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Prin II > RE Investments > Flashcards

RE Investments Flashcards

1
Q

RE Investments are different from others because….

A

Real estate investments are different from stock market investments because the control remains in the hands of the investor. The investor makes his or her own decisions that affect the future of the investment and can also structure purchases and sales according to his or her particular needs.

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2
Q

What do we call the idea that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity?

A

Time Value of Money

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3
Q

List three other risk factors an investor must consider besides financial risk.

A

Business risk
Inflation risk
Management risk

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4
Q

What is liquidity?

A

A term that refers to an asset’s ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value.

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5
Q

How is financial leverage created?

A

Financial leverage is created by mixing borrowed funds with equity (the cash contributed by the investor).

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6
Q

How does an operating statement differ from a typical income statement?

A

Unlike at typical income statement which shows operating revenues when they are earned and operating expenses when they are incurred, a real estate operating statement usually presents cash inflows and outflows from operations and is broadened to include non-operating cash flows, such as those that come from debt service, income taxes, and capital expenditures.

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7
Q

What is debt service?

A

Debt service is the principal and interest payments made on a debt over a period of time.

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8
Q

List four types of tax deductions available to owners of rental property that are not available to ordinary income.

A

Depreciation
Repairs
Legal and Professional Services
Employees and Independent Contractors

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9
Q

What does a Section 1031 exchange allow investors to do?

A

Allows investors to sell rental property and buy replacement property without paying any capital gains tax

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10
Q

Define a syndicate and list its three cycles.

A

A syndicate is a descriptive term for a group of two or more people who combine their financial resources to achieve certain investment objectives.
A syndicate’s three cycles are organization, operation and liquidation.

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11
Q

What business forms can syndication take?

A

Limited Partnership
General Partnership
Corporation
Real Estate Investment Trust

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12
Q

How is a joint venture different from other forms of syndicates?

A

Joint ventures are partnerships for a single undertaking rather than a continuing business.

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13
Q

In a limited partnership, what is the liability difference between a general partner and a limited partner?

A

Limited partners are liable only to the extent of their investment.
General partners have unlimited liability.

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14
Q

What do Real Estate Investment Trusts allow smaller investors to do?

A

To pool their resources for quality investments with limited liability

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15
Q

What is the difference between an equity trust and a mortgage trust?

A

Equity trusts buy and sell real property.

Mortgage trusts buy and sell mortgage loans.

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16
Q

What is a hybrid trust?

A

A hybrid trust unites real estate equity investing with mortgage lending.

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17
Q

What is a Real Estate Mortgage Investment Conduit (REMIC)?

A

A REMIC is an investment-grade mortgage bond that separates mortgage pools into different maturity and risk classes.

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18
Q

An investor can realize profits from real estate in several ways:

A

Positive cash flow – any cash received from rents that is in excess of expenses
Tax benefits – real estate can both avoid and shelter income from taxation
Appreciation – property can increase in value and be realized at the time of sale or by borrowing on the equity

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19
Q

Investors can also lose money via:

A

Negative cash flow – when income does not exceed expenses, although often the tax benefits will minimize the effect.
Loss realized at the time the property is sold.

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20
Q

Three factors that investors need to consider are

A

risk, liquidity and leverage.

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21
Q

Risk

A

the chance of experiencing a loss. The loss can be either monetary or non-monetary. Often, the greater the risk of loss, the greater the potential rate of return on the investment.

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22
Q

Rate of Return

A

investors calculate a rate of return on the investment to see which investment will perform the best.

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23
Q

Time Value of Money

A

based on the idea that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

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24
Q

Business Risk

A

changes in economic conditions can have an effect on some properties more than others depending on the property type, its location and existing leases

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25
Q

Liquidity Risk

A

This risk occurs when the real estate market is slow with not many buyers, sellers or transactions.

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26
Q

Inflation Risk

A

Unexpected inflation can diminish an investor’s rate of return if the income from the investment does not increase enough to make up for the effect of the inflation.

27
Q

Management Risk

A

This risk is based on the capacity of the manager and his or her ability to innovate, respond to competitive situations, and operate the business activity competently.

28
Q

Interest Rate Risk

A

Changes in interest rates can affect the rate of return equity investors earn.

29
Q

Legislative Risk

A

Changes in regulations such as tax laws, rent control, zoning and other government restrictions can negatively affect an investment’s profitability.

30
Q

Environmental Risk

A

Changes in the environment or the sudden knowledge that an existing situation could pose health hazards can have an effect on the value of real estate.

31
Q

Liquidity

A

term that refers to an asset’s ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. Cash is the most liquid asset.

32
Q

Leverage

A

the use of borrowed funds to increase the potential return of an investment. Financial leverage is created by mixing borrowed funds with equity (the cash contributed by the investor). The higher the ratio of borrowed funds to equity, the greater the degree of leverage. When the rate of return exceeds the costs of borrowing, the leverage is said to be favorable or positive. If the cost of borrowing is greater than the return, then the leverage is unfavorable or negative.

33
Q

Favorable Leverage

A

Increases the yield on equity funds
Multiplies the tax deduction for depreciation expense by allowing the purchase of a more expensive property with the equity funds available
Amplifies the benefit from favorable tax rates that apply to capital gains

34
Q

debt to equity ratio

A

total liabilities divided by shareholders’ equity. In the real estate market, the ratio between borrowed funds and the market value of the property being financed is more commonly used.

35
Q

income producing property

A

one owned specifically for the investment rewards it offers. The rewards here could be any/all of the following: income, appreciation, leverage, and tax advantages.

36
Q

non income producing property

A

a residential property used as the investor’s primary residence where the reward comes in the form of appreciation

37
Q

Statistical Analysis

A

Should be done by every investor before considering an investment.

figures they look at are:

Timely
Accurate
Complete
Reflective of current market conditions

38
Q

Tax Advantages

A

Tax laws allow investors to take generous deductions from income to lower yearly taxes, to protect income from higher ordinary tax rates, and to defer tax on profits. These tax write-offs are not available to ordinary income.

39
Q

Ten Tax deductions for owners of rental properties

A 
Interest
Depreciation
Repairs
Local travel
Deduction of actual expenses
Long distance travel
Home office
Employees and independent contractors
Casualty and theft losses
Insurance
Legal and professional services
40
Q

Installment Sale Agreement

A

The IRS allows taxpayers to defer gains on major sales of property or other investments with an installment sale agreement

This arrangement allows sellers to declare a prorated share of their capital gains over several years, as long as they complete the proper paperwork during the year of the sale.

41
Q

Capital Gain

A

the profit realized after selling an asset. The maximum capital gains tax on rental real estate is lower than the maximum rate for ordinary income.

42
Q

Section 1031

A

of the Internal Revenue Code allows investors to sell rental property and buy replacement property without paying any capital gains tax.

43
Q

Real Estate Syndication

A

presents a chance to direct private savings into real estate investments for which other financing may not be available. It has been particularly popular in the financing of higher-priced properties. A typical real estate syndicate combines the money of individual investors with the management of the sponsor.

44
Q

The syndication has three cycles:

A

Organization – Planning, purchasing property, meeting registration and disclosure rules, and marketing.
Operation – Managing both the syndicate and the real property, usually done by the sponsor.
Liquidation – Reselling the property.

45
Q

Partnership

A

When two or more people become associated to carry on a business for profit

46
Q

General Partner

A

an active partner in the partnership who has unlimited personal liability for the debts of the partnership. General partners have equal rights to use partnership property for partnership purposes and cannot transfer their interests to another without the consent of the other partners.

47
Q

Termination of Partnership

A

may be terminated in any of the following ways.

Agreement
Bankruptcy of a partner or the partnership
Court order that results when a partner petitions the court for a dissolution of the partnership
Death of a general partner

48
Q

Joint Venture

A

partnerships for a single undertaking rather than a continuing business. Because the joint venture is set up for a limited purpose, the implied authority of the members is more limited than in general partnerships.

49
Q

Limited Partnerships

A

partnerships in which the limited partners have limited liability as opposed to the unlimited liability of a general partnership.

50
Q

Corporation

A

is a separate legal entity established under state law by the filing of articles of incorporation with the Secretary of State. Corporations can own property in the corporate name.

51
Q

Limited Liabilities Corporation LLC

A

provide the limited liability protection of corporations without the regulations associated with corporations. Limited liability companies have operating agreements that are similar to corporate bylaws, but unlike corporations, they do not have permanent existence.

52
Q

Real Estate Investment Trust REIT

A

allow smaller investors to pool their resources for quality investments with limited liability. Qualifying REITs have tax-free status.

53
Q

Three Types of Trusts

A

Equity, Mortgage, Hybrid

54
Q

Equity Trust

A

give small investors the opportunity to pool their money to participate as owners of larger and more efficient and profitable real estate investments. Equity trusts buy and sell real estate.

55
Q

Mortgage Trust

A

significate to mortgage lending, REMTS buy and sell mortgage loans and attract millions of dollars through the sale of beneficial shares. REMTs increase their financial bases with strong credit at their commercial banks and they give mortgage loans on commercial properties. Many of these properties are built especially for the investment portfolios of REITs

56
Q

Hybrid Trust

A

also known as combination trusts, unite real estate equity investing with mortgage lending. These trusts gain profits from rental income and capital gains as well as mortgage interest and placement fees.

57
Q

real estate mortgage investment conduit (REMIC)

A

Special tax vehicle that exists for entities that issue multiple classes in investor interest that are backed by mortgage pools. A REMIC is an investment-grade mortgage bond that separates mortgage pools into different maturity and risk classes.

58
Q

REMIC

Sequential Pay Classes (SEQ)

A

also called Plain Vanilla, Clean Pay, or Current Pay classes are the most basic classes within a REMIC structure.

59
Q

REMIC

Planned Amortization Classes (PACs)

A

designed to produce more stable cash flow by directing prepayments from the underlying mortgage-related collateral to other classes, called companion or support classes.

60
Q

REMIC

Targeted Amortization Classes (TACs)

A

pay a “targeted” principal payment schedule at a single, constant prepayment speed.

61
Q

REMIC

Support or Companion Classes

A

have the most volatile cash flow behavior. Prepayment variability from the underlying mortgage-related collateral cannot be eliminated; it can only be redistributed.

62
Q

REMIC

Investors in Accrual Classes (Z)

A

receive no cash flow from the security until certain other classes are paid off.

63
Q

REMIC

Interest Only and Principal Only Classes (IO/PO)

A

are complex securities that are extremely sensitive to interest rate changes because prevailing rates affect prepayments.

Prin II (13 decks)

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