Investments Flashcards
What characteristic would make real estate a riskier investment than government securities?
Environmental Risk
What do we call the idea that money available now is worth more than the same amount in the future, due to its potential earning capacity?
Time value of money
What is debt to equity ratio?
Loan to value ratio
(The ratio between borrowed funds (loan/debt) and the current value of the property)
How is financial leverage created?
By adding borrowed funds (debt) with equity
Interest, depreciation, repairs, long-distance travel, casualty, theft losses, and insurance are all examples of what?
Tax deductions for owners of rental property
What is debt service?
The principal and interest payments made on a debt over a period of time.
List four types of tax deductions available to owners of rental property that are not available to ordinary income.
- Depreciation
- Repairs
- Legal + Professional Services
- Employees + Independent Contractors
What is the section of the Internal Revenue Code that allows investors to sell rental property and buy replacement property without paying any capital gains tax?
1031 Exchange
Syndicates intending to make a profit for many people from the efforts of a few, must comply with the rules and regulations of whom?
Securities and Exchange Commission
What business forms can syndication take (4)?
- Limited Partnership
- General Partnership
- Corporation
- Real Estate Investment Trust (REIT)
A joint venture is set up for a limited purpose. Because of this, it makes it different than a general partnership due to what?
The implied authority of the members is more limited.
In a limited partnership, what is the liability difference between a general partner and a limited partner?
- Limited partners are liable only to the extent of their investment.
- General partners have unlimited liability.
When examining Real Estate Mortgage Investment Conduits (REMICs), paying a defined principal payment schedule at a single, constant prepayment speed refers to:
Target Amortization Classes
What does REMIC stand for?
Real Estate Mortgage Investment Conduits
Investors in Accrual Classes receive what?
No cash flow from the security until certain other classes are paid off.
What do Real Estate Investment Trusts allow smaller investors to do?
Pool their resources for quality investments with limited liability
What is the difference between an equity trust and a mortgage trust?
- Equity trusts buy and sell real property.
- Mortgage trusts buy and sell mortgage loans.
What type of trust gains profit from rental income, capital gains, mortgage interest, and placement fees?
Hybrid Trust
“Risk” in real estate investing:
Risk is the chance of experiencing a loss
Liquidity
Assets ability to be easily converted into cash through buying or selling without causing a significant movement in the price or losing value.
(Cash is the most liquid asset)
Illiquid
An asset that cannot be sold or converted into cash easily.
Leverage
Using a loan to finance the purchase of real estate or other assets.
*The higher the ratio of borrowed funds to equity, the greater the degree of leverage.
General Partnership
Active partner in the partnership with unlimited personal liability for the debts of the partnership.
Limited Partnership
Partnerships in which the partners have limited personal liability as opposed to the unlimited liability of a general partnership.
Corporations (Corps)
A legal entity that is separate and distinct from its owners.
Shareholders of a corporation have limited liability and do not participate directly in managing the corporation.
Limited Liability Companies (LLC)
Corporate structures that give its owners protection from personal liability without the regulations associated with corporations.
LLCs have operating agreements that are similar to corporate bylaws but do not have permanent existence.
Real Estate Mortgage Investment Conduit (REMIC)
Special tax vehicle for entities to pool mortgages and offer multiple classes of pass-through securities to investors.
