Anyone looking for ways to increase their investment income in the current recession should consider the recent words of the Governor of Florida. Charlie Crist, who has recommended that more of Florida’s retirement pension funds be invested in Florida residential real estate. If it’s good enough for the state, is it good enough for the resident of the state as well?

The key element in any investment, of course, is finding a way that what you gain outweighs what you are likely to lose. However, there are real estate investments and then there are real estate investments. So how do you choose and how do you decide if real estate is right for you?

Florida, for example, recently suffered losses on a $250 million real estate investment in Manhattan that failed. And yet, the Governor recommends investing in residential real estate in Florida.

It’s a great idea for the right people and the reason it’s a great idea now is the time and the really important reason is that real estate investing is not “fungible”.

Let’s look at the timing issue first, and then get to fungibility. In many cases, Florida residential real estate sells for half of what it would have sold for at the peak of the market. So by definition, if you buy today, you only have half to lose.

If the price of a single-family home in Florida were to be considered as a stock, you would start to see a small number of people speculating if “we’ve seen the bottom of the market.” That kind of guessing is popular in stock investing. And it may be correct. We may be at or near the bottom. And again, we may have a ways to go and prices may come down.

If you are in stocks you have to choose the right time to buy and you will only make money if the market goes up. Sounds reasonable. We are all familiar with this idea. If you don’t already know, it can be hard to understand that in real estate you can, right now, make money after you buy if the market goes down.

That’s where the similarity of real estate prices and stock prices go their separate ways. If you want to buy Google or IBM shares, you will pay the current market price because the shares are fungible. That means that all IBM common shares are the same and all sell for the same price at the same time.

Stock prices can go up and down, but at any given second of the trading day, there is only one value for shares of any stock. This is not true of real estate and it provides an opportunity for higher profits and less risk.

While the overall real estate market in Florida is down to around half of the market’s peak value, there are individual homes that are currently even cheaper. In some cases, I find houses that can be bought for half (sometimes less) of the current value. So let’s say homes in Pasco County are down 50 percent and some individual homes in that big market basket can be bought for around 25 percent of what they would have sold for at the top.

Would you think these properties offer less risk and more potential appreciation? You would and you would be right, with certain precautions.

Homes that are available at bargain basement prices are in most cases damaged, sometimes substantially, owned by banks that have foreclosed on, or owned by a variety of others who are in dire need of selling now. and move on. their lives.

One of the guarantees would certainly be that you need to get someone who is qualified to tell you how much it will cost to repair the house so that it is sold at the current rate and not at a discount. The second risk is that if you want to make that investment and you’ve never rehabbed a home, you have a learning curve ahead of you. Simply, while this sounds like a great idea, it’s not for everyone.

You should also know that the state government has passed legislation that limits how you can buy some of the homes whose value is or may be in jeopardy. Buying a foreclosed home where the owner still lives in the home requires specific forms and disclosures, and failure to comply carries the risk of substantial fines.

Fortunately, there are other ways to participate in this part of today’s real estate market. Many home rehab professionals look for partners with money to finance a property’s rehab. Frequently, the settlement calls for 50 percent distribution of profits to the person who has the money and 50 percent to the person who provided the money.

In two decades in this market, I have seen investors earn incredible returns on their money and, in some cases, finance the same home renovation over and over again with both parties happy. I have also seen an almost infinite variety of potential problems turn into real problems and both parties end up losing money in these types of deals.

I’m not saying it’s a bad idea to make this type of investment, but I suggest that the investor and rehabber research each other thoroughly, have a clear and precise contract that explains who does what, and spells out as many possibilities as possible. If done right, especially now, buying below market and knowing what you’re doing should produce decent real estate profits. The potential for loss, of course, is always there. The property could be on a toxic waste site, have liens or encumbrances that the rehabber was unaware of at first, and a variety of other potential problems.

Another approach to the issue of how to invest in Florida residential real estate would be for the investor to allow the rehabber to complete the home using the rehabber’s own money and skill and then simply take a mortgage on the property after the work is done. and a tenant is in the house. This type of investment will likely only yield 7-12% a year in today’s economy compared to 40% or more return in less than a year for partnership investment where the investor and rehabber share the total profit and the risk.

The second article in this series details a case study of the first home I rehabbed and later financed with an investor. The investor was a mortgage broker that I had used for loans to put some of my buyers in homes and he came up with the idea to finance a home that he had rehabbed in Clearwater Fl two decades ago.