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Chapter 17

Real Estate andOther Investment

Alternatives

McGraw-Hill/Irwin Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

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Real Estate Investment Types

Direct. As the investor, you hold legal title to the

property.

Your home as an investment. A place to live.

A major asset of most households.

Shelter income from taxes if you have a large mortgage -interest is deductible.

Possible hedge against inflation.Be aware of possiblereal estate bubbles.

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Examples of DirectReal Estate Investments

Your primary home. A vacation home.

Tax advantages depend on if the IRS views it

asyour 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

because you want to use it.

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Undeveloped land. Can be tremendous gains but this type of

investment poses enormous risks. All themoney is riding on a single parcel of land.

Most people buy land with the idea ofsubdividing the land.

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Commercial property: land and buildingsthat produce lease or rental income.Examples are: Most common investment of this type is a

duplex or small apartment building. It alsoincludes hotels, office buildings, stores, andmany other types of commercialestablishments.

Will income be greater than expenses?

Tax deductions, such as depreciation andproperty taxes are limited to the amount ofrental income you receive.

Passive activities and passive losses.

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Real Estate Investments Types

Indirect Real estate syndicates.

A syndicate is a temporary association ofindividuals or firms organized to perform aspecific task that takes a large amount ofcapital. 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.

Losses from passive investments is not

allowed to offset income from other sources.

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Examples of IndirectReal Estate Investments

Real estate limited partnerships. A limited partnership has a general partner

who has unlimited liability and sellsparticipation units to the limited partners. Thepartners liability is limited to the extent of their

initial investment, such as $10,000.

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Examples of IndirectReal Estate Investments

Real estate investment trusts (REIT). REITs are similar to a mutual fund or investment

company and trade shares.

May buy properties and/or invest in first and secondmortgages.

Equity REITs own properties; mortgage REITs ownmortgages; hybrid REITS own both properties andmortgages

Participation certificates. A risk-proof real estate investment.

Equity investment in a pool of mortgages that havebeen purchased by one of several governmentagencies, such as Ginnie Mae and Freddie Mac.

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Advantages ofReal Estate Investments

A hedge against inflation. Easy entry as a limited partner, such as

investing $5,000 to own part of an apartmentbuilding.

Limited financial liabilitylimited partners.

No management concerns-REITs,mortgages.

Financial leverage. Use of borrowed funds for investment purposes,

allows you to acquire a more expensive propertythan you could buy on your own.

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Disadvantages ofReal Estate Investments

Illiquidity. Declining property values.

Lack of diversification.

Lack of a tax shelter for real estatesyndicates.

Long depreciation period. Management problemsdirect real

estate.

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Investing in Precious Metals

A hedge against inflation. A safe haven during political or economic

upheaval.

Need a storage place. 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.

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Investing in Precious Metals

Silver, platinum, palladium and rhodium. The last three are industrial catalysts,

particularly in automobile production.

Can be both a hedge against inflation and a

safe haven during political or economicupheavals.

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Investing in Precious Stones

Diamonds, sapphires, rubies, andemeralds can be a hedge against inflation. Appeal to investors because of their small size,

ease of concealment, inflation hedge, and

great durability. 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 roughdiamonds.

Expect to buy at retail and sell at wholesale.

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Investing in 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.

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Collectibles on the Internet

Easier to compare items.

Easier to find items.

The number of collectibles websites is

growing very rapidly - eBay is the biggestauction site.

A disadvantage is that you cant touch and

feel the item and examine it for flaws. There may also be some security risk since

you dont know whos getting your cash or

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Real Estate Activities

Go to www.vanguard.com and do someresearch on their REIT. How has thisinvestment performed in the past?

Bring in real estate ads from the localnewspaper. Find some prices onduplexes in your area. What kind of

rents would you need to charge tenantsin order to make money on propertieslike this?

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http://www.vanguard.com/http://www.vanguard.com/

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Collectibles

Students in the class can share theirexperiences with collectibles. Hascollecting been a good investment

experience for you, or is it more of ahobby?

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