2. Objectives: To examine real estate.
To describe the various types of investments.
To understand the differences between each investment option.
To analyze which methods are best for different types of financial situations.

3. Main Menu
Investment Terms
Types of Real Estate

4. Investment Terms

5. Investment Terms Real estate Appreciation Depreciation
Direct investment
Indirect investment
Inflation
Mortgage broker
Equity
Liquidity
MBS
Participation certificates
Ginnie Mae
Freddie Mac
Fannie Mae
Sallie Mae
REIT
Limited partnerships

6. Real Estate
Is defined as a piece of land and any property attached to it
Can be referred to as an investment a person or business purchases by
buying it in full
using a mortgage
Can either
appreciate over time
depreciate over time
Mortgage: loan taken out to purchase real estate

7. Appreciation
Refers to when an investment becomes more valuable over time
Is usually the goal of investment
Can result in profit for an investor if they sell the investment after is has appreciated
Causes people to pay more taxes since the property value is increasing
taxes are a percentage of the value of the property, so as value increases, so do taxes

8. Appreciation Example
Sam buys a house in 1985 for $120,000 and pays three percent in property taxes. He keeps the house up to date with modern appliances, interior features and exterior features. In 2005, Sam decides to sell the house because it has appreciated by $60,000 and as the price increases, so do his taxes. Sam sells the house for $180,000 and ends up making a profit on his investment.
1985: $120,000 x .03 = $3,600 in taxes
2005: $180,000 x .03 = $5,400 in taxes

9. Depreciation Refers to when an investment loses value over time
Is an unfortunate risk taken on when investing
Saves people money in taxes each year since the value of the property is losing value

10. Depreciation Example 1999: $200,000 x .05 = $10,000 in taxes
In 1999, Jaclyn purchased a home on the beach in Florida for $200,000 with taxes of five percent. The hurricanes over the past few years have caused a lot of damage to the house and it depreciated to a value of $165,000. Because the value is lower now, Jaclyn pays less in taxes on the house.
1999: $200,000 x .05 = $10,000 in taxes
Current: $165,000 x .05 = $8,250 in taxes

11. Direct Investment
Occurs when a person or company purchases an entire piece of real estate
the investor owns the legal title to the asset
Occurs when someone takes out a loan or pays the entire purchase price of the real estate property up front
Asset: item of ownership

12. Direct Investment Example
Taylor buys a house and rents it out to three college students. Each student pays Taylor, the landlord, $350 each month to cover their portion of housing. Even though these students are making payments, the owner of the house is the landlord, Taylor, who made the direct investment to begin with.

13. Indirect Investments Require the use of a trustee
Allow people to invest without having to come up with the entire purchase price or take out a loan
Also include the purchase of stock
stock is partial ownership in a publicly traded company, making it an indirect investment
Trustee: someone who holds legal title of an asset

14. Inflation Causes a substantial increase in the price of real estate
Decreases the amount each dollar is worth
also called purchasing power
Means the value of a dollar does not stay constant
Is measured on a yearly percentage increase
Example: The inflation rate is three percent annually, and a house costs $150,000. In a year, the house will cost ($150,000 x 1.03) =$154,500, assuming the property does not appreciate or depreciate.

15. Mortgage Broker
Is someone who acts as an intermediary between an investor and a lender
Assists a person in taking out a loan for real estate purposes
Helps people come up with the best prices with the lowest interest rates
Interest rate: a percentage charged for borrowing money

16. Equity Is the cash value of a real estate property
Increases as the property appreciates over time
Decreases as the property depreciates over time
Is also referred to as assets or liabilities
the property value minus any expenses

17. Liquidity
Is the degree to which a piece of real estate can be bought or sold without changing price
Is usually characterized by high levels of trading or selling
Makes it easier for an investor to get his or her money out of the investment
Allows assets to be converted into cash quickly
the prices are relatively stable

18. Mortgage Backed Securities (MBS)
Are invested with the intent to loan money to a home buyer or business
Allow smaller banks to lend money to customers without having to worry about them having sufficient funds to repay the loan
Can be used to redirect the money received from loan payments to shareholders

19. Participation Certificates
Are equity instruments sold as various government securities
Consist of an individual purchasing part of the revenue generated by government leases
Contain virtually no risk
are insured by government agencies
Offer high yields

20. Government National Mortgage Association (Ginnie Mae)
Buys mortgages from local lenders, pools them together and sells them as $25,000 certificates to investors
Fully guarantees their securities by the U.S. government
Produces high returns on investments

21. Ginnie Mae Example
An investor purchases a Ginnie Mae certificate for $25,000. In return, the investor receives payments from the borrowers included in the certificate, along with money from the interest rates applied.

22. Federal Home Loan Mortgage Corporation (Freddie Mac)
Helps to keep money flowing to mortgage lenders
Supports home ownership and renting for middle-income Americans
Is used to back securities
Made of fixed rate mortgages
Timely payment of interest and ultimate payment of principal are guaranteed

23. Federal National Mortgage Association (Fannie Mae)
Was chartered by Congress to educate potential homeowners
Ensures mortgage funding is available to qualified homeowners across the United States
Strives to raise consumer awareness as well as the responsibilities of home ownership
Informs people about the various mortgage terms and what the best mortgage options are for them
Congress: elected representatives of the U.S. Government

24. Student Loan Marketing Association (Sallie Mae)
Is the nation’s leading provider of student loans
Allows students to wait until after they graduate before making payments
Student Loan: money borrowed by a student attending college requiring repayment with interest applied over the course of several years

25. Real Estate Investment Trust (REIT)
Allows investors to buy stock directly invested in real estate through
mortgages
property
Is the ownership of a large, diversified group of properties
Includes the following:
Equity REITS: invest in direct property ownership
Mortgage REITS: invest in mortgages only
Combinations or Hybrid REITS: invest in part equity and part mortgage

26. Limited Partnerships Include a general partner who:
selects the property
invites other people (limited partners) to invest in a portion of the property
takes a percentage of the money for organizing the partnership
is responsible for a majority of the liability if something happens
Include limited partners who:
do not take on very much responsibility
put forth money to invest
take on little or no liability

27. Investment Terms Assessment

28. Assessment Which of the following most accurately defines real estate?
Any property which is used as an investment tool
Any type of building which is not a primary residence
A piece of land and the property attached to it
A building in which a person or family lives
Which of the following refers to an investment losing value over time?
Inflation
Equity
Depreciation
Appreciation

29. Assessment Which type of investment requires the use of a trustee?
Direct
Indirect
Which of the following acts as an intermediary between an investor and a lender?
Mortgage broker
Trustee
Realtor
Appraiser

30. Assessment
The cash value of a real estate property is known as which of the following?
Inflation
Equity
Depreciation
Appreciation

31. Types of Real Estate

32. Types of Real Estate Vacation homes Raw land Housing
Commercial properties
Rental properties

33. Vacation Homes
Allow people to have real estate properties in a second location away from “home”
Should be rented 90 percent of the time by another party to be considered a sound investment
Eventually brings in a positive cash flow for the investor

34. Raw Land
Consists of a piece of land not containing any attachments, such as buildings
Usually produces no immediate income for the investor who purchased it
Is purchased with the hope the land will appreciate over time

35. Housing Is the most common type of real estate purchased
Is the largest personal expense of people in the United States
costs people more than transportation, food, medical care, clothing, etc.

36. Commercial Property Is real estate intended for businesses
office complexes, shopping malls, restaurants
Falls between residential and industrial property
Is based off of investment potential
determined by comparing expected income to cost
Should be invested in after looking at:
the location of the space
the potential growth of the area around the property
the amount of vacancy available for rent or purchase

37. Rental Properties
Allow people or companies to rent living or working space without having to purchase the unit
Include:
houses
duplexes
apartment complexes
commercial property

38. Rental Property Investment Example
Megan decides to purchase a ten-unit, six-year-old apartment complex being sold for $400,000. The units cost $475 to rent each month which means the complex brings in $4,750 a month in income and $57,000 a year in gross scheduled income assuming everyone pays on time and all units are filled. If there is a ten percent vacancy factor because of move-ins and move-outs, then $5,700 should be allocated. This makes the gross operating income $51,300.

39. Rental Property Investment Example
The gross operating income has to subtract all expenses as well, for example:
taxes ($5,000)
insurance ($1,200)
utilities ($600)
garbage ($200)
paint ($1,700)
carpet cleaning ($2,600)
Gross operating income ($51,300) - expenses ($11,300) = a net operating income of $40,000.

40. Types of Real Estate Assessment

41. Assessment
Which of the following is NOT a type of real estate discussed in the presentation?
Industrial property
Raw land
Rental property
Commercial property
Which of the following is the most common type of real estate purchased?
Vacation home
Housing

42. Assessment Which of the following is real estate for business use?
Industrial property
Raw land
Rental property
Commercial property
__________ allows people to live or conduct business in a space without purchasing it.

43. Assessment
Which type of real estate usually produces no immediate income for the purchaser?
Industrial property
Raw land
Rental property
Commercial property

44. Final Assessment

45. Assessment
__________ refers to when an investment becomes more valuable over time.
Inflation
Equity
Depreciation
Appreciation
Liquidity is the degree to which a piece of real estate property can be bought or sold without changing price.
True
False

46. Assessment
Direct investment is when the investor owns a partial title to an asset.
True
False
Depreciation costs people more and more taxes each year as their property loses value.
Indirect investment requires the use of a _________.
Limited partnership
Mortgage
Trustee
All of the above

47. Assessment
__________ offer(s) high yields and involve(s) virtually no risk.
Participation certificates
Real estate
Limited partnerships
Student loans
For a vacation home to be considered a sound investment, it should be rented by another party ___________.
At least four months each year
At least eight months each year
Seventy-five percent of the time
Ninety percent of the time

48. Assessment
Housing is the largest personal expense of people in the United States.
True
False
According to the presentation, how should you determine the value of commercial property?
By having the property appraised by a member of the Commercial Property Appraisers Association
By comparing the expected income to its cost
By asking your mortgage broker or lender
By considering the modifications it would require

49. Assessment
Which of the following is the nation’s leading provider of student loans?
Ginnie Mae
Freddie Mac
Fannie Mae
Sallie Mae

50. Sources ACT: Real Estate and Other Investment Alternatives

51. Acknowledgements Production Coordinators Amy Hogan Liz Weber
Brand Manager
Megan O’Quinn
Graphic Designer
Melody Rowell
Technical Writer
Jessica Odom
V.P. of Brand Management
Clayton Franklin
Executive Producer
Gordon W. Davis, Ph.D.
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