Question 1

Can an IA and/or an IAR recommend Real Estate as a suitable investment in certain investment portfolios?

Accepted Answer

Yes. An IA and/or an IAR may recommend Real Estate as a suitable investment in certain investment portfolios.

Question 2

Is real estate considered a separate asset class?

Accepted Answer

``` Yes. Real estate is a separate asset class and, therefore, does provide diversification in the asset allocation of a portfolio. ```

Question 3

How do real estate prices move in relation to the prices of financial assets, like stocks and bonds?

Accepted Answer

Real estate prices frequently move in the opposite direction from the prices of financial assets, such as stocks and bonds, and therefore can reduce the risk in an investment portfolio.

Question 4

How do real estate investors make money?

Accepted Answer

Real estate investors make money from price appreciation and rental income.

Question 5

How can real estate provide "leverage" to the investor with regard to conventional mortgages?

Accepted Answer

Real estate can provide “leverage” to the investor because most conventional mortgages only require 25% down. investor controls the whole property and equity that it holds by only paying a fraction of the total value upfront.

Question 6

Can investors invest in real estate directly or indirectly (through a fund)?

Accepted Answer

Yes. Investors CAN invest in real estate either directly or indirectly through a fund.

Question 7

What are 3 forms of direct investment in real estate?

Accepted Answer

a) . Raw land b) . Primary residence c) . Basic rental properties

Question 8

What is a raw land investment as a direct real estate investment?

Accepted Answer

Raw land — investing in undeveloped land is generally regarded as risky because There is NO income The owner must make the mortgage payments on the land. The owner must pay taxes and maintain the property. The market price may decline and it is an ILLIQUID investment (30 day escrow). Since depreciation does NOT apply to raw land, the depreciation tax deduction is NOT available. Bottom Line for investing in raw land — Note: The ONLY upside is the potential long-term capital gain IF the property value increases. That is the benefit of raw land.

Question 9

What is a primary residence as a direct real estate investment?

Accepted Answer

Primary residence — a home is frequently the largest asset an investor owns. In addition to being a home for the investor, this long-term investment can provide annual income tax deductions (e.g. the interest on mortgage payments) and exclusions from taxes on realized long-term capital gains on the sale of the home ($250,000 for single filers and $500,000 for joint filers) IF the owner has lived in the house for 2 of the last 5 years. BUT home prices can also decline and a home requires maintenance and is generally regarded as an illiquid asset.

Question 10

What are basic rental properties as a direct real estate investment?

Accepted Answer

Basic rental properties — An investor can buy a property and rent it out to a tenant. The property can, therefore, provide a monthly rental income, and possible long-term price appreciation. The investor, as landlord, is responsible for the mortgage payments, taxes, and the costs of maintaining the property, not to mention the problems of a potential bad tenant or no tenant. (The investor also can hire a property manager to handle these responsibilities of rental properties.)

Question 11

What is an indirect investment in real estate?

Accepted Answer

Real Estate Investment Trusts (REITs).

Question 12

What is a Real Estate Investment Trusts (REITs) ?

Accepted Answer

Real Estate Investment Trusts (REITs) are publicly traded companies that manage a portfolio of real-estate assets in an attempt to earn profits for their shareholders. (REITs issue shares of common stock. SO investors in a REIT would buy shares of common stock.) Here, a trust or corporation uses investors’ money to buy and operate income properties (e.g. malls, office buildings, etc.) Though the value of a REIT is always based on the underlying properties, shares of a REIT are NOT considered “derivatives” because REITs directly invest in real estate.

Question 13

REITs avoid double taxation on profits applicable to other corporations if they satisfy 4 conditions:

Accepted Answer

a). The REIT must distribute at least 90% of its profits in the form of dividends to its shareholders ANNUALLY. b). The REIT must have at least 75% of its assets invested in real estate, mortgage loans, shares of other REITs, cash or government securities. c). The REIT must derive at least 75% of its gross income from rents, mortgage interest, or gains from the sale of property. d). 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.

Question 14

REITS offer investors:

Accepted Answer

a). Professional asset management b). Diversification of real estate assets c). Regular income from profits & high yields d). Possible share appreciation e). Liquidity (the shares are traded on exchanges like stock) This is about the ONLY time an investor can be invested in real estate, and yet still have liquidity. When you buy into that REIT, you buy shares of common stock that can be sold at any time the market are open. Whereas, if you invest directly in real estate, you have to sell the real estate and generally have to go through at least a 30 day escrow period. f). Limited Liability

Question 15

Dividends paid to investors by REITs are generally taxed AT the individual’s

Accepted Answer

ordinary income tax rate. So, remember that this is different than a regular corporate dividend paid. If an investor receives regular dividend income from a corporation, it’s usually taxed as 15%. But if they receive dividend income from a REIT, it will be taxed at the individual’s ordinary income tax rate.

Ch 07(5) Inv Vehicle Characteristics | Investments in Real Estate Flashcards

Detail Investing in Real Estate.

Brainscape's Knowledge GenomeTM

Ch 07(5) Inv Vehicle Characteristics | Investments in Real Estate Flashcards

Detail Investing in Real Estate.

Brainscape's Knowledge Genome^TM