Real Estate and High-Risk Investments

Flashcards about Real Estate and High-Risk Investments

Real Estate

Property consisting of land, structures attached to the land, and accompanying rights and privileges.

Direct Ownership

The investor holds actual legal title to the property.

Depreciation

The decline in value of an asset over time due to normal wear and tear and obsolescence.

Price-to-rent ratio

The ratio of median residential real estate prices to the median annual rents that can be earned from the real estate.

Rental yield

A computation of how much income the investor might pocket from rent each year (before mortgage payments) as a percentage of the purchase price; divide the annual rent by 2 and then divide by the purchase price.

Cash flow (real estate context)

Amount of rental income you have left after paying all operating expenses.

Capital improvements

Costs incurred in making value-enhancing changes (beyond maintenance and repair) in real property.

Leverage (investments)

Using borrowed funds to make an investment with the goal of earning a rate of return in excess of the after-tax costs of borrowing.

Tax-free exchanges

Arises when a real estate investor trades equity in one property for equity in a similar property and no other forms of property or money change hands. Any capital gain is deferred.

Discounted cash-flow method

An effective way to estimate the purchase value or appropriate price of a real estate investment. It emphasizes after-tax cash flow and the return on the invested dollars discounted over time to reflect a discounted yield.

Business risk

Possible to lose money (in business).

Illiquidity

Can take time to sell; not a liquid investment.

Collectibles

Cultural artifacts that have value because of their beauty, age, scarcity, etc.

Derivative (or Derivative Security)

An instrument used by people to trade or manage more easily the asset upon which these instruments are based.

Options (investments)

Contract to buy or sell at a specified point in the future at a specified price.

Stock Option

Security that gives the holder the right to buy or sell a specific number of shares (normally 100) of a certain stock at a specified (striking) price before a specified expiration date.

Futures Contract

Type of exchange-traded standardized forward contract that specifies the size of the contract, quality of product to be delivered, and delivery date.

True or False: Speculative investments have the potential for significant fluctuations in return, sometimes over short time periods.

True

The estimated amount of cash flow an income-producing real estate investment will generate depends on

a) gross rental income

b) vacancies and unpaid rent

c) operating expenses

d) all of these

d) all of these

True or False: Most investors prefer to show a negative cash flow on a real estate investment.

False

True or False: A primary advantage of real estate investing is liquidity.

False

_____ would not be included in a list of speculative investments.

a) Gold

b) Rare coins

c) Treasury securities

d) Diamonds

c) Treasury securities