7.5 Investments in Real Estate
Which of the following would be considered an asset class? [A] Real Estate [B] ABC Common Stock [C] U.S. Government Bonds [D] A Bank Certificate of Deposit
A. An asset class is a broad type of investment category. The main types of asset classes for exam purposes will include commodities, equity securities, debt securities, cash and cash equivalents, and real estate/property.
A conservative investor has a portfolio that consists of diversified investments in equity securities, debt securities, and money market instruments. The investor is mildly concerned about a downturn in the stock market. If this investor were seeking to further diversify, which of the following would be the BEST recommendation? [A] A Balanced Fund [B] Real Estate-Related Investments [C] A Hedge Fund [D] Speculation in Equity Options
B. Of the choices listed, the best option is the Real Estate-Related Investments. The real estate market often moves in the opposite direction from or is unaffected by the equities markets. A balanced fund would be redundant with the investor's current holdings. A hedge fund and speculation in options would likely carry too much risk for a conservative investor, and would still be exposing the investor to risks in the equities markets.
Which of the following is an example of an indirect investment in real estate? [A] The purchase of a primary residence [B] An investment in raw land for speculation purposes [C] The purchase of a duplex for rental purposes [D] An investment in a Real Estate Investment Trust
D. A Real Estate Investment Trust (REIT) is a form of business where multiple investors pool money for real-estate related purchases. The investor owns shares of the REIT and is indirectly investing in real estate by purchasing REIT shares. Each of the other items listed would involve direct investment in real estate. If an investor buys a primary residence, raw land, or a duplex, then the investment is direct.
Which TWO of the following are TRUE with relation to real estate investment trusts (REITs)? I.REITs must invest at least 75% of their total assets in real estate assets. II.REITs must invest at least 90% of their total assets in real estate assets. III.REITs must distribute at least 75% of taxable income to shareholders annually in the form of dividends. IV.REITs must distribute at least 90% of taxable income to shareholders annually in the form of dividends.
I and IV In order to qualify as a REIT, at least 75% of total assets must be invested in real estate assets and the REIT must distribute at least 90% of its taxable income to shareholders annually in the form of dividends. Dividends paid to investors are taxable at the investors ordinary income tax rate.
