7 - 5 - Real Estate Flashcards Preview

FINRA 66 Chapter 1 > 7 - 5 - Real Estate > Flashcards

Flashcards in 7 - 5 - Real Estate Deck (25):

Can an Investment Advisory Firm, or Investment Advisory Representative, ever recommend Real Estate as a "Suitable" investment

Yes, in certain investment portfolios


What benefit does including real estate provide to the client's portfolio

Real Estate is a separate asset class.

Therefore, it provides diversification to the asset allocation of the portfolio


What is the correlation between Real Estate prices and securities instruments like stocks and bonds

Real Estate prices frequently move in the opposite direction and therefore can reduce the risk of an investment portfolio. (Hedge)


How to you make money on real estate investment

price appreciation

rental income


How does real estate provide leverage

Most mortgages only require 25% down payment.

This means the investor controls the whole property, and the equity that it holds, by only paying a fraction of the total value up front.


What are some forms of direct investments in real estate

Raw Land

Primary Residence

Basic Residential Properties


Explain Raw Land

Investing in undeveloped land is generally regarded as risky.


Why is Raw Land risky

It generates no income

The owner must make mortgage payments

The owner must pay property taxes

The owner must spend money to maintain the property

Raw land is not easy to liquidate

The Market Price may decline

There is no depreciation tax deduction on raw land


What is the upside to investing in Raw Land

The only upside is the potential long term capital gain if the property value increases


Explain Primary Residence

Primary Residences tend to be the largest asset the investor owns.


What is the benefit of Primary Residence Investments

Annual Income Tax Deductions such as interest paid on a mortgage

Exclusions from taxes on long term capital gains on the sale of a home ($250K for single and $500K for joint) if the owner lived in the home for 2 of the past 5 years.


What is the risk associated with Primary Residence

Generates no income

Home's market price can decline

The owner must make mortgage payments

The owner must pay property taxes

The owner must spend money to maintain the property

Home's are not easily liquidated. Real Estate Agent has to find someone who agrees to live in your specific home.


Explain Basic Residential Properties

Investors can buy a property and then rent it out to a tenant


What is the benefit of Basic Residential Properties

Generates monthly income from rent

Potential for long term appreciation should the owner decide to sell the property in the future.


What is the risk of Basic Residential Properties

The investor becomes a land lord and as such:

Is responsible for the mortgage

Is responsible for property taxes

Is responsible for maintaining the property

Market price of property may decline

Not very liquidate, can take time to sell.

Possibility of bad tenants or no tenants


How can investor divest of some of these risk

As the owner of the property you can never fully divest of your responsibilities since everything will ultimately effect you but you can hire a professional property manager to take care of handling mortgage, taxes, maintenance, rent collection, tenant relations, etc.


What are some forms of indirect investments in real estate

REITs (Real Estate Investment Trusts)


What is a REIT

A REIT, or Real Estate Investment Trust, is a publicly traded company that manages a portfolio of real-estate assets in an attempt to earn profits for its shareholders.


How do you buy into a REIT

REITs issue shares of common stock which trade in the market like any other common stock. You just buy the ticker


What does the REIT do with investor's money

The trust or corporation uses the investors money to buy and operate income generating properties such as malls, office buildings, residential buildings, etc.


What is the value of a REIT based on

It is base don the value of the underlying properties


Are REITs considered derivatives since they derive their value from the underlying properties


REITs represent direct equity ownership of the trust or corporation which itself directly own the real estate properties.

This is not a derivative play.


What are the requirements that REITs must satisfy in order to avoid double taxation

1 - Must distribute at least 90% of its profit in the for of dividends to shareholders annually.

2 - The REIT must have at least 75% of its assets invested in real estate, mortgage loans, shares of other REITs, cash, or government securities

3 - The REIT must derive at least 75% of its gross income from rents, mortgage interest, or gains from the sale of property

4 - The REIT must have at least 100 shareholders and less than 50% of the outstanding shares can be concentrated in the hands of 5 or fewer shareholders.


What are some benefits of REITs

Professional asset management

Diversification of real estate assets

Regular income from profits - high yields

Possible Share Appreciation

Limited Liability - Tenants can sue the property owner but not the investor.

Liquidity - This is the only real estate investment that is liquid. You can easily sell your common stock.