Real Estate and High Risk InvestmentsChapter 16 Personal Finance FIN 235
Learning Objectives 1. Demonstrate how you can make money investing in real estate. 2. Recognize how to take advantage of beneficial tax treatments in real estate investing 3. Calculate the right price to pay for real estate and how to finance your purchase. 4. Assess the disadvantages of investing in real estate. 5. Summarize the risks and challenges of investing in collectibles, precious metals, and gems. 6. Explain why options and futures are high-risk investments.
Making Money in Real Estate • Can you make current income while you own? • Importance of price-to-rent ratio • Computing the rental yield • B. Can you earn capital gains when you sell property? • C. How can leverageincrease the return on investment (ROI)?
Investopedia explains 'Price-to-Rent Ratio' • The price-to-rent ratio provides a comparison between owning and renting properties in certain cities. The ratio uses the average list price with average yearly rent on two-bedroom apartments, condos and townhomes that are listed on www.trulia.com, a real estate search website. The price-to-rent ratio is calculated by dividing the average list price by the average yearly rent price, as follows: Price-to-rent ratio = Average list price / (Average Rent * 12) • Trulia establishes thresholds for the ratios as follows: • Price-to-rent ratio of 1 to 15 = much better to buy than rent • Price-to-rent ratio of 16 to 20 = typically better the rent than buy • Price-to-rent ratio of 21 or more = much better to rent than buy For More Information: http://www.investopedia.com/terms/p/price-to-rent-ratio.asp#ixzz26lgMEMmT
Beneficial Tax Treatments • Depreciation is deductible(See Table 16-1) • Interest is [tax] deductible (See Table 16-2) • Capital gains are taxed at reduced rates. • Exchanges of properties can be tax-free. • Taxes can be lower on vacation home rental income.
Pricing and Financing • Pricing using the Discounted Cash Flow method • Financing the purchase • Pitfalls of Timeshare plans
Potential Disadvantages • Complex and time consuming. • Business, liquidity and interest rate risk. • High transaction and legal costs.
Collectibles, Precious Metals, Gems • Faddish & fickle markets • Profits difficult to time • Lower cost transactions on internet (eBay) • Gold and Silver • Volatile markets • High storage and transportation costs • Precious and Semi-Precious Gems • Problems similar to Gold • Problem with liquidity
Investing in Options and Futures • Options: Stock, Index, Commodity • Buying Options • Selling Options • Risks • Futures: Commodities, Financials, Currency • Zero-um Game (wealth is redistributed) • Long v-v Short positions • Hedging v-v Speculating • Assignments and Settlements
Homework • Do the Math: 1, 4 (a, b) • Be Your Own Personal Financial Planner • 1 – Foreclosure and short sales (no w/s) • 2 – Before investing in Real estate (no w/s)