Chapter 17: Investing in Real Estate and Other Investment Alternatives

direct investment

direct investment

Investment in which the investor holds legal title to property.
Example: Your home, commercial properties

indirect investment

Investment in which a trustee holds legal title to property on behalf of the investors.

Example: REITs, 1st and 2nd mortgages

Advantages of real estate investments

• hedge against inflation

• Limited financial liability

• No management headaches

• Financial leverage

Disadvantages of real estate investments

• Liquidity

• Lack of diversity

• No tax shelters

• New tax law provisions

What home you can afford depends on your:

Income, credit rating, current monthly expenses, down payment, and interest rate

commercial property

Land and buildings that produce lease or rental income.

syndicate

A temporary association of individuals or firms organized to perform a specific task that requires a large amount of capital.

real estate investment trust (REIT)

A firm that pools investor funds and invests them in real estate or uses them to make construction or mortgage loans. (Similar to a mutual fund or a investment company on stock exchanges)

There are 3 types of REITs:

Equity REITs, mortgage REITs, and hybrid REITs.

Federal law requires REITs to

• Distribute at least 90% of their taxable annual earnings to shareholders

• Refrain from engaging in speculative short-term holding of real estate for quick profits

• Hire independent real estate professionals to carry out certain management activities

• Have at least 100 share holders

• Invest at 75% of the total assets in real estate

participation certificate (PC)

An equity investment in a pool of mortgages that a government agency has purchased.

collectibles

Rare coins, works of art, antiques, stamps, rare books, and other items that appeal to collectors and investors.

The following factors cause gold prices to fall

• deflation

• easing of international tension

• rising interest rates

the following are drawbacks to investing in precious metals

• Their eventual profit upon sale is subject to market forces.

• Precious metals do not bear current income.

the following are noted as factors that appeal to investors when investing in precious stones

• inflation hedge

• great durability

What metals besides gold serve as a hedge against inflation?

• silver

• palladium

• rhodium

• platinum