Investing in Real Estate: Key Terms.

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Author: Garcia, Erica

Few investments fuel our dreams of getting rich the way real estate does. But before you embark on this time-consuming and potentially risky path to wealth, it pays to know the lingo and strategies

A TERM
B WHAT IS IT?
C BENEFITS
D DRAWBACKS

Flipping
Buying, fixing up and selling a house, all withn a few years
 or less; serial renovations
Live there two of five years and $250,000 gain is
 tax-free ($500,000 for couples).
You may not recoup the cost of all costly renovations. Steeper
 taxes if you sell in a year or less.

The 14-day rule
The tax rule that applies to a vacation or future retirement
 home that you rent out.
If you rent for no more than 14 days a year, the income is
 tax-free.
If you rent for more than 14 days, the income is taxable (but some
expenses are deductible).

Land speculation
Buying with the intention of building on the property or
 flipping bare land.
They're not making more of it. Few real estate deals stir the
 imagination more.
More risky than developed property (are there roads? power
lines?). Financing is tough to get.

Lease option
Giving renter an option to buy at a fixed date and price.
 Rent can go toward the sale.
Allows seller to postpone a sale (maybe for tax
 reasons), but lock in a price.
If real estate prices go up during the lease, you could lose out
on potential gains.

Rondo
Conversion of multi-unit rentals into condominiums; sell to
 tenants or new owners.
If the rental market is soft but prices are high, a way to
 forgo cash flow but book a gain.
Complicated zoning laws. Legal costs to draft a prospectus.
 Process can take six to 18 months.

Seller financing
When seller, not a bank, lends the money for the deal. Also
 known as owner financing.
Sellers often charge a percentage point more than 30-year
 fixed-mortgage rate.
You can't charge too much (state usury laws) or too little (IRS
gift rules) in interest. You must collect.

Short sale
A lender accepts an offer during foreclosure for less than the
 outstanding balance.
The price could be lower than if you bought at a
 foreclosure sale.
This is time-consuming work, akin to prospecting, that may never
pan out.

Tenancy in common
Shared ownership (up to 35 shareholders) of a residential or
 commercial property.
Tax breaks and income. For about 3% of rent, a manager takes over
 landlord duties.
Gridlock. Decisions on important economic or material issues
generally must be unanimous.

1031 exchange
A way to defer taxes on the sale of investment property;
 also, like-kind exchange.
You roll your gains from the sale of property into
 another one of equal or higher value.
Strict deadlines on the timing of the sales. Must hire a qualified
intermediary to handle the deal.

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By Erica Garcia