7/31/2019 Personal Finance - Chap 017
1/23
McGraw-Hill/IrwinCopyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
17-1
7/31/2019 Personal Finance - Chap 017
2/23
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
17-2
7/31/2019 Personal Finance - Chap 017
3/23
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
17-3
7/31/2019 Personal Finance - Chap 017
4/23
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
17-4
7/31/2019 Personal Finance - Chap 017
5/23
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
Investing in Real Estate(continued)
17-5
7/31/2019 Personal Finance - Chap 017
6/23
Investing in Real Estate(continued)
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
17-6
7/31/2019 Personal Finance - Chap 017
7/23
Investing in Real Estate(continued)
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
17-7
7/31/2019 Personal Finance - Chap 017
8/23
Investing in Real Estate(continued)
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
17-8
7/31/2019 Personal Finance - Chap 017
9/23
Investing in Real Estate(continued)
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
17-9
7/31/2019 Personal Finance - Chap 017
10/23
Investing in Real Estate(continued)
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
17-10
7/31/2019 Personal Finance - Chap 017
11/23
Investing in Real Estate(continued)
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
17-11
7/31/2019 Personal Finance - Chap 017
12/23
Investing in Real Estate(continued)
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
17-12
7/31/2019 Personal Finance - Chap 017
13/23
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
17-13
7/31/2019 Personal Finance - Chap 017
14/23
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
17-14
7/31/2019 Personal Finance - Chap 017
15/23
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
17-15
7/31/2019 Personal Finance - Chap 017
16/23
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
17-16
7/31/2019 Personal Finance - Chap 017
17/23
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
17-17
7/31/2019 Personal Finance - Chap 017
18/23
Investing in Precious Metals,Gems, and Collections (continued)
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
17-18
7/31/2019 Personal Finance - Chap 017
19/23
Investing in Precious Metals,Gems, and Collections (continued)
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
17-19
7/31/2019 Personal Finance - Chap 017
20/23
Investing in Precious Metals,Gems, and Collections (continued)
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
17-20
7/31/2019 Personal Finance - Chap 017
21/23
Investing in Precious Metals,Gems, and Collections (continued)
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
17-21
7/31/2019 Personal Finance - Chap 017
22/23
Investing in Precious Metals,Gems, and Collections (continued)
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
17-22
7/31/2019 Personal Finance - Chap 017
23/23
Investing in Precious Metals,Gems, and Collections (continued)
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
17-23
Top Related