Commodities, Bonds and Real Estate

What three things must be met to be considered a cash commodity?

It has to be in a basic, raw, unprocessed state. - Perishable commodities must have an adequate shelf life - The cash commodity's price must fluctuate enough to create uncertainty

What is the Pit?

Most exchange trading floors are divided into pits (or rings) where traders stand facing one another. These are more or less shallow octagonal areas with raised steps around the edge. Each pit is designated for trading one or more futures contracts

What are the main sources of commodities?

Agricultural Products and Natural Resources

What is the difference between a hedger and a speculator in the commodities market?

A speculator does not want to own the commodity and is only buying to make a profit. A hedger needs the product and wants a guaranteed price so they know their costs

What is a margin in a commodities contract?

Cash given as a guarantee of fulfillment of a futures contract - The required money you have to leave in during that whole contract

What percent do you usually have to pledge up front in a commodities contract?

5-15%

What is a bond?

It is a loan to the government or to a business

In which bond are the gains often tax-free?

Municipal Bonds

What is a Treasury Bill?

Paid within 52 weeks (one year) - sold for less than Par Value (face value) -no interest payments.

What is a Treasury Note?

Varying timelines from 2-10 years that pay interest every 6 months

What is a Treasury Bond?

20-30 year bond term with interest paid every 6 months

Why do corporate bonds often pay higher rates of return compared to government bonds?

It’s riskier and you might lose all the money you loaned them

What are low rated bonds called?

Junk bonds

What is income-producing real estate?

Receiving regular cash flow as a part of owning the property

What is non-income producing real estate?

No regular cash flow is received - hope is that the property will appreciate in value

What are the most common types of residential real estate?

Houses, townhomes, assisted living, and apartment/rental units

When deciding where and what type of residential real estate to buy, what major factors should you analyze?

Is the area growing in population (which increases demand) - demographics such as age, income, and education - accessibility to roads for shopping, events, and commuting - quality for schools, community, and crime rates - supply and demand - condition of the property

What is a lease option?

Rent the property with the option to buy, renter can maintain the property as if they are the owner

What is the recommended approach when investing in residential income-producing real estate?

Lease option

What are the most common types of agricultural real estate?

Farming (cash crop/livestock), orchards, nursery, timber, and rental property

What are the pros and cons of agricultural real estate?

Pros - tax break on property tax (don’t pay as much property tax %) and if you know your rental rates ($200-300/acre) it can make you a profit

Cons - commodities risk if you manage the property yourself

What are the most common types of leisure time real estate?

Waterfront property, land/cabin, seasonal/vacation rental property (Airbnb), and hotels/motels/resorts

What is a timeshare and how can you make money on it as an investment?

Own/use a property for a week each year (may include maintenance fees) - If you make the price higher than your monthly rent

What are the major factors to analyze when looking at lakeshore property?

Quality of the lake (depth and clarity) - size of the lake (acres) - fishing - supply & demand of an area - condition - crime rates

What is meant by the term “sweat equity” or “Flipping a house”?

Complete home improvements and sell for a profit by doing the work yourself - literally sweating to make a profit

What is commercial real estate?

Buildings for retail stores, restaurants, offices and malls

How are commercial real estate prices calculated?

$ amount per sq. foot of the building per year

When choosing a city or area for commercial real estate, what would you want to research before making the decision?

If the economic base of the area is growing - look for vacancy rates (covid changes and what’s available) - specific supply and demand - know the sq. foot lease rates

What is industrial real estate?

Manufacturing facilities and warehouses, similar research to commercial but rates are lower ($6-9/sq. foot)

How do industrial real estate rates compare to commercial rates and why?

They are lower because they don’t need it to look pretty and nice since all they are doing in that area is doing labor work

In all types of rental real estate, what is the key component to maximizing your profits?

Supply and demand

Which type of real estate typically holds its value better during a weak economy?

Waterfront Properties

What does the acronym REIT stand for?

Real Estate Investment Trusts

If you had to explain a REIT to someone, what would you tell them?

It is like a mutual fund, but you are actually an owner of the property

What are some of the common advantages of investing in real estate?

High potential profit - can enjoy the property and make money - additional income - tax deductions - no age requirement

What are some of the common disadvantages of investing in real estate?

Generally, need a lot of cash (20% or more on down payment) - maintenance, taxes and insurance - interest paid on loans - affected by the economy - not liquid - headaches of being a landlord

What is Par Value?

Face value

What is Laddering?

Spreading out the maturity dates to reduce risk

What is Bond Ratings?

A letter grade based upon the financial condition of the issuer

What is Coupon Rate?

the interest rate that you will receive

What is Bond Term?

The length of time in which you will receive your money back

What is Interest Rate Risk?

If interest rates rise, the value of the bond will decrease in value

What is Credit Risk?

If the credit rating of the issuer changes, the value of the bond could decrease

What is Call Risk?

Usually happens when interest rates fall so you would have to reinvest at a lower coupon(interest) rate

What is Inflation Risk?

If inflation increases and the cost of things increases, you will be locked in to the current coupon (interest) rate

What is Liquidity Risk?

Some bonds might be difficult to cash in early if there are concerns about the issuer or the coupon (interest) rate

What is Currency Risk?

If the value of a currency decreases in a foreign market, it could result in less value when the bond is paid