Garman/Forgue
Personal Finance
Ninth Edition
Chapter 16:
Real Estate and
High-Risk
Investments
PPT slide program prepared by
Amy Forgue and Ray Forgue.
Learning Objectives
1. Demonstrate how you can make
money investing in real estate.
2. Calculate the right price to pay real
estate investment and how to finance
your purchase.
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Learning Objectives
3. Assess the disadvantages of
investing in real estate.
4. Summarize the risks and challenges
of investing in collectibles, precious
metals, and gems.
5. Explain why options and futures are
high-risk investments.
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Making Money Investing in Real Estate
• Real Estate: property consisting of
land, structures attached to the land,
and accompanying rights and privileges
• Direct Ownership: actual legal title to a
property
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Making Money Investing in Real Estate
• Current income and capital gains
– Rental yield
• Current income results from positive
cash flow.
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Making Money Investing in Real Estate
• Price appreciation leads to capital
gains.
– Capital improvements
– Repairs
• Leverage can increase an investor’s
return.
– Loan-to-value ratio
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Making Money Investing in Real Estate
Beneficial tax treatments:
1. Depreciation Is tax deductible.
2. Interest Is tax deductible.
3. Rental income tax regulations on
vacation homes.
4. Capital gains are taxed at reduced rates.
5. Tax-free exchanges
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Pricing and Financing Real Estate
Investments
• Pay the right price.
– Discounted cash-flow method
• Financing a real estate investment
– Seller financing (or owner financing)
– Sweat equity property
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Disadvantages of Real Estate Investing
• Business risk
• Complexity
• Large initial investment
• Dealing with tenants
• Time-consuming management demands
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Disadvantages of Real Estate Investing
• Low current income
• Unpredictable costs
• Interest rate risk
• Legal fees
• Illiquidity
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Investing in Collectibles, Precious
Metals, and Gems
• Collectibles: cultural artifacts that have value
because of their beauty, age, scarcity, etc.
• Making a profit on collectibles is not easy.
• Buying and selling collectibles on the ‘Net:
easy and convenient, but not always safe!
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Investing in Collectibles, Precious
Metals, and Gems
• Gold and other metals
– Gold bullion, gold coins
– Gold stocks and mutual funds
– Silver, platinum, palladium, rhodium
• Precious stones and gems: diamonds,
sapphires, rubies, etc.
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Investing in Options and Future
Contracts
• Derivative (or Derivative Security)
• Options allow you to buy or sell an
asset at a predetermined price.
– Stock Option
– Expiration Date
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Investing in Options and Future
Contracts
• Options are created by an option writer.
– Option premium
– Option holder
– Call option
– Put option
• Conservative writers profit by selling
covered calls.
– Covered Option, Naked Option
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Investing in Options and Future
Contracts
• Conservative investors reduce risks by
purchasing covered puts.
• Speculative investors try to profit with
options.
• Speculative investors buy calls to create
tremendous leverage.
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Commodities Futures Contracts
• Futures Contract
• Economic need creates futures
markets.
• Speculators may trade in futures
markets.
• Futures are a zero-sum game.
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The Top 3 Financial Missteps In Real
Estate and Investing
People slip up in investing in real estate
and high risk investments when they do
the following:
1. Fail to factor in income lost due to
vacancies and collection costs for
tenants who do not pay.
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The Top 3 Financial Missteps In Real
Estate and Investing
2. Fail to set enough money aside for
maintenance, repairs, unanticipated
capital improvements, and rising real
estate taxes.
3. Assume that real estate prices will go
up and interest rates will not increase.
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Good Money Habits in Real Estate and
High-Risk Investments
• Consider the disadvantages before
investing in real estate.
• Invest only in real estate properties
that have a positive cash flow.
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Good Money Habits in Real Estate and
High-Risk Investments
•
Finance real estate investments with
conventional mortgages, not
mortgages with adjustable interest
terms.
•
Use the discounted cash-flow method
to help determine the right price to
pay.
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Good Money Habits in Real Estate and
High-Risk Investments
• If you put money into high-risk assets,
limit your investment to no more than 10
percent of your portfolio.
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