Chapter 16: Real Estate and High-Risk Investments Garman/Forgue Personal Finance Ninth Edition PPT...

Chapter 16:Real Estate and High-Risk Investments

Garman/Forgue

Personal FinanceNinth Edition

PPT slide program prepared by Amy Forgue and Ray Forgue.

Copyright ©Houghton Mifflin Company. All rights reserved. 16 - 2

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.


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.


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



• Current income and capital gains– Rental yield

• Current income results from positive cash flow.



• Price appreciation leads to capital gains.– Capital improvements– Repairs

• Leverage can increase an investor’s return.– Loan-to-value ratio



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


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


Disadvantages of Real Estate Investing

• Business risk

• Complexity

• Large initial investment

• Dealing with tenants

• Time-consuming management demands


Disadvantages of Real Estate Investing

• Low current income

• Unpredictable costs

• Interest rate risk

• Legal fees

• Illiquidity


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!


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.


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



• 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



• Conservative investors reduce risks by purchasing covered puts.

• Speculative investors try to profit with options.

• Speculative investors buy calls to create tremendous leverage.


Commodities Futures Contracts

• Futures Contract

• Economic need creates futures markets.

• Speculators may trade in futures markets.

• Futures are a zero-sum game.


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.


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.


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.



• 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.



• If you put money into high-risk assets, limit your investment to no more than 10 percent of your portfolio.

Chapter 16: Real Estate and High-Risk Investments Garman/Forgue Personal Finance Ninth Edition PPT...

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