1. Real Estate and Other Investments
Chapter 11

2. Section 11.1
How to explain the different types of real estate investments
How to discuss the advantages and disadvantages of real estate investments
Main Idea
Real Estate investment opportunities vary widely. Consider the advantages and disadvantages of each type of investment opportunity

3. Direct vs. Indirect Two main types of real estate investments Direct

4. Direct vs. Indirect Direct real estate – owner holds legal title
Single family homes
Vacation homes
Duplexes
Apartments
Land
Commercial property

5. Direct vs. Indirect
Indirect real estate – trustee holds legal title on behalf of investors
Real Estate Investment Group
Real Estate Investment Trusts
Real Estate Flipping

6. Single Family Homes
Homeowner’s equity - market value of home minus amount owned on loan
Good investment that appreciates over time
Average rate of return after inflation is 2.5% - about the same as a bond
Tax benefits
Mortgage interest and property taxes can be deductions

7. Vacation Homes
Provides tax benefits if it is used year round as a second home
Can rent out up to 14 days a year without having to claim rental income
If considered rental property, tax deductions depend on how property was managed and size of their income

8. Commercial Property Land and buildings that produce rental property
Apartments, duplexes, hotel, office buildings, and stores
Most investors start out small
Use equity from small businesses to invest in larger properties

9. Land Does not produce any income unless rented Farming Hunting
Solar or wind energy
Consider usage – zoning, available utilities, size and shape, flood zones, taxes

10. Real Estate Investment Group
Organization that builds or buys a group of properties and then sells them to investors as rental properties
Organizations finds tenants, handles maintenance and other responsibilities in exchange for a portion of the investors' monthly rent

11. Real Estate Investment Trusts
Investors pool money (like mutual funds)
Money invested in real estate, construction loans, or mortgage loans
Distribute at least 90% of net annual earnings to shareholders
Have at least 100 shareholders, no more than half the shares owned by 5 or fewer people

12. Real Estate Flipping
Own for a short time (3 or 4 months) and sell for profit after making improvements
Can be financially tough if house cannot be sold and mortgage cannot be paid, investor loses money

13. Advantages of Real Estate Investments
Inflation hedge – keeps up/stays above inflation
Appreciation – rise in value
Cash flow – financial security
Financial leverage – use equity to borrow against for more purchases
Tax benefits – exemptions/deductions
Control – make decisions

14. Disadvantages of Real Estate Investments
Illiquid - Not easily converted to cash
Declining property values – when market is bad, not worth as much
Lack of diversification – expensive to buy different types
Costly to buy, sell, and operate
Management problems/legal issues

15. Precious Metals, Gems, and Collectibles – Section 11.2
How to identify the different types of precious metal and gem investments
How to describe collectibles investments
How to analyze the risks of investing in precious metals, gems, and collectibles

16. Why Invest in Precious Metals?
Precious metals – gold, platinum, silver, and palladium
Hedge against inflation
Helps diversify a portfolio
Remains steady when stocks and bond are negatively affected by market
Price rises when people believe war, political unrest, or inflation is around the corner

17. Disadvantages to Precious Metals
Does not earn any interest or produce income
Cost of storage
May be difficult to access if in storage
Not liquid
High taxes on capital gain
Theft

18. Advantages of Investing in Precious Gems?
Ease of storage
Great durability
No decrease in demand
Increase in value
Not subject to price fluctuations like stocks
Hedge against inflation
Inflation during the 1970 caused more people to invest in gems and diamond prices increased 40 fold

19. Risks of Investing in Precious Gems
Cannot easily convert into cash
Need knowledge of gems
Theft
Low liquidity
Political unrest can affect supply and demand
Greatest risk is fluctuation of prices from global, economic, financial and political factors

20. How do you know what you are getting?
Go to a certified geological lab
Certificate will list
Stones characteristics
Weight
Color
Clarity
Quality of cut
Grading of gems not an exact science

21. 5 C’s of a Diamond Certification/Confidence
A certificate that gives the stone grading and characteristics.
Carat
Weight of a diamond which indicates size.
Clarity
Clarity is graded under 10X magnification where imperfections or lack there of are seen.
Color
The whiter the diamond is the greater its value since a colorless diamond will allow increased light to pass through it and will consequently emit a greater amount of fire and brilliance.
Cut
Shape and style of the diamond, including its proportions, symmetry, and finish or make. The cut of the diamond is the only "C" that is entirely dependent on man.

22. What are collectibles?
Any physical asset that appreciates in value over time because it is rare or it is desired by man
Price of the collectible peak very quickly or items such as antiques can take several decades before appreciating in value
Examples: Stamps, coins, fine art, sports cards, comic books, antiques

23. Where To Buy Flea markets Antique stores Collectible retailers
Auctions
Garage sales
Online
May get better prices online, however harder to assess condition and dealer

24. Advantages of Collectibles
Enjoyment or self-fulfillment
Fun to search for
Offers reasonable protection against inflation

25. Disadvantages of Collectibles
Not very liquid
Wear/tear
Storage issues
Produces no income or interest
True value can be difficult to determine
Fraud

26. Average Annual Return After…….
Asset
1 Year
5 Years
10 Years
20 Years
Stocks
2.6%
10.4%
15.5%
13.1%
Bonds
0.7%
9.9%
14.1%
10.2%
3 Month Treasury Bills
4.3%
5.6%
6.7%
8.3%
Diamonds
0.0%
1.4%
5.9%
7.9%
Housing
1.8%
2.9%
4.1%
6.3%
Gold
4.7%
1.3%
-0.2%
4.5%

27. What are blood diamonds?
Stones from an uncertain background, coming from African countries immersed in civil wars and sold by rebels and governments to fund their war campaigns
Accounted for an estimated 14% to 20% of diamonds sold in the 1990’s

28. Sierra Leone
Has vast mineral wealth - gold, bauxite (aluminum ore), timber, copper, and diamonds yet it is one of the poorest countries on earth
Bordered by Liberia and Guinea, it borders have been a popular route for smuggling raw materials, weapons, and – most – significantly – uncut diamonds
1991, former army corporal Foday Sankoh, led the Revolutionary United Front (RUF) from the jungles bordering Liberia and declared war on the government in a fight against corruption and poverty of his people
The revolution was backed by Liberian President Charles Taylor, and it was able to continue for more than 10 years
It became clear that the RUF’s political aims came second to their pursuit of mineral wealth as they battled the government for control of the diamond territories
RUF sold diamonds to unlicensed diamond traders and corrupt government officials, and the diamonds were never seen by official eyes