The purchase of real estate itself may be considered as an investment if it is already improved and yields an income, or if the purchaser improves it immediately after its purchase. To buy unimproved real estate simply with the hope that it will increase in value in the future, is a speculation, not an investment.

Among men who have been successful in a small way the purchase of unimproved real estate is at times quite popular. The idea seems to be inherited that to own a piece of property is a mark of respectability and substance. The thought that it cannot run away or disappear seems to make it safe, and there is always the hope that it will increase in value. Nothing, however, could be more delusive. In ninety-nine cases out of a hundred it would pay better to put the money in a savings bank at 3 per cent. interest.

Even improved property is usually unsatisfactory as an investment. When taxes, depreciation by use and by change of style, repairs, insurance, periods of vacancy, and failure to collect rents are taken into account, the owners of real estate are generally disappointed in the net result. There are many notable exceptions, of course, but to own much real estate and get little out of it is so common that the term "real-estate poor" has come to be quite well understood among business men. The safest way to invest money in real estate is to buy it and lease it to others to build upon. In good localities the ground rent is assured by this means, and this makes one of the safest investments known. There is not enough of such business, however, to make it generally available.

Mortgages

Another way to invest money in real estate is to advance it on mortgages, with a margin which should not be less than 50 per cent. Even then you are not sure that you will not have to foreclose your mortgage and take the property. A fall of 50 per cent. in the estimated value of real estate during the currency of a mortgage even in growing and prosperous communities is by no means uncommon. The value of real estate is never more than an estimate - an opinion - in which it is always difficult to find two authorities who agree. There is nothing wilder or more extravagant than the ideas of otherwise sensible men on the value of real estate during a period of inflation.

I remember a case in Minneapolis which will serve as an illustration. A man after successful litigation became the owner of a tract of land near that prosperous city, valued in popular opinion at a million dollars. He became involved in debt to the extent of $250,000 and mortgaged all his real estate for the benefit of his creditors. The mortgage was foreclosed for the various creditors by the leading lawyer of the city - one of the ablest all-round business men I have ever known - who thus became thoroughly familiar with the property. The bank with which I was connected was one of the creditors, and I remember his telling me that the claim was quite good because the debtor would be certain to redeem the property from the foreclosure. It was not redeemed, however, and it fell to my lot to arrange a division of the property among the creditors. For that purpose I had another valuation made of the various lots, which amounted in all to about $70,000. On that basis the million-dollar property was divided, the best cash offer we could get being about two-thirds of that amount. In other words, the value of a tract of land contiguous to a thriving city of (then) 160,000 inhabitants shrank in popular estimation in a few years from $1,000,000 to less than $50,000.

Anyone wishing to invest his money in a real-estate mortgage should make sure that he is getting a first mortgage. There is nothing on the face of a mortgage or trust deed in Illinois and some other states to show whether a prior lien exists, and the palming off of a second or third mortgage as a first is not an unknown trick. He should also be satisfied that the title is clear in the name of the mortgagor. This is usually evidenced by a title guarantee policy, which is sufficient in most cases, though by no means infallible.

Then he should insist on seeing the property with his own eyes. No matter how reliable the mortgage dealer may be, a purchaser may, by visiting the property, discover something which may save him from an unsafe, or at least a slow and unsatisfactory, investment. It is not impossible that he may discover that the building shown to him by the mortgage broker as on the property is as yet far from completed, and that only part of the money represented by the mortgage has been paid to the mortgagor, the balance being represented by a credit on the books of the broker which is to be exhausted as the building goes on. In this case the investor must trust to the broker to see that the building is completed free of mechanic's liens and fit for occupancy.

Whether it is safe to trust the broker depends upon his financial and moral standing - which opens up a new field of investigation for the investor. He should also inquire into the financial standing of the mortgagor.

If that be unsatisfactory, the payment of interest is likely to be irregular, and foreclosure may become necessary on account of the mortgagor's difficulties, although the property itself may be quite good for the amount involved. Foreclosure is a slow, tedious, and expensive way of getting your money back, even if it does get it back.