Exam 4: Final Exam, Baby!

rental unit percentage

35% of US households live in rental units

A ____________ depreciation period _____________ the amount of depreciation that an investor can claim each year and _____________ the amount of tax the investor must pay each year.

A longer depreciation period reduces the amount of depreciation that an investor can claim each year and increases the amount of tax the investor must pay each year.

advantages of real estate investments

a possible hedge against inflation easy entry limited financial liability no management concerns financial leverage

What relationship exists between the length of the loan and the monthly payment? How does the mortgage rate affect the monthly payment? .$132,000, 15-year loan at 5.50 percent.$1,078.44 b.$126,000, 30-year loan at 8.00 percent.$924.84 c.$88,000, 20-year loan at 8.50 percent.$763.84 d-1.Longer mortgage terms mean a lower monthly payment. 2.For increase in mortgage rate higher monthly payment is required.

a. $8.17 × 132 = $1,078.44 b. $7.34 × 126 = $924.84 c. $8.68 × 88 = $763.84 d. Longer mortgage terms mean a lower monthly payment. As rates increase, a higher monthly payment is required.

illiquidiity

absence of large liquid and relatively efficient markets

Renting Apartment

adv: easy to move, fewer responsibilities for maintenance, minimal financial commitment disadv: no tax benefits, limitations regarding remodeling, restrictions regarding pets/other activities

renting house

adv: easy to move, less maintenance, more room than apartment, minimal financial commitment disadv: higher utility expenses than apartment, limitations regarding remodeling

owning manufactured home (mobile home)

adv: less expensive than other ownership options, flexiblity in selection of home features and appliances disadv: may be difficult to sell in future, financing may be difficult to obtain, construction quality may be poor

owning new house

adv: no previous owner, pride of ownership, tax benefits disadv: financial commitment, higher living expenses than renting, limited mobility

owning cooperative

adv: ownership in form of nonprofit organization, stable property values disadv: frequently difficult to sell, potential disagreements among members, other members may have to cover costs of unrented units

owning previously owned house

adv: pride of ownership, established neighborhood, tax benefits disadv: financial commitment, possibbility of repairs or replacements, limited mobility

owning condominium

adv: tax benefits, fewer maintenance responsibilities than house, usually good accessibility to recreation and business districts disadv: less privacy than house, financial commitment, uncertain demand affecting property value, potential disagreements with condo association regarding rules, assessment fees

second mortgage

akak home equity loan allows homeowner to borrow on the paid-up value of the property

participation certificate (PC)

an equity investment in a pool of mortgages that have been purchased by a government agency, such as Ginnie Mae

amortization

balance owed is reduced with each payment

passive activity

business or trade in which the investor does not materially participate

Hybrid REITs

combinations of mortgage and equity REITs

factors when yoou evaluate adjustable-rate mortgages

determine the frequency and restrictions for changes in interest rates consider the frequency and restrictions for the changes in payment investigate possibility that the loan will be extended due to negative amortization find out what index the lending institution will use to set the mortgage interest rate

precious stones

diamonds, sapphires, rubies, and emeralds small size, ease of concealment, great durability, and potential hedge against inflation not easily turned into cash, difficult to determine whether you are getting a good stone

lack of diversification

diversification in real estate investments id difficult because of the large size of most real estate projects

declining property values

during deflationary and recessionary periods

conventional mortgage

fixed-rate, fixed-payment home loan with equal payments over number of years

investing in precious metals, gems, collectibles

gold, gold bullion, gold bullion coins, gold stocks, gold certificates, silver, platinum, palladium, and rhodium, precious stones

adjustable rate mortgage aka flexible-rate or variable-rate

home loan with interest rate that can change during the mortgage term due to changes in the market interest rates

limited financial liability

if you are a limited partner, you are not liable for losses beyond your initial investment important if the venture is speculative and rewards are not assured

gold bullion

includes gold bars and wafers basic unit is 1 kilogram od 0.995 fine gold sold from 5g to 500oz or more

direct investment

inestment in which the investor holds legal title to property home vacation home commercial property raw land foreclosures

buy-down

interest rate subsidy from a home builder or real estate developer that reduces the mortgage payments during the first few years of the loan

payment cap

keeps the payments on an adjustable-rate mortgage at a set level or lilmits the amount to which those payments can rise

commercial property

land and buildings that produce lease or rental income

lease

legal document that defines the conditions of a rental agreement

choice of a place to live

lifestyle, needss, values, beliefs, and attitudes reflect your choice

Mortgage REITs

loan money to real estate owners or invest in existing mortgages 7% of all REITs

real estate investment trust (REIT)

similar to mutual fund or investment company, trades on stock exchanges or over the counter

syndicate

temporary association of individuals or firms ogranized to perform a specific tassk that requires a large amount of capital may be organized as a corporation, a trust, or a limited partnership (most common)

Many locations require that renters be paid interest on their security deposits. If you have a security deposit of $3,000, how much would you expect to receive in interest per year at 3 percent?

$3,000 × 0.03 = $90

Condominiums usually require a monthly fee for various services. At $375 a month, how much would a homeowner pay over a 10-year period for living in this housing facility?

$375 × 12 × 10 = $45,000

Rental Costs Buying CostsAnnual rent$8,150 Annual mortgage payments$10,410($9,658 is interest)Insurance 158 Property taxes 2,760 Security deposit 1,580 Insurance/maintenance 1,840 Down payment/closing costs 4,500 Growth in equity 752 Estimated annual appreciation 2,600 Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent. (a) Calculate the total rental cost and total buying cost. (b) Based on the cost criteria, would you recommend buying or renting?

(a) Rental CostsBuying CostsRent$8,150 Mortgage payments$10,410 Insurance 158 Taxes, insurance, maintenance 4,600 Interest lost on security deposit 95 Interest lost on down payment, closing costs 270 Growth in equity -752 Annual appreciation -2,600 Tax savings for mortgage interest -2,704 Tax savings for property taxes -773 Total rental costs$8,403 Total buying costs$8,451 Interest lost on security deposit = $1,580 × 0.06 = $95 Interest lost on down payment and closing cost = $4,500 × 0.06 = $270 Tax savings for mortgage interest = $9,658 × 0.28 = $2,704 Tax savings for property taxes = $2,760 × 0.28 = $773 (b) If cost is the only decision criteria, then you should rent because the cost of renting is less than the cost of buying.

opportunity costs of housing choices

-Interest Income Lost. -Time and cost of commuting to live in less expensive area. -No tax advantages for renters. -No equity build up for renters. -Time and money to repair/improve lower-priced home. -Time and effort to custom build.

home-buying process

1. determine home ownership needs 2. find and evaluate a property to purchase 3. price the property 4. obtain financing 5. close the purchase transaction

If an adjustable-rate 30-year mortgage for $136,000 starts at 4 percent and increases to 5.5 percent, what is the amount of increase of the monthly payment?

136 × $4.77 = $648.72; 136 × $5.68 = $772.48; $772.48 - $648.72 = $123.76; or, $5.68 - $4.77 × 136 = $123.76

All of the following are true of adjustable-rate, variable-payment mortgages according to the video

Adjustable-Rate, Variable-Payment Mortgages:• Payment may change on a 1, 3, 5, 7, or 10-year schedule.• The down payment varies for this type of mortgage.• Payments are fixed for a set period of time and then they may adjust, if the market interest rate has risen.• Lower initial interest rates followed by the potential for much higher rates and payments in the future.

All of the following are advantages of real estate investments discussed in the video

Advantages of real estate investments discussed in the video include inflation protection, easy entry, financial liability, indirect investments, and financial leverage.

According to the video, which of the following is an advantage of renting a home?

Advantages of renting a home includes a smaller financial commitment, it easier to move or change homes, and there is less maintenance associated with renting a home.

Aubrie is going to make a 22% down payment on her house. If her affordable mortgage amount is $212,476.35, what is Aubrie's affordable home purchase price?

Affordable home purchase price = $212,476.35/(1 - 0.22) = $272,405.58

As you make your monthly payments to repay your loan, the amount for interest _______________ and the amount used to reduce the principal ______________.

As you make your monthly payments to repay your loan, the amount for interest decreases and the amount used to reduce the principal increases.

what is reported at the bottom of the statement

At the bottom of the statement, the amount owed at closing by both the buyer and the seller is reported.

All of the following are true about conventional mortgages discussed in the video

Conventional Mortgages:• Mortgage length is typically 15, 20, or 30 years.• Down payments are usually 5 to 10 percent.• There is no flexibility in the monthly payments and it does not change over the life of the loan. Each payment has a portion of principal and interest, with larger principal amounts at the end.• Higher initial interest rates than adjustable mortgages.

Advantages of renting a home includes a smaller financial commitment, it easier to move or change homes, and there is less maintenance associated with renting a home.

Disadvantages of buying a home include the higher cost to buy a home, difficulty in moving or changing homes, and difficulty in finding a buyer that will pay what your home is worth and can qualify for a loan to buy your home may take time.

All of the following are disadvantages of real estate investments discussed in the video,

Disadvantages of real estate investments discussed in the video include illiquidity, declining property values, a lack of diversification, limited tax shelter, longer depreciation periods, and more management issues. The video does not support that real estate investments always have high interest rates.

Which type of REIT is considered the most popular and accounts for about 90% of all REITS?

Equity REITs own and operate income-producing real-estate and are considered the most popular type of REITs, accounting for about 90% of all REITs.

In an attempt to have funds for a down payment, Jan Carlson plans to save $3,800 a year for the next five years. With an interest rate of 6 percent, what amount will Jan have available for a down payment after the five years?

FV=$3,800 × 5.637 =$21,420.60

All of the following are situations that could cause your insurance premium to increase or decrease

Factors that can cause your insurance premium to increase or decrease include the location of your home, the type of home and construction materials to build your home, and the type of policy you select and the financial limits of coverage.

According to the video, what type of REIT represents approximately 3% of all REITs and is the least popular form of REITs?

Hybrid REITs are a combination of equity and mortgage REITs and represent approximately 3% of all REITs, making them the least popular form.

Assume your 10-year old home originally cost $300,000. Unexpectedly, a fire totally destroys your home. Over the past 10 years, your home has increased in value by 20 percent and is now worth $360,000. Under the replacement value coverage, what will the insurance company pay you?

If a fire destroys this home, the insurance company will pay the homeowner $360,000 - the replacement cost of the home. Because you chose replacement coverage, there is no depreciation deducted from the current value of your home.

According to the video, which of the following amounts can you deduct from your taxable income when you file your income tax return?

Interest payments and property tax payments are both tax-deductible amounts.

affordable mortgage amount example Mason is applying for a 30-year mortgage with a 5% interest rate. Mason has an annual income of $50,000 and has no additional debt. His estimated monthly property taxes and homeowners insurance is equal to $430. What is Mason's affordable mortgage amount?

MGI = $50,000/12 = $4,166.6733% max of MGI without other debt = $4,166.67 x 0.33 = $1,375 Affordable monthly mortgage payment = $1,375 - $430 = $945 Affordable mortgage amount = [($945/5.37) x 1,000] = $175,977.65

affordable monthly mortgage payment example Paisley has an annual income of $54,600 and has additional debt of $350. Her estimated monthly property taxes and homeowners insurance is equal to $390. What is Paisley's affordable monthly mortgage payment?

MGI = $54,600/12 = $4,55038% max of MGI with other debt = $4,550 x 0.38 = $1,729 Affordable monthly mortgage payment = $1,729 - $350 - $390 = $989.00

Felice bought a duplex apartment at a cost of $145,000. Her mortgage payments on the property are $1,490 per month, $629 of which can be deducted from her income taxes. Her real estate taxes total $1,620 per year, and insurance costs $1,104 per year. She estimates that she will spend $1,398 each year per apartment for maintenance, replacing appliances, and other costs. The tenants will pay for all utilities. What monthly rent must she charge for each apartment to break even?

Monthly costs=Mortgage payment + Real estate taxes + Insurance costs + Maintenance costs =$1,490 + ($1,620 / 12) + ($1,104 / 12) + [2 × ($1,398 / 12)] =$1,490 + 135 + 92 + 233 =$1,950 Break-even monthly rent per apartment= Monthly costs / 2 =$1,950 / 2 =$975.00

Ben and Carla Manchester plan to buy a condominium. They will obtain a $191,000, 25-year mortgage at 8.5 percent. Their annual property taxes are expected to be $2,148. Property insurance is $1,032 a year, and the condo association fee is $250 a month. Based on these items, determine the total monthly housing payment for the Manchesters.

Monthly mortgage payment=Mortgage factor × Mortgage amount in thousands =$8.05 × 191 =$1,538.00 Monthly property taxes=Annual taxes / 12 =$2,148 / 12 =$179.00 Monthly property insurance=Annual property insurance / 12 =$1,032 / 12 =$86.00

Which mortgage would result in higher total payments? Mortgage A: $1,380 a month for 30 years Mortgage B: $1,000 a month for 4 years and $1,450 for 26 years

Mortgage A: Total payments=$1,380 × 360 months =$496,800 Mortgage B: Total payments=($1,000 × 48 months) + ($1,450 × 312 months) =$48,000 + $452,400 =$500,400 Mortgage B has higher total payments than Mortgage A.

all of the following are other options to consider when you finance your home

Other financing options for your home are buy-downs, second mortgages, reverse mortgages, and refinancing.

Peril

Peril is defined as the cause of a possible loss, such as accidents fire, windstorm, robbery, disease, or death.

All of the following are characteristics of pure risks

Pure risks are insurable, whereas speculative risks are not insurable because they can result in a possible financial gain.

What types of financial liability are discussed in the video?

The two types of financial liability mentioned in the video are liabilities for limited partners and general partners.

Kelly and Tim Browne plan to refinance their mortgage to obtain a lower interest rate. The Browns will reduce their mortgage payments by $173 a month and incur closing costs of $2,020 as a result of refinancing. How long will it take them to recover the cost of refinancing?

Recovery time=Refinancing cost / Monthly savings =$2,020 / $173 =11.7 months

return on investment example Dave bought a rental property for $270,000 cash. One year later, he sold it for $278,000. Suppose Dave invested only $85,000 of his own money and borrowed $185,000 interest-free from his rich father. What was his return on investment?

Return on investment=Profit / Initial investment =(Selling price − Purchase price) / Investment =($278,000 − $270,000) / $85,000 =0.0941, or 9.41%

return on investment example Dave bought a rental property for $515,000 cash. One year later, he sold it for $540,000. What was the return on his $515,000 investment?

Return on investment=Profit / Purchase price =(Selling price − Purchase price) / Purchase price =($540,000 − $515,000) / $515,000 =0.0485, or 4.85%

a way to deal with risk

Risk shifting, avoidance, reduction, and assumption were all discussed in the video as ways to deal with risk.

all of the following are seller estimated costs

Seller estimated costs include title insurance, attorney's fee, property survey, and recording fees or transfer taxes.

Kara wants to purchase a home for $300,000. In order to purchase her home, she obtains a $275,000 loan that will be repaid in 30 years and has a fixed interest rate of 5%. Assume that during year 4, the interest she pays totals $11,940 and property taxes paid are $6,000. Kara is in the 30% tax bracket. What is the reduction in the amount of taxes that Kara must pay to the federal government?

Since the interest paid and property taxes paid are both deductible, Kara can deduct $17,940 from her taxable income in year 4. Multiply the $17,940 by the 30% for the tax bracket, and the answer equals $5,382. Kara can reduce the taxes she pays to the federal government by $5,382.

All of the following are federal law requirements that REITS must meet before being sold to investors, except:

The correct federal requirement states that REITS must refrain from engaging in speculative, short-term holding of real estate to sell for quick profits.

In split limit coverage, the second number represents:

The second number in split limit coverage is the limit for claims that can be paid to all individuals involved in an accident where you are liable.

The title search fee is paid by the _________ and is designed to ensure that the ___________ can legally purchase the property.

The title search fee is paid by the buyer and is designed to ensure that the buyer can legally purchase the property.

Factors that insurance companies consider when determining premiums for auto insurance include all of the following

The type of car you drive, the places you live/work/drive, and driver classification are all considered by insurance companies to determine your premium for auto insurance.

Assume your 10-year old home originally cost $300,000 and is expected to have a 50 year life. Unexpectedly, a fire totally destroys your home and the home is now worth $350,000. Under the actual cash value method, what will the insurance company pay you?

The yearly depreciation amount is calculated by dividing the current cost ($350,000) by the expected life (50 years), which means the annual depreciation amount is $7,000. The total depreciation for the 10 years the home is held is equal to $7,000 multiplied by 10 years, which equals $70,000. The amount of insurance coverage can now be calculated by current cost ($350,000) minus total depreciation ($70,000), which equals $280,000.

Uninsured and underinsured motorist's protection provides protection for you and your family against all of the following, except:

Uninsured and underinsured motorist's protection provides protection for you and your family against accidents caused by a person without insurance, accidents caused by a person with inadequate insurance, financial losses from injuries caused by a hit-and-run driver, and financial losses from injuries caused by an underinsured driver who has insufficient coverage to cover the cost of your injuries. It does not protect against accidents involving individuals with high premium auto insurance.

Medical payments insurance provides medical benefits or the cost of health care to:

While bodily injury liability pays for the costs of injuries to persons who were not in your automobile, medical payments covers the cost of health care for you and other people who were injured in your automobile.

According to the video, a common statistic often quoted is that real estate will increase, on average, about ___________ to ___________ percent each year over a long period of time.

While there are many exceptions, a common statistic often quoted is that real estate will increase, on average, about 2 to 3 percent each year over a long period of time.

selecting an apartment

location: schools, church, synagogue, shopping, public trans, recreation building exterior: condition of building, grounds, parking facilities and recreation building interior: exits, security, hallway maintenance, condition of elevators, access to mailboxes financial aspects: rent, length of lease, security deposit, utilities, other costs layout and facilities: condition, size, closets, carpeting, appliances, type of heat, air-conditioning, plumbing, water pressure, storage area, room size, doors, locks, windows

mortgage

lontg-term loan on a specific piece of property like a home or other real estate

determining home price

main factors to consider are recent selling prices in the are, current demand for housing, length of time the home has been on the market, the owner's need to sell, financing options, and feature and condition of the home

security deposit

money held by the landlord to cover the cost of any damages done to the rental during the lease period usually one month's rent

Equity REITs

own and operate income-producing real estate 90% of REITs revenues mostly come from rents

determine down payment

personal savings, retirement funds, sale of investments or other assets, income from a second job or part-time business, and assistance from relatives are the most common down payment sources

earnest money

portion of the price of a home that the buyer deposits as evidence of good faith to indicate a serious purchase offer

gold

prices driven by fear of war, political instability, and inflation easing of international tensions or disinflation causes a decline in gold prices

benefits of home ownership

pride of ownership: having a place to call their own financial benefits: deductability of mortgage interest and rel estate tax payments for federal income taxes lifestyle flexibility: more opportunity to express individuality, decorating dwellings and entertaining guests

collectibles

rare coins, works of art, antiques, stamps, rare books, sports memorabilia, rugs, Chinese ceramics, paintings, and other items that appeal to collectors and investors

few financial benefits

renters do not have the financial advantages of homeowners tenants can't take tax deductions for mortgage interest and property taxes or benefit from the potential increased value of real estate

mobility

renting offers mobility when a location change may be needed desired

zoning laws

restrictions on how the property in an area can be used

rate cap

restricts the amount that the interest rate can increase or decrease during the arm term

According to the video, the decision to rent or buy a home is an important decision that can affect not only your ________________, but also your _________________.

the decision to rent or buy a home is an important decision that can affect not only your financial decisions, but also your quality of life.

What are the major reasons why there may be a difference between what you think your property is worth and what someone is willing to pay you for your property?

the major reasons why there may be a difference between what you think your property is worth and what someone is willing to pay you for your property are economic recessions, high interest rates, and lack of buyers with the financial resources to buy real estate.

financial leverage

the use of borrowed funds for investment purposes enables you to acquire a more expensive property than you could on your own

passive loss

total amount of losses from a passive activity minus the total income from the passive activity

indirect investment

trustee holds legal title to property on behalf of the investors real estate syndicates or limited partnerships REITs 1st and 2nd mortgages participation certificates

Silver, Platinum, Palladium, and Rhodium

used as a hedge against inflation and as a safe haven during political or economic upheavals precious metals sit in vaults earning nothing whether 4you profit on an eventual sale depends entirely on how well you call the market

disadvantages of real estate investments

• Illiquidity • Declining property values • Lack of diversification • Lack of a tax shelter • Long depreciation period • Management problems