How to explain the different types of real estate investments
How to explain the different types of real estate investments
How to discuss the advantages and disadvantages of real estate investments
Main Idea Real Estate investment opportunities vary widely. Consider the advantages and disadvantages of each type of investment opportunity
Direct vs. Indirect
Two main types of real estate investments Direct Indirect
Direct vs. Indirect
Direct real estate – owner holds legal title Single family homes Vacation homes Duplexes Apartments Land Commercial property
Direct vs. Indirect
Indirect real estate – trustee holds legal title on behalf of investors Real Estate Syndicates or Limited Partnerships Real Estate Investment Trusts High risk mortgages Participation certificates
Single Family Homes
Home ownership is the largest financial asset of most people Homeowner’s equity is 30% of household wealth Equity, market value of home minus amount owned on loan Good investment Prices risen steadily Average rate of return after inflation is 2.5% - about the same as a bond Tax benefits mortgage interest and property taxes can be deductions
Vacation Homes
Provides tax benefits if it is used year round as a second home If rented out for more than 14 days a year, it is considered a rental property If considered rental property, tax deductions depend on how property was managed and size of their income
Commercial Property
Land and buildings that produce rental property
Apartments, duplexes, hotel, office buildings, and store
Most investors start out small Use equity from small business to invest in larger properties
Land
Do not produce any income unless rented May not grow in value If planning on parceling off, be certain that utilities are available
Real Estate Syndicates or Limited Partnerships
Syndicate
Limited partnership
Individuals or businesses organized to use large funds to buy real estate, commonly as a limited partnership General partner takes complete responsibility for all liabilities General partner sells units, or shares, to limited partners Limited partners are only liable for the amount they invested
Benefits
Can be diversified Professionally managed
Real Estate Investment Trusts
Similar to mutual funds but money invested in real estate, construction, mortgage loans Equity REIT – money invested in properties Mortgage REIT - money invested in construction loans and mortgages on developed properties Hybrid REIT – money combined to buy properties and mortgages REITS required to:
Distribute at least 90% of net annual earnings to shareholders Avoid risky, short-term real estate to make quick profits Hire independent real estate professionals to do certain management activities Have at least 100 shareholder, no more than half the shares owned by 5 or fewer people
High Risk Mortgages
Purchases mortgages of properties not legally clear or insurable Buy cheaper because they are not in demand May make a lot or lose everything
Participation Certificates
Risk-free real estate investment Investment in group of mortgages that have been purchased by a government agency Ginnie Mae, Freddie Mac, Fannie Mae, Sallie Mae Are as safe as US Savings bonds
Advantages of Real Estate Investments
Hedge against inflation
Easy entry
Indirect entry through syndicates
Limited financial liability
Historically it increase faster than or at least holds value against inflation
Only liable for money you invest
Financial leverage
Use borrowed funds to purchase more expensive properties Advantage if property values and incomes are rising
Disadvantages of Real Estate Investments
Illiquidity
Declining property values
Because of cost, hard to buy a lot of different types
Lack of a tax shelter
When interest rates fall or economy bad, value of real estate falls
Lack of diversification
Not easily converted to cash
Law changes in 1980’s changed how rental income was assessed
Management problems
Finding tenants, replacing/fixing things
Precious Metals, Gems, and Collectibles
Why do people invest in precious metals?
Precious metals – ores such as gold, platinum, and silver Invest as protection, or a hedge, against inflation Price of gold rises when people believe war, political unrest, or inflation is around the corner
What is one disadvantage of investing in a precious metal such as platinum?
Other precious metals that rise in value during time of political or economic trouble are silver, platinum, palladium, and rhodium Storage can be tricky Interest bearing investments earn money, precious metals earn nothing In order to make a profit selling metals you must be able to correctly predict the marker
What is one of the advantages of investing in precious gems?
Size Ease of storage Great durability Protection against inflation
Inflation during the 1970 caused more people to invest in gems and diamond prices increased 40 fold
Risks of investing in precious gems
Cannot easily convert into cash May have difficulty determining if gems are of good quality Political unrest can affect supply and demand You will like have to buy at high retail prices and sell at lower wholesale prices Greatest risk is fluctuation of prices from global, economic, financial and political factors
How do you know what you are getting?
Go to a certified geological lab Certificate will list
Stones characteristics Weight Color Clarity Quality of cut
Grading of gems not an exact science
5 C’s of a Diamond
Certification It is crucial when choosing a diamond to review the diamond certificate, referred to by diamond grading laboratories as a grading report. Carat Diamonds are always measured in carat weight. One carat is the equivalent of 1/5 of a gram. Additionally, there are "100" points in a carat, so that a . 50 "point" diamond would be described as a half-carat. Clarity Almost every diamond will contain some blemishes, and inclusions formed during the course of its crystallization. The diamonds clarity grade refers to the visual impact of these characteristics or lack thereof, as viewed under 10X loupe magnification. There is a grading structure (GIA clarity grading scale) used to describe inclusions found within the diamond. Color The "color" of a diamond refers to the presence or absence of inherent coloration in a white diamond. The whiter the diamond is the greater its value since a colorless diamond will allow increased light to pass through it and will consequently emit a greater amount of fire and brilliance. Cut Cut is the most misunderstood and underestimated "C" of the five "C's". Cut is properly referred to as the "make" or quality of the way the diamond has been crafted. "Cut", should never be confused with the "shape" of the diamond. The cut of the diamond is the only "C" that is entirely manipulated by the diamond cutter, and will determine the beauty and value of the diamond.
What are collectibles?
Rare coins, works of arts, antiques, stamps, rare books, comic books, sports memorabilia, rugs, ceramics, paintings Sometimes bought for own enjoyment but discover they are worth money
The Internet and collectibles
Advantages
Made more efficient and convenient Can reach sellers all over the world Use a bidding process and make more money Prices are not lower, but comparison shopping is easier Most sites do not charge a buyer’s commission
The Internet and collectibles
Disadvantages
Cannot assess dealer face-to-face Cannot assess product face-to-face Fraud is ever present Some online auctions are more reliable than others National Consumers League said that 76% of fraud complaints between January and June 2004 were related to online auctions
Collector Beware
76% of fraud complaints in 6 months in 2004 were related to online auctions Learn everything you can about items you collect Only buy and sell with reputable dealers and auction sites Do not offer interest or dividends Cannot sell at a good price on short notice May have to purchase insurance against damage and theft
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