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C HAPTER 17. Real Estate and Other Investment Alternatives. Personal Finance. 7e. Kapoor Dlabay Hughes. 17-1. Real Estate Investment Types. Direct. As the investor, you hold legal title to the property. Your home as an investment. A place to live.

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  1. CHAPTER17 Real Estate and Other Investment Alternatives Personal Finance 7e Kapoor Dlabay Hughes 17-1

  2. 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. 17-2

  3. Examples of Direct Real Estate Investments • Your primary home. • A vacation home. • Tax advantages depend on if the IRS views it as your second home or as a rental property. • If you don’t 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. 17-3

  4. Examples of Direct Real Estate Investments (continued) • Undeveloped land. • Can be tremendous gains but this type of investment poses enormous risks. All the money is riding on a single parcel of land. • Most buy with the idea of subdividing the land. 17-4

  5. Examples of Direct Real Estate Investments (continued) • Land and buildings that produce lease or rental income. • Commercial Property • Most common investment of this type is a duplex or small apartment building. It also includes hotels, office buildings, stores, and many other types of commercial establishments. • Will income be greater than expenses? • Tax deductions are limited to the amount of rental income you receive. • Passive activities and passive losses. 17-5

  6. Real Estate Investments Types • Indirect • Real estate syndicates. • A syndicate is a temporary association of individuals or firms organized to perform a specific task that takes a large amount of capital. Can be organized as a corporation or a limited partnership. • Provide professional management for its members, and if several properties are owned, provides diversification. 17-6

  7. Examples of Indirect Real Estate Investments • Real estate limited partnerships. • A limited partnership has a general partner who has unlimited liability and sells participation units to the limited partners. The partner’s liability is limited to the extent of their initial investment, such as $10,000. 17-7

  8. Examples of Indirect Real Estate Investments (continued) • 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 second mortgages. • Participation certificates. • A risk-proof real estate investment. • Equity investment in a pool of mortgages that have been purchased by one of several government agencies, such as Ginnie Mae and Freddie Mac. 1789

  9. For Sale Advantages of Real Estate Investments • A hedge against inflation. • Easy entry as a limited partner. , such as investing $5,000 to own part of an apartment building. • Limited financial liability. • No management concerns. • Financial leverage. • Use of borrowed funds for investment purposes, allows you to acquire a more expensive property than you could buy on your own. 17-9

  10. Disadvantages of Real Estate Investments • Illiquidity. • Declining property values. • Lack of diversification. • Lack of a tax shelter for real estate syndicates. • Long depreciation period. • Management problems. 17-10

  11. 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. 17-11

  12. Investing in Precious Metals (continued) • 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 economic upheavals. • Also see www.collectingchannel.com/cds. 17-12

  13. Investing in Precious Stones • Diamonds, sapphires, rubies, and emeralds can be a hedge against inflation. • Appeal to investors because of their small size, ease of concealment, and great durability. • Risks include.. • Not easily turned into cash. • Difficult to know if you are getting a good stone. • De Beer’s controls 85% of the world’s supply of rough diamonds. • Expect to buy at retail and sell at wholesale. 17-13

  14. Investing in Collectibles • Includes rare coins, works of art, antiques, stamps, rare books, sports memorabilia, rugs, Chinese ceramics, paintings and other items that appeal to collectors and investors. • Can be both a good investment and a hobby, or a financial disaster. • It’s “buyer beware.” Be careful of investment scams and forgeries. • Know dealer’s reputation and be wary of promises. Get a second opinion. • Use common sense, and also comparison shop. 17-14

  15. Collectibles on the Internet. • Easier to compare items. • Easier to find items. • Some sites help you value what you have such as Hallmark Christmas ornaments at www.ornament-shop.com. • The number of collectibles websites is growing very rapidly - eBay is the biggest auction site. • A disadvantage is that you can’t touch and feel the item and examine it for flaws. • There may also be some security risk since you don’t know who’s getting your cash or credit card. 17-15

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