Business and Personal Finance Unit 3 Chapter 11

Chapter 11 Real 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 1

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. Go to finance 07. glencoe. com to complete the Standard & Poor’s Financial Focus activity. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 2 2

Section 11. 1 Real Estate Investment Main Idea Why do you think so many Americans invest in real estate? Real estate investment opportunities vary widely. Consider the advantages and disadvantages of each type of investment opportunity. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 3 3

Section 11. 1 Real Estate Investments Real 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 4

Section 11. 1 Real Estate Investment direct investment an investment in which the owner holds legal title to the property he or she has purchased Direct Real Estate Investments Real estate investments can be either direct or indirect. Direct investments include: § Single-family houses § Duplexes § Apartments § Land § Commercial property Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 5

Section 11. 1 Real Estate Investment 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 6

Section 11. 1 Real Estate Investment commercial property land buildings that produce rental income 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 7

Section 11. 1 Real Estate Investment 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 8

Section 11. 1 Real Estate Investment 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 Indirect Real Estate Investments If 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 Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 9

Section 11. 1 Real Estate Investment syndicate a temporary association of individuals or business firms organized to perform a task that requires a large amount of funds 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 10

Section 11. 1 Real Estate Investment participation certificate (PC) an investment in a group of mortgages that have been purchased by a government agency Participation Certificates If you are looking for a risk-free real estate investment, then participation certificates might be a good choice for you You 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) Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 11

Section 11. 1 Real Estate Investment: Pros and Cons Before you invest in real estate, you will want to weigh the advantages and disadvantages. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 12

Section 11. 1 Real Estate Investment financial leverage the use of borrowed funds for direct investment purposes Advantages of Real Estate Investments The advantages of certain types of real estate investments include: § Hedge against inflation § Easy entry into commercial property ownership § Limited financial responsibility § Financial leverage Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 13

Section 11. 1 Real Estate Investment Disadvantages of Real Estate Investments Some 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 14

Section 11. 1 Real Estate Investment Options If 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 15

Section 11. 2 Precious Metals, Gems, and Collectibles Main Idea Do you think investments in precious metals, gems, or collectibles are risky or safe? Understanding the risks and rewards of investing in precious metals, gems, and collectibles will help you build a sound, diversified portfolio. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 16 16

Section 11. 2 Precious Metals, Gems, and Collectibles precious metals valuable ores such as gold, platinum, and silver Gold Many 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 17

Section 11. 2 Precious Metals, Gems, and Collectibles Silver, Platinum, Palladium, and Rhodium Other 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 18

Section 11. 2 Precious Metals, Gems, and Collectibles precious gems rough mineral deposits (usually crystals) that are dug from the earth by miners and then cut and shaped into brilliant jewels Precious Gems Precious gems appeal to investors because of their: § Small size § Ease of storage § Great durability § Potential as a protection against inflation Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 19

CROWN JEWELS Throughout history, precious gems have been associated with great royalty. Why do you think diamonds, rubies, and other precious stones fascinate people? Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 20

Section 11. 2 Precious Metals, Gems, and Collectibles Risks of Investing in Precious Gems Despite 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 21

Section 11. 2 Precious Metals, Gems, and Collectibles 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 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 22

Section 11. 2 Precious Metals, Gems, and Collectibles on the Internet The 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 Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 23

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Collectible Gifts Suggest 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/Mc. Graw-Hill 25 25

Section 11. 2 Precious Metals, Gems, and Collectibles Let the Collector Beware A wise collector must always be alert for scams. The safest way to steer clear of collectiblesrelated fraud is to: § Learn everything you can about the items you collect. § Buy and sell only with reputable dealers and auction Web sites. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 26

Section 11. 2 Precious Metals, Gems, and Collectibles Planning Investments Investing 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 27

Chapter 11 Real Estate and Other Investments Key Term Review § § § § § direct investment commercial property indirect investment syndicate participation certificate (PC) financial leverage precious metals precious gems collectibles Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 28

Chapter 11 Real Estate and Other Investments Reviewing Key Concepts 1. 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 29

Chapter 11 Real Estate and Other Investments Reviewing Key Concepts 2. 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 Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 30

Chapter 11 Real Estate and Other Investments Reviewing Key Concepts 3. 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 Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 31

Chapter 11 Real Estate and Other Investments Reviewing Key Concepts 4. 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 Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 32

Chapter 11 Real Estate and Other Investments Reviewing Key Concepts 5. 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. Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 33

Newsclip: A Piece of Childhood Animation art, hand-painted images from which cartoons used to be made, is a popular collectible. Log On Go to finance 07. 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? Business and Personal Finance Unit 3 Chapter 11 © 2007 Glencoe/Mc. Graw-Hill 34