Advantages and Disadvantages of Investing in Real Estate Flashcards
What is Rate of Return?
The net gain or loss of an investment of over a specific period of time.
What is a property’s internal rate of return or IRR?
Its the percentage of interest you earn on each dollar you have invested into the property over the entire period owned.
When it comes to real estate, it is generally harder to have control over investments. T/F?
False. Investing in real estate is generally much easier to control than other type of investments like stocks and bonds.
What is Appreciation?
It refers to the increase in the value of property over time.
What is Equity Buildup?
Equity build up is the process of increasing equity by making monthly payments that include the principle, appreciation, and making a down payment
Equity can be realized before selling a home. T/F?
False. Equity can only be realized as cash when property is sold or refinanced.
What is Leverage?
Refers to the borrowed amount used to finance an investment in order to increase the potential return.
How can Leverage also be a bad thing?
The higher the leverage or the more loans you have, the riskier it will be for the lender and investor because if the value of the property drops, then the investor may not be able to pay or have a hard time paying on time.
What is Depreciation or Cost Recovery?
In appraisal, it is the loss of value in property due to any physical or functional damage. Opposite of Appreciation.
Is land considered in Depreciation?
No. Land is not considered a depreciating asset.
What is Tax Liability?
Tax Liability is the total amount of tax you are responsible for paying.
What is Property Cost or Basis?
Property Cost is the amount of money you spent on a property which includes all expenses towards improvements. Basis is then used to determine how much your profits will be taxed.
Its how much your property is worth to taxes.
How can you avoid Federal Tax on Capital Gain?
By Exchanging a property for one of the same value.
If I exchange a property for one of the same value, will i be taxed for the exchanged property right away?
No, the property gained from the exchange will only be taxed once it is sold.
What are the Advantages and Disadvantages of Real Estate?
Advantages:
- Rate of Return
- Tax Incentives
- Equity Buildup
- Appreciation
- Control
- Leverage
Disadvantages:
- Slow Liquidity
- High Risks and Costs
- Deprecation
- Active Management
