Real Estate Investment

Question 1

List the 3 types of Improved Land

Answer 1

1. Residential
2. Commercial
3. Industrial

Question 2

What are some bummers about Unimproved Land?

Answer 2

1. Lack of liquidity
2. High cost of selling
3. Interest cost is not deductible

Question 3

If you own a home through a mortgage loan, there is a tax deductibility of ___A___ and up to $___B___ of home equity debt.

Answer 3

a. Mortgage Interest
b. $100,000

Question 4

Up to $__A__ of the gain on the sale of a principle residence is excluded from taxation for single individuals, and up to $__B__ of the gain for joint filers.

Answer 4

a. $250,000
b. $500,000

Question 5

Interest on total mortgage amount (Home Ownership) up to $_____ is deductible

Answer 5

$1 Million

Question 6

To calculate after tax cost of Interest Payments (aka Effective Interest Rate use this equation)

Answer 6

Effective Interest Rate = Mortgage Rate x (1 - marginal tax bracket rate)

Question 7

If there is state income tax, what do you do with it concerning the Effective Interest Rate equation?

Answer 7

Add it to the income tax bracket

Question 8

What is the purchase price equation for someone who has a required rate of return?

Answer 8

Purchase Price = Net operating Income ÷ Required rate of return

Question 9

What is a Closed End Investment Company? (also give an example)

Answer 9

Company created with a fixed number of shares (e.g. REIT)

Question 10

True or False

REITs will receive exemption from capital gains taxes as long as they derive at least 90% from real estate and distribute 75% of income in cash dividends

Answer 10

False; exemption from Corporate Income Tax; 75% real estate and 90% of income in cash dividends

Question 11

List 3 benefits of REITs over traditional real estate investments

Answer 11

1.They are liquid
2. You can share in non-residential properties
3. No minimum investment

Question 12

True or False

REITs offer numerous tax benefits to shareholders, including reducing tax basis through dividends

Answer 12

True

Question 13

What’s the difference between Equity REITs and Mortgage REITs?

Answer 13

Equity REITs
- Apt buildings, malls, commercial buildings, etc.

Mortgage REITs
- Mortgages is owned, not the real estate
- Revenue is from interest on mortgages

Question 14

How do Real Estate Limited Partnerships work generally?

Answer 14

You can invest in real estate without having to buy and actively manage the property

Question 15

What is the difference between General Partners and Limited Partners in RELP?

Answer 15

GP - actively manage property; has liability

LP - limited liability; doesn’t manage property

Question 16

2 types of Limited Partnerships in RELP

Answer 16

1. Specified Partnership - property is identified to possible investors
2. Blind Pool - properties are not disclosed to investors

Question 17

True or False

Like REITs, RELPs are publicly traded

Answer 17

False; RELPs are generally not publicly traded

Question 18

What are REMICs?

Answer 18

Real Estate Mortgage Investment Conduits

consists of a fixed pool of mortgages broken apart and marketed to investors as individual securities

Question 19

In order to qualify as a REMIC, it must confine investments to these 5 things

Answer 19

1. Mortgages
2. Cash
3. Government securities
4. Foreclosure property acquired in connection with imminent default of a mortgage
5. Other REMICs

Question 20

Are REMICs publicly traded?

Answer 20

Not generally no