0 Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/McGraw-Hill.


Chapter 11Real Estate and Other Investments

What You’ll Learn Section 11.1

Explain the different types of real estate investments.

Discuss the advantages and disadvantages of real estate investments.

Section 11.2 Identify the different types of precious metal and

gem investments. Describe collectibles investments. Analyze the risks of investing in precious metals,

gems, and collectibles.


Collecting

Q: Are collectible action figures a smart investment for retirement?

A: Although collecting can be an enjoyable and sometimes profitable pursuit, collectibles are not a mainstay of retirement planning. It would be best if you focused your retirement planning efforts on building a diversified portfolio that may include stock and bond investments. You could still use collectibles as a small part of your portfolio, but their returns are very unpredictable.

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2Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/McGraw-Hill


Why do you think so many Americans invest in real estate?


Main IdeaReal estate investment opportunities vary widely. Consider the advantages and disadvantages of each type of investment opportunity.

Section 11.1 Real Estate Investment


Real Estate InvestmentsReal estate has always been a favorite investment for Americans.

Unlike stocks and bonds, a piece of property is something you can:

See Touch Take pride in

If you are new to the real estate market, you may be confused by all the different choices you have.




Direct Real Estate InvestmentsReal estate investments can be either direct or indirect. Direct investments include:

Single-family houses Duplexes Apartments Land Commercial property

direct investment

an investment in which the owner holds legal title to the property he or she has purchased



A Home as an Investment

Home ownership is most Americans’ largest financial asset.

Owning a home is a good investment because: Home prices have risen steadily over the

years. Most homeowners have mortgages,

which can provide certain tax benefits.

Second homes, or vacation homes, also provide tax benefits.



Commercial Property

Some examples of commercial property include: Duplexes Hotels Office buildings Stores

Many investors start by purchasing a small commercial property. Then they buy larger properties as the equity in their original investment increases.

commercial property

land and buildings that produce rental income



Land

While land investments often promise tremendous gains, they also pose enormous risks.

For example, you might not be able to sell your property at a profit, or even at the price you paid for it, if:

Construction in general slows. Business activity declines.

Unlike an apartment building, land in urban areas usually does not produce any income.



Indirect Real Estate InvestmentsIf you want to invest in real estate but do not have enough money to purchase property on your own, you might want to consider an indirect investment.

Indirect investments include: Real estate syndicates Real estate investment trusts High-risk mortgages Participation certificates

indirect investment

an investment in which a trustee is appointed to hold legal title to the property on behalf of an investor or group of investors



Real Estate Syndicates or Limited Partnerships

A real estate syndicate invests in real estate. A syndicate may be organized as:

A corporation A trust A limited partnership

A real estate syndicate offers you and the other partners a variety of benefits.

syndicate

a temporary association of individuals or business firms organized to perform a task that requires a large amount of funds



Participation CertificatesIf you are looking for a risk-free real estate investment, then participation certificates might be a good choice for youYou can buy participation certificates from these federal agencies:

Government National Mortgage Association (Ginnie Mae)

Federal Home Loan Mortgage Corporation (Freddie Mac)

Federal National Mortgage Association (Fannie Mae)

Student Loan Marketing Association (Sallie Mae)

participation certificate (PC)

an investment in a group of mortgages that have been purchased by a government agency



Real Estate Investment: Pros and ConsBefore you invest in real estate, you will want to weigh the advantages and disadvantages.



Advantages of Real Estate InvestmentsThe advantages of certain types of real estate investments include:

Hedge against inflation Easy entry into commercial property

ownership Limited financial responsibility Financial leverage

financial leverage

the use of borrowed funds for direct investment purposes



Disadvantages of Real Estate InvestmentsSome of the possible disadvantages to real estate investments include:

Illiquidity Declining property values Lack of diversification Lack of a tax shelter Management problems

Property management can be a full-time job, and many investors are not willing to take on that much responsibility.



Investment OptionsIf you decide that real estate investment is too risky or too complicated, you might consider other tangible investments, such as:

Gold and other precious metals Gems Collectibles

However, these investments can also be risky.


Do you think investments in precious metals, gems, or collectibles are risky or safe?


Main IdeaUnderstanding the risks and rewards of investing in precious metals, gems, and collectibles will help you build a sound, diversified portfolio.

Section 11.2 Precious Metals, Gems, and Collectibles



GoldMany people invest their money in precious metals as a hedge, or protection, against inflation.

The price of gold rises in times of: War Political unrest Inflation

As international tensions ease or the political situation stabilizes, the price of gold falls.

precious metals

valuable ores such as gold, platinum, and silver



Silver, Platinum, Palladium, and RhodiumOther precious metals that rise in value during times of political or economic trouble are:

Silver Platinum Palladium Rhodium

Remember that while stocks, bonds, and other interest-bearing investments are earning money for you, precious metals sit in vaults, earning nothing.



Precious GemsPrecious gems appeal to investors because of their:

Small size Ease of storage Great durability Potential as a protection against inflation

precious gems

rough mineral deposits (usually crystals) that are dug from the earth by miners and then cut and shaped into brilliant jewels


CROWN JEWELS Throughout history, precious gems have been associated with great royalty. Why do you think diamonds, rubies, and other precious stones fascinate people?



Risks of Investing in Precious GemsDespite the attraction of precious metals and gems, the investment risks are sizeable. These risks include:

You cannot easily convert diamonds and other precious gems into cash.

You may have difficulty determining whether the gems you are purchasing are of high quality.

The primary risk is the great fluctuation in prices of precious gems.



CollectiblesCollectibles are another type of investment. These items offer the knowledgeable collector or investor:

Pleasure An opportunity for profit

Many collectors have been surprised to discover that items they bought for their own enjoyment have increased greatly in value while they owned them.

collectibles

a type of investment that includes rare coins, works of art, antiques, stamps, rare books, comic books, sports memorabilia, rugs, ceramics, paintings, and other items that appeal to collectors and investors



Collectibles on the InternetThe Internet has made buying and selling collectibles efficient and convenient. As an online buyer or seller, you can easily:

Search for items to add to your collection. Comparison shop. Reach people all around the world.

Some drawbacks of online buying include: Being unable to examine objects for flaws

or trademarks The ever-present danger of fraud


Collectible GiftsSuggest to your family and friends that you make gifts for each other instead of buying them for special days and holidays. You will all save money, and your gifts may become family heirlooms.How much money do you think you could save each year by making gifts instead of buying them?

Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/McGraw-Hill



Let the Collector BewareA wise collector must always be alert for scams.

The safest way to steer clear of collectibles-related fraud is to:

Learn everything you can about the items you collect.

Buy and sell only with reputable dealers and auction Web sites.



Planning InvestmentsInvesting in collectibles may seem interesting, but it may not be the best way for you to achieve your financial goals.

When making investment choices, you should: Research the types of investments that

are available. Weigh the advantages and

disadvantages of each type of investment.

Ask yourself how much risk and responsibility you are willing to assume.



Key Term Review direct investment commercial property indirect investment syndicate participation certificate (PC) financial leverage precious metals precious gems collectibles



Reviewing Key Concepts1. Compare and contrast direct and indirect real estate investments.

The owner of a direct investment in real estate: Directly holds the legal title to the residential or commercial

property Is responsible for its maintenance and management

An indirect investment is similar to investing in mutual funds,

in that: A group of investors buys property. Legal title is held by a trustee.



Reviewing Key Concepts2. List two advantages and two disadvantages of real estate

investments.

Advantages of real estate investments include: Its use as a hedge against inflation The ease of entering the market Limited liability

Disadvantages of real estate investments include: Lack of liquidity and diversification Risk of declining property values Fewer tax incentives Potential management problems



Reviewing Key Concepts3. Describe precious metal and gem investments and why they

remain popular despite their speculative nature.

Precious gems appeal to investors because of their: Small size Ease of storage Great durability Potential as a protection against inflation



Reviewing Key Concepts4. Explain what is meant by the term collectible, and give some

examples of collectible items you or your family may own.

Collectibles are items that appeal to collectors and investors.Some examples of collectibles include:

Rare coins Works of art Antiques Stamps Rate books Comic books



Reviewing Key Concepts5. Explain why so many fraud complaints are related to online

auctions.

Fraud is an ever-present danger on the Internet because: You cannot assess a dealer face-to-face. You cannot examine the objects for flaws or

trademarks. Some online auction and exchange sites are less

reliable than others.


Newsclip: A Piece of ChildhoodAnimation art, hand-painted images from which cartoons used to

be made, is a popular collectible.

Log On Go to finance07.glencoe.com and open Chapter 11.

Learn more about the different types of alternative investments,

such as collectibles. Write a paragraph about the kinds of things

you like to collect. Could any of them be valuable?

0 Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/McGraw-Hill.

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Transcript of 0 Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/McGraw-Hill.