In December of 2014, Karen Jones bought 200 shares of Mex Inc. common stock for $10 per share.
The stock is selling for $18 per share.
Karen wants to invest the proceeds of the sale of the stock in an attractive emerging company because she believes that the stock is fully valued in the market.
Karen, who is in the 25% tax brackets, knows that if she sells the stock before the end of the year, she will have to pay taxes on the capital gain.
Karen would like to lock in her profit but defer the tax on it until 2017, so she plans to investigate the strategies available for doing this.
If the stock price drops below the current price, then recommend a strategy to Karen.
Juan Gonzalez, a single person working for Harla, Inc., will make $48,000 in 2015 and contribute $7,000 to the firm's 401(k) plan.
The Wilsons had no idea how income taxes might affect their investment decisions.
Their stock broker, Sid Nichols, advised them on their stock holdings.
Even though several of their holdings showed losses from their original purchase prices, they still experienced some nice capital gains.
A summary of their holdings was published on December 20.
Hal thinks it's a good time to revise their portfolio.
He would like to sell all their holdings and use the funds for growth oriented mutual funds and real estate investment trusts.
She is reluctant to sell everything, but she agrees that their portfolio could use some revision.
She is concerned that federal income taxes might take a large share of their profits.
She believes that Amalgamated Iron & Steel will make a significant recovery in the coming year.
Elaine Byer, a friend of the Wilsons, was a CPA for a major public accounting firm.
Byer couldn't tell the Wilsons which securities to buy or sell because she wasn't an expert in the investment field.
She didn't recommend selling everything in the 2016 tax year.
She said that Consolidated Power and Light, PYT Corporation, Amalgamated Iron & Steel, and Jones Building Supplies should be sold in December 2016 if the Wilsons wanted to do that.
Hal andTerri had two major concerns after Byer's advice.
They were worried about waiting to sell Cargon because it had shown such a large gain and they were worried that its price would decline in a stock market sell-off.
They were reluctant to sell Amalgamated Iron & Steel because they wanted to remain invested in the steel industry over the long run.
As a final step, they contacted their broker, who agreed with Byer's advice, and told him not to worry about the Cargon situation.
He would sell a deep-in-the-money call option on Cargon, which would allow them to deliver the shares sometime early in the new year.
They could use a tax swap to get the tax benefit of the loss on Amalgamated Iron & Steel while still being invested in the steel industry.
He thought United States Iron was a good swap candidate because it was selling for the same price as Amalgamated.
If the Wilsons sell all of their securities in 2016 at their current market values, they will have to pay federal income tax.
Discuss the tax swap.
You can see people hurrying to work in high-rise office buildings when you travel through the downtown area of a major city.
There is an article about the low vacancies for office space in the business section of the city's paper.
Buying an office building is not likely to be something you want to do, but you can purchase shares in a company like Mack-Cali to accomplish your goal.
Equity REITs invest in various types of real estate.
You should be able to: nearly $4 billion after studying this chapter.
A total of 281 office properties comprise 32.1 million square feet, and 13.8 million square feet of land for future development.
Explain how real estate investment objectives are, how the features of real estate are analyzed, and what health-care facilities, lodging, and a combination of several determines real estate value.
Discuss the techniques used for valuation.
CLI's 5-year average dividend yield was 5.6%.
Special tax real estate investment analysis is enjoyed by REITs.
The framework used to value a fully compliant real estate investment trust and avoid federal taxation at the prospective real estate investment needs to be demonstrated.
In this chapter, you will see that real estate is an important part of a diversified investment portfolio, whether the structure and investment appeal of real investment is made through a REIT or through direct purchase estate investment trusts.
Understand the investment characteristics of tangibles such as gold and other precious metals, gemstones, and collectibles, and review the suitability of investing in them.
The Pez containers are chosen by people who want to put their money in something that they can see and feel.
Real estate, gold, gemstones, and collectibles are attractive ways to invest in a portfolio.
The unique nature of real estate and other tan gible assets and the relatively inefficient markets in which they are traded are appealing.
In this chapter we look at the aspects of real estate investment and then look at the other classes of tangible assets.
Managerial decisions about real estate greatly affect the returns earned from investing in it, in addition to being a tangible asset.
Market forces and answers to such questions determine whether you will earn the desired return on your real estate investment.
The national real estate market was strong through the 1970s and 1980s.
The market was strong during prosperous times.
The time of high inflation was another factor in the pricing of real estate.
Increased demand for U.S. commercial and residential real estate from foreign investors helped fuel the market.
Commercial values in many cities fell up to 50% in the early 1990s as the real estate market declined.
The "oil patch" of Texas, Oklahoma, Louisiana, and Colorado were the last markets to recover from the real estate collapse.
By early 1998 the real estate market had returned to pre-1989 levels, after a resurgence in the mid 1990s.
Real estate values in most areas of the country increased as a result of growing demand, low unemployment, low interest rates, and a lack of available properties.
Values began to decline in 2006 as real estate growth flattened.
The causes were rising interest rates, high oil prices, and an excessive inventory of unsold properties.
Due in large part to declining housing values and expiring "teaser rates" on subprime mortgages, foreclosures throughout the United States increased from 2006 to 2010 as many homeowners were unable to keep pace with rising mortgage payments.
The decline in housing values was caused by the rate of foreclosures over this period.
Home prices were little changed from 2010 to 2012 after several years of decline.
The housing market began a sustained recovery in early 2012 and by the end of the year had climbed back to 80% of their peak values.
The last several decades have shown that real estate investments are just as risky as securities.
Real estate investors have the same considerations about risk and return as investors in stocks and bonds.
The first step in setting objectives is to consider the investment characteristics of real estate.
Investment constraints and goals should be established.
Selecting an investment property without considering whether it is the right one for you is like selecting an investment property without considering whether it is a good idea.
If you want an equity or debt position, you need to consider the available types of prop erties.
We discuss real estate investment from the standpoint of equity in this chapter.
Mortgages and deeds of trust are instruments of real estate debt that can be invested by individuals.
If the borrowers are required to maintain at least a 20% equity position in the mortgaged property, these instruments provide a fairly safe rate of return.
The real estate lender has an equity position that gives it a margin of safety.
There are two investment categories for real estate: income properties and speculative properties.
Income properties are subject to a number of risks.
Tenants carelessness, excessive supply of competing rental units, or poor management can result in losses.
Income properties can provide increasing rental incomes, appreciation in the value of the property, and possibly even some shelter from taxes.
Speculative properties give their owners a chance to make a lot of money but also carry a risk of heavy loss.
A new multimillion-dollar plant is going to be built on the edge of town.
Land buyers would enter the market and prices would go up.
The right buy-sell timing can produce returns of hundreds or even thousands of dollars.
The major part of a person's investment may be lost if they bought into the market late or failed to sell before the market turned.
If you want to invest in real estate, you need to determine the risks that various types of properties present and then decide which risks you can afford.
You need to set both financial and nonfinancial constraints when setting your real estate investment objectives.
The risk-return relationship you find acceptable is one financial con straint.
You should define a quantifiable financial objective and con sider how much money you want to allocate to the real estate portion of your portfolio.
We will show how constraints and goals can be applied to real estate investing later in the chapter.
You need to consider how your technical skills, temperament, repair skills, and managerial talents fit into a potential investment if you want to invest in real estate.
You shouldn't buy a property just for the money, just as you wouldn't choose a career just for the money.
The analytical framework suggested in this chapter can help you estimate the investment potential.
There are four important features of real estate investment.
Make sure you get both quantity and quality of property when buying real estate.
Failure to obtain a site survey, an accurate square-footage measurement of the buildings, or an inspection for building or site defects can cause problems.
When signing a contract to buy a property, make sure it accurately identifies the real estate and lists all items of personal property that you expect to receive, such as refrigerator and curtains.
What you buy when you buy real estate is a bundle of legal rights that fall under the concepts of law such as deed, titles, ease ments, liens, and encumbrances.
You should get a legal inspection from a qualified attorney when you invest in real estate.
Real estate sale and lease agreements should be done by professionals.
Real estate prices go up and down.
Sometimes market forces pull them up slowly but surely; in other times, prices can fall so fast that an investor can't breathe.
If you don't know what time period is relevant, you won't be able to judge whether a real estate investment will appreciate or depreciate.
The short-term investor might hope for a quick drop in interest rates and market expectations, whereas the long-term investor might look more closely at population growth potential.
The value of real estate is linked to what is happening around it.
An area of hundreds of square miles is the relevant market area for some properties.
Before you can analyze real estate demand and supply, you have to decide what spatial boundaries are important.
Value is the central concept in the analysis of a real estate investment.
To address these questions, you need to evaluate four major factors: demand, supply, the property, and the property transfer process.
Demand comes from a market area's economic base.
Buying power in most real estate markets comes from jobs.
When employment increases, property values go up, but when employers lay off workers, values go down.
The rising demand for real estate can be seen in the upward trends in these indicators.
Population characteristics affect demand.
If you want to analyze demand for a specific property, you should look at the area's demographic and psychographics.
If you compare demographic and psychographic trends to the features of a property, you can determine if it will gain or lose favor among potential buyers or tenants.
If an area's population is made up of a large number of sports minded, highly social 25- to 35-year-old singles, the presence of nearby or on-site health club facilities may be important to a property's success.
A key factor is mortgage financing.
Easy money can create an excess supply, just as tight money can choke off demand for real estate.
Real estate prices fell as inventories of unsold properties grew due to high interest rates and the unavailability of mortgages.
As mortgage interest rates fell, real estate sales and refinancing activity in many cities throughout the United States expanded.
Although interest rates continued to decline in the early 1990s, they did not encourage real estate activity because of poor economic conditions and an enormous supply of vacant space.
In the 1990s and early 2000s, a rapidly improving economy and decreasing property values drove up prices and returns.
Real estate markets were strong until early 2006 when a declining economy put the brakes on values.
It wasn't until early 2012 that new housing starts and real estate values began to increase again, despite interest rates remaining near historic lows.
Nobody wants to pay more for a property than the price he or she can pay your competitor; nor when you're buying or renting should you pay more than the prices asked for other, similar prop erties.
The investments are by price and features.
If you are trying to sell a house, you should look at other houses for sale in the same area.
The principle states that people don't buy or rent real estate per se, but rather judge properties on their benefits and costs.
Demand is created by people's needs being filled by properties.
Potential competitors are not just geographically similar.
In some markets, low-priced, single- family houses might compete with manufactured homes and rental apartments.
Before investing in any property, you should decide what market that property appeals to and then define its competitors as other properties that its buyers or tenants might choose.
The relative pros and cons of each property in terms of features and prices are what you should look for after identifying all relevant competitors.
New use for some types of property is a key ingredient in real estate.
To try to develop a property's competi investment real estate--housing tive edge, an investor should consider restrictions on use and location for business travelers.
State and local business travel, bridgestreet laws and private contracts limit the rights of property owners in today's highly regulated society.
The company's lease restrictions are derived from building and scuplture codes, as well as health site furnished apartments.
Private restrictions include deed, lease, and con property managers.
You should not invest in a property until you or your lawyer know what you want to do with it.
There is only one factor that affects value, and that is a growing leisure travel market.
Information is easy to find.
A novel is often needed to go in a target market.
Any residential or commercial market way that applies the principles of segment has a set of preferred places that its tenants or buyers will want to be close to.
The convenience includes transportation facilities.
Commercial properties need to be accessible to their customers.
The aesthetic, legal, and fiscal surroundings of real estate are more important than its natural surroundings.
Intrusion of noise, sight, and air pollution is not noticeable.
Property taxes are a coin.
They impose a cost, but also provide services that may be of benefit.
A property site's size is one of the most important features.
Some people prefer a large yard for a garden or children to play in, while others prefer no yard at all.
It is necessary for adequate parking space for commercial properties.
Make sure the site can accommodate a later addition of space, both physically and legally.
Quality of the site is reflected in soil fertility, elevation, and drainage.
Some sites may be subject to flooding.
In terms of square footage, building size is measured and expressed.
If you are considering investing in a property, you should get accurate square-footage measures.
Room count and floor plan are other measures of building size.
A well-designed 750-square-foot apartment unit might be more convenient to rent than a poorly designed 850 square feet apartment.
You should make sure that the floor plans are logical, that traffic flow through the building will not cause any problems, and that there is enough closet, cabinet, and other storage space.
In an office building, you should not have to cross through other offices to get to the only restroom facilities, and small merchants in a shopping center should be located where the pedestrian traffic comes from.
The attention should be given to amenities, style, and construction quality.
The value of investment property can be affected by amenities such as air conditioning, swimming pools, handicap accessibility, and eleva tors.
The architec tural style and quality of construction materials and workmanship are important factors.
In recent years, real estate owners and investors have realized that investment properties do not earn maximum cash flows by themselves.
Property management can help guide them toward that goal.
No real estate investment can produce maximum benefits without effective property man agement.
Today property management requires you or a hired manager to run the entire operation as well as perform day-to-day chores.
The property manager will segment buyers, improve a property's site and structure, keep tabs on competitors, and develop a marketing campaign.
The property manager is responsible for the maintenance and repair of buildings and their physical systems, as well as the keeping of revenue and expense records.
Property managers decide the best ways to protect properties against loss from perils such as fire, flood, theft, storms, and carelessness.
The manager has less control over the profit picture for speculative investments such as raw land.
The price of the affected company's stock adjusts to reflect its current potential for earnings or losses as soon as something good or bad happens.
Some people think securities markets are efficient, while others don't.
Most knowledgeable real estate investors know that real estate markets are not as efficient as capital markets.
Real estate analysis can help you beat the averages.
No comprehensive system exists for complete information exchange among buyers and sellers in real estate markets.
The New York Stock Exchange does not have a central marketplace where transactions are made by equally well-informed investors who share the same objectives.
promotion and negotiation can affect the cash flows of a property.
Unless you can reach the people you want to reach in a cost-effective way, you can't sell or rent a property quickly.
There are many ways to promote a property.
Negotiating price is equally important.
Seldom does the minimum price a seller is willing to accept just equal the maximum price a buyer is willing to pay.
The asking price for a property can be as high as 60% above the actual price that a seller will actually accept.
The final transaction price is determined by the negotiation skills of each party.
Give examples of residential and commercial income properties.
The following features should be considered when making a real estate investment.
The meaning of this concept is different in stocks and bonds.
Each property is unique, terms and conditions of a sale may vary widely, market information is imperfect, and properties may need substantial time for market exposure, time that may not be available to any given seller.
No one can tell what a property's true market value is because of all these factors.
Many properties sell for more than their market values.
Real estate investors forecast investment returns to evaluate potential property investments.
We first look at procedures for estimating the market value of a piece of real estate and then look at the role and procedures used to perform investment analysis.
The current market value of the property can be deterred using certain techniques.
You should be skeptical of the market value.
This estimate is subject to substantial error because of both tech nical and informational deficiencies.
Although you can arrive at the market values of frequently traded stocks simply by looking at current quotes, in real estate, appraisers and investors have to use complex, and imperfect, techniques and correlate the results to come up with the best estimate.
The cost approach is one of the three approaches to real estate market value.
The approach to estimating value works well for new buildings.
It is more difficult to apply the cost approach to older properties.
If you want to value older properties, you have to take the replacement cost estimates into account.
The cost approach is a good way to check against a price estimate, but should not be used exclusively.
The method is based on the idea that the value of a property is the same as the prices that other properties have recently sold for.
All properties are unique in some way.
The price that a subject property could be expected to bring must be adjusted upward or downward to reflect its superi ority.
The sales prices of compa rable homes may not indicate whether the sale was a stress sale in which the asking price was lowered by the owner in order to hurry the sale along.
The comparable sales approach is based on selling prices, not asking prices, so it can give a good feel for the market.
If you can find at least one sold property slightly better than the one you're looking at, and one slightly worse, their recent sales prices can be used to calculate an estimated market value for the property you have your eye on.
Direct capitalization is the most popular income approach.
This approach is represented by an equation.
It is similar to the zero-growth valuation model used to value common stock.
The market capitalization rate is the rate used to convert an income stream to a present value.
You can get an income property's estimated market value by dividing the annual net operating income by the market cap rate.
Table 18.1 shows an example of the income approach being applied.
Real estate valuations are complex and technical.
Reliable information about the features of comparable properties, their selling prices, and terms of financing is required.
In the example in Table 18.1, there are some subjective judgments involved.
Rather than relying solely on their own judgement, many investors hire a real estate agent or a professional real estate appraiser to advise them about the market value of a property.
As a form of insurance against overpaying, the use of an expert can be well worth the cost and is often required by the lender.
Real estate decision making involves estimates of market value.
This form of real estate valuation looks at more than just what prop erties have sold for.
It is an extension of the traditional valuation approaches that gives investors a better picture of whether a property is likely to satisfy their investment objectives.
The concept of market value is different from investment analysis in a number of ways.
Market value appraisals try to estimate the price a property will sell for by comparing recent sales of similar ties.
It can be reasonable under static market conditions.
Past sales prices may not be indicative of a property's current value or future value if interest rates, population, and buyer expectations are changing rapidly.
Factors such as economic base, population demographic and psychographics, cost of mortgage financing, and sources of competition are included in an investment analysis.
A market value estimate is the price a property will sell for under certain conditions.
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