Chapter 17 Investing in Real Estate and Other Investment Alternatives

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?

$5,382 Explanation: Add the amount of interest she pays ($11,960) to the property taxes she pays ($6,000) to get $17,940. Take the $17,940 and multiply it by her tax bracket (30%) and you will get $5,382.

Felice bought a duplex apartment at a cost of $210,000. Her mortgage payments on the property are $1,420 per month, $648 of which can be deducted from her income taxes. Her real estate taxes total $1,740 per year, and insurance costs $1,044 per year. She estimates that she will spend $1,092 each year per apartment for maintenance, replacing appliances, and other costs. The tenants will pay for all utilities.

- $210,000 -

Which of the following best describe the contrast between the liability of a limited partner versus a general partner?

- As a limited partner, you cannot lose more than your initial investment. - As a general partner, you bear all financial risks.

What are the 5 Federal Law Requirements for REITs?

- Distribute at least 90% of their taxable annual earnings to shareholders. - Have at least 100 shareholders and 5 or fewer people may own no more than half the shares. - Hire independent real estate professionals to carry out certain management activities. - Invest at least 75% of the total assets in real estate.

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

- Engage in speculative, short-term holding of real estate to sell for quick profits. Federal Law Requirements: - Distribute at least 90% of their taxable annual earnings to shareholders. - Have at least 100 shareholders and 5 or fewer people may own no more than half the shares. - Hire independent real estate professionals to carry out certain management activities. - Invest at least 75% of the total assets in real estate.

Which of the following are noted as factors that appeal to investors when investing in precious stones?

- Great durability - Inflation hedge

What are some advantages to real estate investment:

- Hedge against inflation - Limited financial liability - No management headaches - Financial leverage

Which of the following are examples of direct real estate investments?

- Home (residence) - Vacation home - Raw land Not: - 1st and 2nd mortgage - Limited partnership - REITs - Participation - Real estate syndicate

What are some disadvantages to real estate investment:

- Illiquidity - Lack of diversification - No tax shelters - New tax law provisions

What are the advantages of Real Estate Investment?

- Inflation Hedge: Increase in value over time - Easy entry Financing Min down payment Indirect investment - Financial Liability Limited liability General partner - Management Concerns Limited partnership - Financial Leverage More expensive property Increasing property values

Which of the following is true about diversification and real estate?

- It is difficult for the individual investor to diversify real estate investments. Not: - Diversification is relatively easy when investing in real estate because of financial leverage.

Which of the following factors cause gold prices to rise?

- Political instability - Fear of war - Inflation Not: - Rising common stock prices - Political stability

Examples of indirect real estate investments:

- Real estate syndicates or limited partnerships - Reits - 1st and second mortgages - Participation certificates

Which of the following factors cause gold prices to fall?

- Rising interest rates - Deflation - Easing of international tension Not: - Outbreak of war - Falling interest rates

What metals besides gold serve as a hedge against inflation?

- Silver - Platinum - Palladium - Rhodium

Collectibles include which of the following?

- Stamps - Works of art - Antiques - Rare coins Not: - Gold bullion

Which of the following are drawbacks to investing in precious metals?

- Their eventual profit upon sale is subject to market forces. - Precious metals do not bear current income. Not: - The commissions on precious metal purchases and sales are expensive.

Examples of Direct real estate investments:

- Your home - Vacation home - Commercial property - Raw land - Foreclosures

What are the two parts of a loan?

1. An amount to pay the interest on the loan 2. An amount that reduces the outstanding balance on your loan.

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

1. Decreases 2. Increases

What are the three types of REITs?

1. Equity reits 2. Mortgage reits 3. Hybrid reits

What are the three basic indirect methods of investing in real estate?

1. Real estate syndicates, partnerships that buy properties 2. Real estate investment trusts (REITs) stockholder-owned real estate companies. 3. Participation certificates sold by federal and state agencies

Dave bought a rental property for $490,000 cash. One year later, he sold it for $500,000. What was the return on his $490,000 investment? Return on investment ___%

2.04% 500,000-490,000 = 10,000/490,000 = 0.0204081633 x100 = 2.04%

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.

2; 3

Dave bought a rental property for $310,000 cash. One year later, he sold it for $325,000. Suppose Dave invested only $50,000 of his own money and borrowed $260,000 interest-free from his rich father. What was his return on investment?

325,000-310,000= $15,000 gain 15,000/50,000 = 0.3x100 = 30% gain/initial investment = 0.3x100 = ROI (30%)

REITs - Real estate investment trust

A firm that pools investors funds and invests them in real estate or uses them to make construction or mortgage loans.

Which of the following amounts can you deduct from your taxable income when you file your income tax return? A. Principal payments B. Interest payments C. Property tax payments D. Interest payments and Property tax payments E. Principal payments, Interest payments, and Property tax payments

D. Interest payments and Property tax payments

What are the two types of real estate investments?

Direct and indirect

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

Equity REIT

True or false: In comparison to other investments, such as stocks and bonds, an investment in real estate would be considered more liquid.

False

True or false: Political instability and inflation usually cause the price of gold to decrease.

False

True or false: In times of deflation and recession when the stock market is declining, real estate prices are usually rising.

False - The prices are usually stable or falling.

Deflation and rising interest rates can cause the price of gold to increase.

False Explanation: Deflation and rising interest rates normally cause the price of gold to decrease.

True or false: A firm that pools investor funds and invests them in real estate is called a real estate consortium.

False REIT

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

Hybrid REIT

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?

Lack of buyers with the financial resources to buy real estate, High interest rates, and Economic recessions

What types of financial liability are discussed in the video?

Limited Liability and General Liability

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.

Longer; reduces; increases

What is an Equity Reit:

Own and operate income-producing real estate. Note: - They have increasingly become real estate operating companies engaged in leasing, maintaining, and developing real prop and tenant services. - Equity REITs make up 90% of reits

All of the following are disadvantages of real estate investments, except:

Real estate investments always have high interest rates. Disadvantages: - Individual investors have a lack of diversification. - Management problems created from buying property, such as finding reliable tenants. - Property must be depreciated over a longer depreciation period. - Property is considered illiquid.

What are Mortgage Reits?

Reits that loan money to real estate owners or invest in existing mortgages. Note: - Mortgage Reits make up 7% of all reits

What are Hybrid Reits?

They are a combination of mortgage and equity reits

True or false: Financial leverage allows you to buy more expensive real estate than you otherwise could afford and to realize a higher return on your investment.

True

True or false: Land and buildings that produce lease or rental income are called commercial properties.

True

Participation Certificate (PC)

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

Investing in coins or stamps is known as investing in _____.

collectibles

When an investor holds legal title to a property, the investment is called _____ a investment in real estate. This is a one word answer.

direct

When investors purchase real estate, they often use borrowed funds, which is also called _____ leverage.

financial

A limited partner in a real estate venture is not liable for losses beyond their _____.

initial investment

Syndicate

is a temporary association of individuals or firms organized to perform a specific task that requires a large amount of capital. Note: The syndicate may be organized as a corporation, as a trust, or, most commonly, as a limited partnership.

Unlike stocks and bonds, real estate lacks large, _____ and relatively efficient markets.

liquid

Lack of _____ can be a disadvantage when investing in real estate.

liquidity

A real estate investment trust (REIT) is a firm that _____ investment funds and invests them in real estate or to make construction or mortgage loans.

pool

The risks of investing in diamonds includes liquidity and difficulty in judging _____.

quality

Commercial property includes land and buildings that produce lease or _____ income.

rental

The impact of deflation and recession on real estate values depresses _____ .

value