Personal Finance: Investing in Real Estate and Small Business

Real estate investment has long been considered one of the smartest and most secure investments to make. “There's nothing safer than bricks and mortar,” we’re consistently told. Yet there are different kinds of real estate available to the investor, each with its own level of risk and return.

The Four Main Categories of Real Estate

The four main categories of real estate include:

1) The Family Home

Owning your own home is still an achievable dream, and for many people the single largest investment they’ll ever make. At the time you buy a home you’re not often thinking of resale value or capital growth potential or how this asset can help your wealth creation plans grow and mature. This is a shame because normally your home is the key asset that gets your whole investment program up and running.

2) Residential Real Estate Investments

Owning rental properties has traditionally been the central element in an investor’s wealth creation plan. In today's environment it can still be an excellent way to accrue wealth — provided you know what you’re doing.

Residential real estate can be high, medium or low risk, depending on the location of the property, the economic strength of the local area, the purchase price, and how well it rents out. The good news is that many people earn excellent returns from real estate investments. The cautionary note is that these people are the ones who know and understand clearly how the market operates.

3. Commercial, Industrial and Retail Property Investments

This type of real estate investment opens up an entire new investment world. Generally speaking it involves larger sums of money and higher risks and returns than residential real estate investment. In a nutshell, commercial, industrial and retail investments tend to be bigger and better — provided, of course, that you do everything right.

As you can imagine, this type of venture requires considerably more time, knowledge, experience and capital than other types of real estate investment. Growth in this market is subject to a wide array of factors, and the right type of financing arrangement is critical.

4. Real Estate Investment Trusts

Real estate investment trusts are ideal for investors who do not wish to deal in real estate directly. What they effectively do is pool investor's funds together to purchase a real estate portfolio. The larger trusts (which tend to be safer investments) typically invest in commercial, industrial and retail property.

It’s actually quite rare to find real estate trusts that specialize in residential real estate investment. Listed real estate trusts offer much lower risk because they are actively traded on the stock exchange, and are therefore very liquid investments (“liquid” meaning you have the ability to quickly convert your investment into cash without suffering a noticeable loss in value.)

So, clearly, there are real estate investments to suit just about every size budget and risk profile. Historical figures clearly demonstrate the steady growth experienced by real estate.

Seven Reasons for Investing in Real Estate

There are many reasons why investing in real estate is an excellent idea, but seven stand out from all the rest:

1. The real estate value should rise over time, so investors will benefit from capital growth.

2. Investment properties provide regular income through monthly rents received.

3. There are numerous tax benefits associated with real estate investment that can significantly reduce the holding cost of the investment (e.g., interest, operating costs and depreciation).

4. Real estate is an “inflation-proof” investment as both rent and property values tend to rise at rates higher than inflation. This ensures the long-term value of the investment.

5. There can be massive leverage benefits through using real estate investments as collateral for other investments.

6. Real estate exists in a stable price environment (as opposed to the more volatile stock market).

7. You can have direct control over your real estate investments through “value adding,” which can enhance their performance and returns. (Adding value to a property can include renovating a kitchen, adding a deck or backyard pool, etc.)

Waiting for “supposed” growth to occur can be a very frustrating experience. It is more profitable to know the market well and then anticipate growth areas so as to ensure that you have the maximum growth in the least possible time.

Investing in Your Own Small Business

Another place to invest your money is into your own small business. There are many small business owners in the world — some are very successful, others make a living, and still others seem to be in a perpetual state of struggle. It's an important category to explore because owning a business affects your income stream, your tax position, your borrowing limits and, of course, your lifestyle.

Unfortunately, many people become self-employed because they wish to escape the pressures of a nine-to-five job. What they fail to realize is that most small businesses involve ‘round the clock hours and considerably more stress.

The questions to ask, then, are what are the merits of investing in your own business, and how will this move affect your retirement?

Small business owners are notorious for investing every spare dollar into their business. Don't get me wrong — every new business needs that sort of support and nourishment in order to grow and prosper. What's amazing, however, is how many businesses rely on these capital injections just to keep going.

You see, there is a point where you should be able to stop giving everything to the business and have it start giving back to you. After all, this is the entire reason for having it. The biggest problem associated with investing all your money into one business is lack of diversification. In many cases this means absolutely no protection should anything happen to the industry, the business or the key people running it.

The bottom line is that this is neither a sensible strategy nor an approach likely to yield significant amounts of wealth. Investing in your own business is terrific provided the business is not your only asset and that you are not relying on it alone to provide you with a comfortable retirement.

If the business is making a profit, take money out and invest it elsewhere so that no matter what happens, your earnings are protected. Many astute investors seek the advice of a tax specialist to establish an appropriate business structure as a protective benefit.

Four Small Business Tips

Following is a list of basic guidelines to always keep in mind:

• Always maintain a business budget that is separate from your own personal budget. This allows you to ensure that you’re investing an appropriate amount from your personal wages, as well as maximizing your business profits, either in expansion or other investments.

• Never allow your family business to be your only investment. A lack of diversification can be a costly mistake should anything untoward happen.

• To maximize business growth and profits, always look for new information on how to operate your business and improve sales. There are many wonderful books and seminars on the subject, and it is amazing what a difference a few basic changes can make.

• Ensure that your business is set up to maximize any tax advantage. If your accountant is not actively helping you with your tax situation, it may be time to look for another.

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