Personal Finance - Chap 017

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McGraw-Hill/IrwinCopyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 17Learning Objectives

1. Identify types of real estate investments

2. Evaluate the advantages of real estate investments

3. Asses the disadvantages of real estate investments

4. Analyze the risks and rewards of investing inprecious metals, gems, and collectibles

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Investing in Real Estate

Objective 1: Identify types of real estateinvestments

Direct Real Estate Investments

As the investor, you hold legal title to the property

Yourhome as an investment A place to live

A major asset of most households

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Investing in Real Estate(continued)

Direct Real Estate Investments (continued)

Shelter income from taxes if you have a large

mortgage - interest is deductible

Possible hedge against inflation. Be aware ofpossible real estate bubbles

Housing prices have tumbled across the countrywith some of the hardest-hit metro areas beingTampa, Detroit, and San Diego

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Your vacation home

Tax advantages depend on if the IRS views it as

your second home or as a rental property

If you dont rent it more than 14 days a year you

can write off mortgage interest and property tax

Primary reason to own a vacation home is becauseyou want to use it


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Commercial property

Land and buildings that produce lease or rental

income

Most common investment of this type is aduplex or small apartment building. It also

includes hotels, office buildings, stores, andmany other types of commercial establishments

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Will income be greater than expenses?

Tax deductions, such as depreciation and

property taxes are limited to the amount of rentalincome you receive

Passive activities and passive losses

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Undeveloped land

Can be tremendous gains but this type ofinvestment poses enormous risks. All themoney is riding on a single parcel of land

Most people buy land with the idea ofsubdividing the land

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Indirect Real Estate Investments

Real estate syndicates or limitedpartnerships

A syndicate is a temporary association ofindividuals or firms organized to perform aspecific task that takes a large amount of capital.Can be organized as a corporation, trust, or

limited partnership Provide professional management and limited

liability for its members, and diversification, ifseveral properties are owned

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Limited partnerships

A limited partnership has a general partner who

has unlimited liability and sells participation units tothe limited partners. The partners liability is limited

to the extent of their initial investment, such as$5,000 or $10,000

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Real estate investment trusts (REIT)

REITs are similar to a mutual fund or investmentcompany and trade shares on stock exchanges orover the counter.

Equity REITs own and operate income-producingproperties; Mortgage REITs loan money or investin mortgages; Hybrid REITS own both propertiesand mortgages

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Investing in First and Second Mortgages

Participation certificates

A risk-proof real estate investment

Equity investment in a pool of mortgages thathave been purchased by one of severalgovernment agencies, such as Ginnie Mae andFreddie Mac

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Advantages ofReal Estate Investments

Objective 2: Evaluate the advantages of realestate investments

A possible hedge against inflation

Easy entry as a limited partner, such as investing$5,000 to own part of an apartment building

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Advantages ofReal Estate Investments

(continued)

Limited financial liability limited partners

No management concerns - REITs, mortgages

Financial leverage

Use of borrowed funds for investmentpurposes, allows you to acquire a moreexpensive property than you could buy on yourown

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Disadvantages ofReal Estate Investments

Objective 3: Asses the disadvantages of realestate investments

Illiquidity

Declining property values

Lack of diversification

Lack of a tax shelter for real estate syndicates Long depreciation period

Management problemsdirect real estate

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Investing in Precious Metals,Gems, and Collections

Objective 4: Analyze the risks and rewards ofinvesting in precious metals, gems, andcollectibles

A hedge against inflation

A safe haven during politicalor economic upheaval

Need a storage place

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Investing in Precious Metals,Gems, and Collections (continued)

Can be risky due to price variations Gold - lower interest rates often result in higher gold

prices

Bouillon - bars and wafers Gold bouillon coins Gold stocks Gold certificates

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Silver, platinum, palladium and rhodium

Silver prices have fluctuated from $24.25 an ouncein 1932, to over $50 an ounce in early 1980, and

then back to less than $18.49 an ounce in June2010.

The last three are industrial catalysts, used mostly

in automobile production Can be both a hedge against inflation and a safe

haven during political or economic upheavals

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Precious Stones

Precious stones like diamonds, sapphires,

rubies, and emeralds can be a hedge againstinflation

Appeal to investors because of their small size,ease of concealment, inflation hedge, and great

durability

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Risks include..

Not easily turned into cash

Difficult to know if you are getting a good stone

De Beers controls 85% of the worlds supply of

rough diamonds

Expect to buy at retail and sell at wholesale

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Collectibles

Includes rare coins, works of art, antiques,stamps, rare books, sports memorabilia, rugs,

Chinese ceramics, paintings and other itemsthat appeal to collectors and investors

Can be a good investment and a hobby, or afinancial disaster

Its buyer beware. Be careful of investment

scams and forgeries Know dealers reputation and be wary of

promises. Get a second opinion

Use common sense & comparison shop

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Collectibles on the Net

Easier to compare items

Easier to find items

The number of collectibles websites is growingvery rapidly - eBay is the biggest auction site

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Disadvantages of purchasing collectibles

over the internet.

You cant touch and feel the item and examine it

for flaws

There may also be some security risk since youdont know whos getting your cash or credit card

number

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Personal Finance - Chap 017

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