney born February 13, 1956 is a precious metals investor, serial entrepreneur, author, and a recognized historian on monetary history and economics. He's been the precious metal investment advisor for Robert Kiyosaki since 2005, author of Rich Dad, Poor Dad...
(Serial entrepreneur and precious metals investor) - Sharon LechterSharon LechterSharon L. Lechter is an American accountant, author, businesswoman, investor, international speaker, and philanthropist. Lechter is best known as the co-author of the international best-selling book Rich Dad, Poor Dad and the Rich Dad series of books as well as one of the founders of the Rich Dad...
(Arizona based businesswoman and co-author of the Rich Dad Poor Dad series of books) - Li Ka ShingLi Ka ShingSir Ka-shing Li, GBM, KBE, JP is a Chinese business magnate based in Hong Kong. He is the richest person of East Asian descent in the world and the eleventh richest person in the world with an estimated wealth of US$26.0 billion on 10 March 2011...
(Hong Kong based businessman) - Carlos Slim HeluCarlos Slim HelúCarlos Slim Helú is a Mexican business magnate and philanthropist who as of 2011 is the richest person in the world, for the second year in a row...
(Mexican entrepreneur) - Steve Wynn (New York based casino entrepreneur and real estate developer)
- Sam Zell (Chicago based real estate entrepreneur and newspaper publisher)
- Master PMaster PPercy Robert Miller , better known by his stage name Master P or his business name P. Miller, is an American rapper, actor, entrepreneur, investor, and producer. He is the founder of the popular label No Limit Records, which went bankrupt and was relaunched as New No Limit Records through Koch...
(New Orleans based musicianMusicianA musician is an artist who plays a musical instrument. It may or may not be the person's profession. Musicians can be classified by their roles in performing music and writing music.Also....* A person who makes music a profession....
and entrepreneurEntrepreneurAn entrepreneur is an owner or manager of a business enterprise who makes money through risk and initiative.The term was originally a loanword from French and was first defined by the Irish-French economist Richard Cantillon. Entrepreneur in English is a term applied to a person who is willing to...
) - Paul McCallumPaul McCallumPaul McCallum is a professional Canadian football player currently playing as a placekicker and punter for the BC Lions of the Canadian Football League...
(VancouverVancouverVancouver is a coastal seaport city on the mainland of British Columbia, Canada. It is the hub of Greater Vancouver, which, with over 2.3 million residents, is the third most populous metropolitan area in the country,...
based football player, real estate agent, and entrepreneur) - Jorge M. PerezJorge M. PerezJorge M. Pérez is a Cuban American real estate magnate and author. Pérez was born in Argentina of Cuban parents and lived in Colombia before moving to Miami in 1968. He is graduate of Long Island University C.W...
(Florida based real estate developer and author) - Paul AllenPaul AllenPaul Gardner Allen is an American business magnate, investor, and philanthropist. Allen co-founded Microsoft with Bill Gates...
(co-founder of MicrosoftMicrosoftMicrosoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...
and Washington based entrepreneur) - Bob Kraft (Boston based businessman and majority owner of the New England PatriotsNew England PatriotsThe New England Patriots, commonly called the "Pats", are a professional football team based in the Greater Boston area, playing their home games in the town of Foxborough, Massachusetts at Gillette Stadium. The team is part of the East Division of the American Football Conference in the National...
) - Leona HelmsleyLeona HelmsleyLeona Mindy Roberts Helmsley was an American businesswoman and real estate entrepreneur. She was a flamboyant personality and had a reputation for tyrannical behavior that earned her the nickname Queen of Mean...
(New York based hotelierHotelierHotelier is a South Korean drama broadcast by MBC in 2001. Asahi TV of Japan later remade the series in 2007. Hotelier contains a total of 20 episodes. The word "Hotelier" literally means "a person who owns or runs a hotel"...
and businesswoman)