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Real Estate and Other Investments

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Title: Real Estate and Other Investments


1

LECTURE
Real Estate and Other Investment Alternatives
If you have the older (bigger, hardback) book,
this material is from chapter 17.
2
Real Estate Investments Types
  • ?Direct
  • As the investor, you hold the title to the
    property
  • Your home as an investment
  • A major asset of most households
  • Tax advantages
  • Possible hedge against inflation
  • A home produces an after-inflation return of
    about 2.5 percent a year (San Diego?)
  • But it is a home first, an investment second
  • In my humble opinion

3
Examples of Direct Real Estate Investments
  • Vacation home
  • Tax advantages depend on if the IRS views it as
    rental property
  • Rental property
  • Whole course unto itself! (More later)
  • 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
  • Plus there is no cash flow and you still have to
    pay the property taxes
  • And there is often no guarantee that you will be
    able to develop the land

4
Real Estate Investments Types
  • ?Indirect
  • Real estate syndicates or limited partnerships
  • Real Estate Investment Trusts
  • REITs are kinda like closed-end real estate
    mutual funds
  • Investing in first, second, etc. mortgages
  • Equity Sharing
  • You put up the down payment for someone else and
    then share in the appreciation

5
Investing in Commercial Property
  • Most common investment of this type is a duplex
    or small apartment building
  • Also includes hotels, office buildings, stores,
    and many other types of commercial establishments
  • Look for income to be greater than expenses
  • Duh! Good advice, guys!
  • But do not be surprised if you are looking at
    negative cash flow for several years
  • Rule of Thumb Price 7 to 10 times Rent
  • In San Diego? Ha! Ha! Ha! Ha! Ha!
  • Again, I think the South Bay is where the
    bargains are if you are so inclined

6
Investing in Fixer-Uppers
  • Concentrate on smaller properties first
  • Two to four units and live in one of them
  • Look for low down payments and seller financing
    of rundown properties
  • Banks usually do not want to loan to distressed
    properties, however
  • Banks are all too happy to finance a rundown
    foreclosure on their books
  • Stay away from property managers
  • Nobody cares about your property as much as you
    do (but there are always exceptions)

7
Investing in Fixer-Uppers
(continued)
  • Most Importantly,
  • Are you savvy dealing with repairs? and
  • Are you savvy dealing with renters?
  • Fixing a tenant is just as important as fixing a
    toilet
  • One bad tenant can set you back thousands
  • Make improvements that add perceived value
  • Example Install a white picket fence
  • Investing in Fixer-Uppers, Jay P. DeCima

8
Advantages of Real Estate Investments
  • A hedge against inflation
  • Financial leverage
  • The use of borrowed funds for investment purposes
    allows you to acquire a more expensive property
    than you could own on your own (More later)
  • For Real Estate Partnerships
  • Easy entry as a limited partner
  • Limited financial liability as a limited partner
  • No management concerns
  • You can not check the price of your real estate
    investments every day on the Internet
  • One of the major problems with stocks

9
Disadvantages of Real Estate Investments
  • Liquidity may be poor
  • It may be hard to sell the property (or your
    share of the property if a partnership)
  • Not a problem for REITs buy/sell like a stock
  • Declining property values
  • Yeah, Right, Paiano!
  • Yeah, Right, Paiano
  • Lack of diversification
  • Although REITs do offer diversification
  • Management or tenant problems

10
The Perfect Investment
  • Cmon, Paiano Admit it!
  • Real estate is the Perfect Investment
  • This is what people were telling me a few years
    ago
  • Beware the Permanent Trend (Andrew Tobias)
  • Real estate goes up and down in cycles
  • Ask those who bought in 1990 and sold in 1994
  • And those who bought in 2006 and are now in
    foreclosure
  • Real estate seems to be finally coming back
  • Although it is too soon to tell if this is true,
    if you plan to hold for the long-term, you should
    do well
  • By the way, there is no Perfect Investment
  • Folks were saying the same things back in 1999
    about Internet stocks

11
The Perfect Investment
(continued)
  • But what about Leverage?! Huh? What about the
    ability to make money with other peoples money?
  • I already told you about it, didnt I?
  • But isnt that what makes real estate such a
    great investment?
  • Well, yes. Let us look at the two problems in
    the older book that illustrate the power of
    leverage
  • Financial Planning Problems 1 2
  • Page 563 (from the old book)

12
Real Estate and Leverage
1. Calculating the Return on Investment. Dave
bought a rental property for 200,000 cash. One
year later, he sold it for 240,000. What was
the return on his 200,000 investment?
2. Calculating the Return on Investment using
Financial Leverage. Suppose Dave invested only
20,000 of his own money and borrowed 180,000
(90 financing). What was his return on
investment?
Page 563, Financial Planning Problems 1 2 from
our previous book
13
Real Estate and Leverage
(continued)
666. Calculating the Return on Investment using
Financial Leverage and things do not go as
planned. Suppose Dave invested only 20,000 of
his own money and borrowed 180,000 (90
financing) and the property value went down
20. What is he going to tell his wife?
Page ???, Financial Planning Problem that was
conveniently left out of the previous text book
14
Real Estate and IRAs
  • Yes, you can do it
  • Many people believe it is prohibited
  • But there are strict, complicated rules
  • Do not try to go it alone!
  • There are huge penalties if you break the rules
    (15 to 110)
  • Few knowledgeable regulated trustees advisors
  • Find a reputable, experienced trustee
  • Usually have high operating fees and expenses
  • Can not be your home or business
  • Nor your parents nor childrens
  • But it can be your brothers or sisters (?)

15
Real Estate and IRAs
(continued)
  • Must have sufficient cash in the account to
    perform necessary transactions
  • If not, you must either sell the property, or
  • Deposit more cash into the IRA
  • But if you go over the annual maximum
    contribution level, then you will be penalized 6
    per year on the amount over-deposited until there
    is sufficient cash in the IRA and you are able to
    withdraw the amount over-deposited
  • For this reason, often people pool their IRAs
  • Which is normally forbidden (?)
  • Again, seek a reputable, experienced trustee

16
Real Estate and IRAs
(continued)
  • The advantages can be dubious
  • Investment real estate often has many of the same
    advantages as an IRA without any the constraints
    of an IRA
  • Capital gains taxes are deferred until you sell
    the property which may not be until retirement
  • Income is usually negative or minimal for years
  • Real estate offers many tax deductions which you
    will not get if it is inside an IRA
  • And capital gains on real estate can currently be
    eliminated if you simply live in the property for
    two years before you sell it principal
    residence
  • 250,000 single / 500,000 married

17
Real Estate and IRAs
(continued)
  • Or the advantages can be compelling
  • If the real estate investment is in a Roth IRA,
    then any capital gains and rental income will be
    tax free in retirement
  • Plus you can not check the price of your real
    estate investments every day on the Internet

18
Real Estate and Capital Gains
  • Wait a minute. Did you say that there are no
    capital gains taxes on real estate?
  • Currently, as the law stands now, as long as the
    real estate is your primary residence for 2 out
    of the last 5 years, you pay no capital gains on
    the first
  • 250,000 if you are single
  • 500,000 if you are married
  • By the way, capital losses on your primary
    residence are not tax-deductible

The property must be your principal residence.
Be careful! If you own two or more properties
and frequent each regularly, the IRS can rule
that none of your properties is your principal
residence!
19
Investing in Precious Metals
  • Gold
  • Bouillon bars and wafers
  • Gold bouillon coins
  • Gold stocks
  • Exchange-Traded Mutual Funds (ETFs)
  • Silver
  • Platinum, palladium and rhodium

If you believe that the world economy is going
to fall apart anytime soon, put your money here!
if your reason for owning gold has something to
do with the end of the world as we know it,
shotguns and canned food probably would be more
practical investments. Tom Petruno, Los
Angeles Times
20
Growth of 1 Investment
1801 2011
21
Investing in Precious Gems
  • Precious stones
  • Diamonds
  • Sapphires
  • Rubies
  • Emeralds

Video. Sorry, Ladies
22
Investing in Collectibles
  • Includes rare coins, works of art, antiques,
    stamps, rare books, sports memorabilia, antique
    cars, rugs, Chinese ceramics, paintings and other
    items that appeal to collectors and investors
  • Can be both a good hobby and investment, or a
    financial disaster (Example El Cajon Barbie Guy)
  • Be careful of investment scams
  • Know the dealers reputation
  • Comparison shop

Dont buy art as an investment. Christopher
Burge, Christies Auctions
23
Metals, Collectibles Taxes
  • The maximum capital gains taxes on most all
    financial and real estate investments is
    currently 15
  • The capital gains taxes on precious metals, art,
    and collectibles is 28
  • Plus precious metals, art, collectibles are not
    allowed into an IRA (or any other tax-qualified
    plans)

Do ya think the Congress is trying to tell ya
something?
24
Speaking of Info-mercials
  • Have you seen the Robert Allen ads?
  • Start your real estate empire with No Money
    Down!
  • You, too, can take advantage of the tremendous
    opportunities now in the wide-open Real Estate
    Foreclosure Market!
  • Just take our Guaranteed, Sure-Fire Three-day
    Real Estate Investment Seminar for only 2,995
    that will pay for itself in just one month
  • You will be on your way toward Riches beyond
    your Wildest Dreams!

No comment.
25
Bottom Line(s?)
  • Buy a house and make it your home
  • It should reward you well over the long-term
  • Both personally and financially
  • Learn the ropes regarding being a landlord
  • Possibly working for a property manager
  • And do not overextend yourself with too many
    properties
  • Stay away from precious metals and gems, art, or
    collectibles as an investment
  • Unless you absolutely love it as a hobby first
  • Good Luck, by the way. You will need it
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