Principal 2: Unit 6: Real Estate Investments

Jim owns several real estate assets that he has purchased through the years in a variety of ways. He has been very successful in relying on his real estate agent, Clair, to inform him when certain types of properties go on the market. If you were Clair, what types of sales would you be watching for Jim?

The answer is all of these. In December 2015, according to NAR, 15% of existing home sales were to investors, and undoubtedly most of those sales were either short sales or foreclosures. In addition REOs, or bank owned properties taken back after they fail to sell in a foreclosure sale, are also attractive to investors.

An investor may defer federal income taxes on a portion of the gain on the sale of a property, provided all sales proceeds are not received during the year of the sale. This describes

The answer is an installment sale. Payments from the sale of a property must be received over two or more years to qualify for an installment sale. Income tax is paid each year based on the amount received during that year.

Operating expenses include all of the following EXCEPT

The answer is debt services. The cash flow produced by any given parcel of real estate is determined by at least three factors: (1) amount of rent received, (2) operating expenses, and (3) method of debt repayment. Operating expenses include general maintenance of the building, repairs, utilities, taxes, and tenant services (such as security systems).

Which of the following real-property objectives is also a real-property security objective?

The answer is income stream. Real-property objectives generally include positive cash flow, equity buildup, tax savings, and property appreciation.

Shareholders in a real estate investment trust (REIT) generally

The answer is receive most of the trust's income each year. Members of a REIT realize their profits through the income derived from the various properties owned by the REIT rather than from the sale of the properties. A REIT is required to distribute 90% of its income to shareholders annually to avoid paying corporate income taxes.

Which of the following is considered a benefit of real estate investment?

The answer is the availability of tax shelters. Tax shelters may allow real estate investors to reduce or defer payment of large portions of their federal and state income taxes. There is no investment guarantee or protection from bankruptcy. Also, it can be difficult to liquidate real estate holdings into cash.

George owns several types of real estate investments. He owns two houses that he rents out, and he has sold one other that he carried back a mortgage on. What is the benefit of holding the mortgage as a security over the rental properties as assets?

He has an income stream from the security without having to manage the properties.

If an investor purchases a property for $200,000, makes $100,000 in improvements, and takes $50,000 in depreciation, the investor's

The answer is adjusted basis is now $250,000. An owner's basis is the investor's initial cost of the property. To derive the property's adjusted basis, the investor adds any improvements made and deducts depreciation expenses taken. ($200,000 initial cost + $100,000 improvements - $50,000 depreciation = $250,000 adjusted basis).

Income from interest, stock dividends, and royalties is

portfolio income.

An investment syndicate is to be set up to allow all members to share equally in the managerial decisions, profits, and losses involved in the venture. Which of the following is the business structure BEST suited to these investors?

A general partnership

What are the three factors that determine cash flow?

Amount of rent received, operating expenses and method of debt repayment

Which of the following is similar to a mutual fund?

An equity REIT

An investor decides to liquidate property previously acquired through a 1031 exchange. If she is not acquiring replacement property in this transaction, which statement regarding capital gains taxes would be TRUE?

Capital gains taxes are due on the total capital gain accumulated since the purchase of the initial property.

Arnold has watched television commercials promoting the use of pyramiding as a real estate investment technique. If Arnold wants to try this approach, which action would he take?

Contact his bank to arrange a refinance of one of his investment properties, thereby obtaining cash to buy another rental house

What is the BEST way for an investor to get the maximum return on an initial investment?

Making a small down payment, paying low interest rates, and spreading mortgage payments over a long period of time

Stan wants to invest in real property. Rather than be a sole owner, Stan would prefer to pool his resources with other people to own and develop a small office building. He would prefer not to take part in the day-to-day responsibilities of the organization. What type of business venture would best fit his goals?

The answer is a limited partnership real estate investment syndicate. A real estate investment syndicate is a business venture in which a group of people pools its resources to own or develop a particular piece of property, or both. Under a limited partnership syndicate agreement, the general partner organizes, operates, and is responsible for the entire syndicate. The limited partners are passive investors with no voice in the organization and direction of the operation.

What is it called when an investor refinances existing holdings and uses the proceeds to buy more properties?

Pyramiding

When used for real estate investments, the form of ownership used by a syndication is usually

The answer is a partnership. Real estate investment syndicates usually are organized as general, limited, or limited liability partnerships.

Syndications often come under securities registration laws administered by the federal

Securities and Exchange Commission (SEC).

Taking advantage of which strategy reduces taxes to an investor in low-income housing?

Tax credits

Jennifer is an investor who purchased a single-family property for $200,000 for use as a rental property. She is now selling the property for $300,000. Jennifer remodeled the kitchen at a cost of $8,000 and replaced the roof for $10,000 before selling it. The improvements have depreciated by $20,000 while Jennifer owned the property. Jennifer will pay a commission of 7% and closing costs of $500. What is Jennifer's adjusted basis?

The answer is $198,000. The adjusted basis is equal to the original cost plus improvements minus depreciation. In this case, $200,0000 + $18,000 ‒ $20,000 = $198,000.

If investor A exchanges a building worth $200,000 for investor B's building worth $150,000, a car worth $20,000, and $30,000 in cash, investor A has a taxable boot of

The answer is $50,000. To qualify as a tax-deferred exchange, the properties involved must be of like kind. Any additional capital or personal property included with the transaction to even out the exchange is considered boot, and the party receiving it is taxed at the time of the exchange. In this example, the taxable boot is $50,000 ($20,000 car + $30,000 cash).

Jennifer is an investor who purchased a single-family property for $200,000 for use as a rental property. She is now selling the property for $300,000. Jennifer remodeled the kitchen at a cost of $8,000 and replaced the roof for $10,000 before selling it. The improvements have depreciated by $20,000 while Jennifer owned the property. Jennifer will pay a commission of 7% and closing costs of $500. What is Jennifer's total capital gain?

The answer is $80,500. The total capital gains is the sales price minus selling expenses (net sales price) minus adjusted basis. $300,000 ‒ $21,500 = $278,500. The net sales prices is $278,500. The adjusted basis is equal to the original cost plus improvements minus depreciation. In this case, $200,0000 + $18,000 ‒ $20,000 = $198,000. $278,500 - 198,000 = $80,500.

Clarice purchased raw land for $1,000 per acre. She pays $80 per acre for annual real estate taxes and has various expenses of about 8% per year. By how much per year must the land appreciate in order for Clarice to break even?

The answer is 16%. 8% × 1,000 = $80 + $80 = $160 divided by $1,000 = 16%.

Which of the following is a means of diversification into a real estate security while continuing to hold a real estate investment?

The answer is a seller takes back a mortgage on a house he sells to a buyer. If the seller decides to sell the home and, using seller financing, carries back a mortgage on the property, the real estate investment has been converted from dirt to paper, but it is still considered a real estate investment.

What is the definition of capital gain?

The difference between the adjusted basis of property and its net selling price

A parcel of property that increases in value because of its location in the center of an affluent and rapidly growing neighborhood is an example of

appreciation through intrinsic value.

The increase of money in circulation coupled with a rise in prices, resulting in a decline in the value of money, is called

inflation.

If a property has a yearly income of $100,000 and ownership expenses of $110,000, the property provides the investor $10,000 in

negative cash flow.