Quiz 17: Investing in Real Estate and Other Investment Alternatives

In a direct real estate investment,the investor holds legal title to the property.

With an indirect real estate investment,the investors appoint a trustee to hold legal title on behalf of all the investors in the group.

Limited partnerships and syndicates are examples of direct real estate investment.

People primarily buy a vacation home for tax reasons according to one certified public accountant.

A real estate syndicate provides professional management and unlimited liability for its members.

Land purchased with the intent of subdividing it is speculative,because it involves many risks.

Indirect real estate investments include investing in real estate syndicates,REITs,and participation certificates.

Ginnie Maes are backed by the full faith and credit of the Federal Government.

A passive activity is a business or trade in which you do not materially participate.

Passive loss is the total amount of losses from a passive activity minus the total income from the passive activity.

Many investors buy land with the intention of subdividing it.

Real estate investment trusts are government-owned real estate companies.

A syndicate is a temporary association of individuals or firms organized to perform a specific task that requires a large amount of capital.

Real Estate Investment Trusts are required by federal law to have at least 500 shareholders.

Real Estate Investment Trusts must distribute at least 90 percent of their taxable annual earnings to shareholders.

The limited partnership is formed by a limited partner,who has unlimited liability for its debts.

A REIT is similar to a mutual fund or an investment company,and it trades on stock exchanges or over-the-counter.

There are three types of REITs: equity REITs,mortgage REITs,and hybrid REITs.

Federal law requires that no more than half the shares in a REIT may be owned by 15 or fewer people.

A participation certificate is an equity investment in a pool of mortgages or student loans that have been purchased by one of several government agencies.

First and second mortgages may potentially provide relatively high rates of return due to their special risk characteristics.

One needs at least $25,000 to indirectly invest in participation certificates.

Ginnie Maes and Freddie Macs are guaranteed by agencies closely tied to the federal government,making them as secure as U.S.Treasury bonds and notes.

If you want a risk-proof real estate investment,participation certificates are for you.

Direct real estate investments include single-family dwellings,duplexes,apartments,undeveloped land,and commercial property.

Housing will continue to be a not-so-liquid investment that promises steady returns over time.

Commercial property refers to land and buildings that produce lease or rental income.

Investment in land usually produces considerable cash flow.

A REIT is a firm that pools investor funds and invests them in real estate or uses them to make construction or mortgage loans.

A REIT must invest all of its assets in real estate according to federal law.

A REIT may engage in speculative,short-term holding of real estate to sell for quick profits.

General partners in a real estate limited partnership bear unlimited liability.

You can gain entry to a shopping center investment by investing $5,000 in a limited partnership.

If you are a limited partner,you are generally liable for losses beyond your initial investment.

Financial leverage is the use of borrowed funds for investment purposes.

A limited partner cannot take part in the management of the partnership.

Financial leverage is a disadvantage when property values and incomes are rising.

Financial leverage enables you to acquire a more expensive property than you could on your own.

The tax shelter aspect of real estate syndicates no longer exists due to the Tax Reform Act of 1986.

Perhaps the largest drawback of direct real estate investments is the absence of large,liquid,and relatively efficient markets for them.

The percent return on a real estate investment equals net profit divided by the amount invested.

Diversification in direct real estate investment is difficult because of the large size of most real estate projects.

It may take months to sell commercial property or limited partnership shares.

During deflationary or recessionary periods,the values of real estate investments generally increase.

REITs,Ginnie Maes,Freddie Macs,and other syndicates do not provide any diversification.

Gross profit on a real estate transaction equals the selling price minus the purchase price.

Today,real estate investors must use accelerated depreciation methods to recover the costs.

The tax laws prevent real estate investors from taking losses in excess of the actual amounts they invest.

Factors such as fear of war,political instability,and inflation cause gold prices to decline.

High interest rates depress gold prices,because they make it very expensive to carry gold as an investment.

You can avoid storage and assaying problems by investing in gold bullion coins.

Collecting for investment purposes is very similar to collecting as a hobby.

Collectibles may be difficult to sell at the right price on short notice.

Easing of international tensions or disinflation causes a decline in gold prices.

The price of gold is subject to daily fluctuations.

The basic unit of gold bullion is one troy ounce.

On small gold bars,gold dealers and banks add a five to eight percent premium over the pure gold bullion value.

Gold bullion poses storage problems.

The first gold bullion coin ever produced by the U.S.government was issued in 2001.

Most gold brokers require a minimum order of ten bullion coins and charge a commission of at least two percent.

You may invest in gold by purchasing the common stocks of gold mining companies.

Investments in silver,platinum,palladium,and rhodium are not used as a hedge against inflation.

Unlike stocks and bonds,precious metals sitting in vaults earn no income.

When you purchase precious stones,it is difficult to determine whether you are getting a good stone.

Collectibles include rare coins,works of art,antiques,stamps,rare books,paintings,and other items that appeal to collectors and investors.

Prices of collectibles aren't necessarily cheaper on the web,but it's much easier to compare them.

Most REITs specialize in one property type only.

Which one of the following is not required of a REIT by federal law? A)Distribute at least 90 percent of the taxable annual earnings to shareholders B)Hire independent real estate professionals to perform certain management activities C)Have at least 100 shareholders with no more than half of all shares owned by 5 or fewer people D)Make direct investments only in apartment houses, shopping malls, and other commercial property E)Invest at least 75 percent of the total assets in real estate

Real estate investments are classified as: A)participating or nonparticipating. B)common or preferred. C)cumulative or noncumulative. D)direct or indirect. E)conservative or risky.

An example of an indirect real estate investment is a: A)single family dwelling. B)duplex. C)apartment. D)undeveloped land. E)mortgage pool.

An example of a direct real estate investment is a: A)limited partnership. B)single-family dwelling. C)real estate syndicate. D)real estate investment trust. E)mortgage pool.

The median price of existing homes: A)has increased over the past 30 years, thereby acting as a hedge against inflation. B)has risen less than the Consumer Price Index. C)always increases in value. D)tends to be countercyclical, thereby acting as a hedge against the business cycle. E)remains constant over time.

If you have a vacation home,the after-tax cost of owning it since 1987 has: A)risen. B)remained unchanged. C)declined. D)equaled annual cost of living changes. E)equaled the annual inflation rate.

Aside from a home,the real property investment most widely favored by the small investor is: A)a post office building. B)land. C)a large apartment building with 100 or more apartments. D)a condominium. E)the duplex, fourplex, or small apartment building.

Which type of REIT invests directly in income-producing real estate? A)Compound B)Equity C)Mortgage D)Hybrid E)Simple

Which type of REIT pools money to invest in new shopping malls for the sole purpose of collecting rent? A)Mortgage B)Compound C)Hybrid D)Simple E)Equity

About 90% of REITs are _____ REITs. A)equity B)mortgage C)hybrid D)participation E)government

In what type of real estate investment do you assume the role of a mortgage or student loan lender receiving interest and principal by check each month? A)Real estate investment trusts B)Real estate limited partnerships C)Participation certificates D)Real estate syndicates E)Post office buildings

In what type of real estate investment does the investor not hold legal title to the property? A)Vacation homes B)Hotels C)Apartments D)Direct investment E)Indirect investment

An example of an indirect real estate investment is: A)a single-family home. B)a duplex. C)a real estate investment trust. D)undeveloped land. E)an apartment building.

REITs,Ginnie Maes,and Freddie Macs are examples of ____________ real estate investments. A)direct B)indirect C)low yield D)risky E)speculative

Jane Calvert owns a condominium at the beach which she rents out to vacationers.What type of investment does she hold? A)Direct investment in real estate B)Indirect investment in real estate C)Equity REIT D)Participation certificate E)Mortgage REIT

Owen Cartwright has joined a real estate syndicate that bought an office building in downtown Orlando,Florida.What type of investment does he hold? A)Direct investment in real estate B)Indirect investment in real estate C)Equity REIT D)Participation certificate E)Mortgage REIT

Which of the following is a true statement? A)Rental property expenses do not include mortgage interest. B)Many investors acquire large rental properties initially and then trade down to smaller units. C)Rental property expenses are not limited for tax purposes. D)Rental property expenses are treated as a passive loss once they exceed rental income. E)A passive activity is a business you materially participate in.

Stuart Michelson has invested in several pieces of real estate.Which one of the properties that Stuart owns would be considered commercial real estate? A)4 bedroom home that he does not rent out B)20 acre tract of farm land that is sitting idle C)Fourplex that he rents to college students D)100 acres of land in the mountains that he hopes to subdivide and sell as residential lots E)Vacation home.

Andrea Mitchell has joined a real estate syndicate.The syndicate she belongs to was formed by one individual who sold participation units to Andrea and several others.The individual who sold the participation units has unlimited liability and manages the property.Andrea and the others can only lose their initial investment.What type of real estate syndicate has Andrea joined? A)One organized as a corporation B)Limited partnership C)Trust D)REIT E)Real estate mutual fund

Jefferson Davis has invested in something that acts like a mutual fund and that invests in hospitals all over the country.He knows there are federal laws that require this type of investment to distribute at least 90 percent of the income to shareholders and that requires there be at least 100 shareholders.What type of investment has Jefferson made? A)Foreclosures B)REITs C)Limited partnerships D)Participation certificates E)Direct investment

Harrison Ford has invested in something that acts like a mutual fund and that derives income from interest on loans to real estate owners.He knows there are federal laws that require this type of investment to refrain from engaging in speculative,short-term holding of real estate to sell for quick profits.What type of investment has Harrison made? A)Limited partnership B)Equity REIT C)Mortgage REIT D)Hybrid REIT E)Participation certificate

David Harris has invested in something that acts like a mutual fund and that invests in both construction loans and real estate operating companies.This investment trades on the New York Stock Exchange.What type of investment has David made? A)Limited partnership B)Equity REIT C)Mortgage REIT D)Hybrid REIT E)Participation certificate

Hal Lindon has an equity investment in a pool of student loans that have been purchased by Sallie Mae.What type of investment is this? A)Limited partnership B)Equity REIT C)Mortgage REIT D)Hybrid REIT E)Participation certificate

Which of the following is an investment where a trustee holds legal title to the investment? A)Commercial property B)Undeveloped land C)Office buildings D)Duplexes E)Syndicates

Diane Chambers buys an apartment building for $2 million.Which one of the following demonstrates the highest degree of financial leverage? A)$500,000 down payment and mortgage of $1,500,000 B)$250,000 down payment and loan of $1,750,000 C)$150,000 down payment and loan of $1,850,000 D)$100,000 down payment and loan of $1,900,000 E)$1 million down payment and loan of $1 million

Real property equity investments are usually considered attractive during times of: A)deflation. B)disinflation. C)inflation. D)recession. E)unemployment.

One of the advantages of being a limited partner in a real estate investment venture is that you have ____________ liability for losses beyond your initial investment. A)no financial B)unlimited C)product D)limited E)implied

General partners in a real estate investment venture have liability for _____financial losses. A)none of the B)all of the C)some of the D)only exceptional E)implied

Which of the following is an advantage of investing in limited partnerships,REITs,mortgages,or participation certificates? A)a possible hedge against inflation. B)easy entry. C)no management concerns. D)financial leverage. E)All of these.

Real property equity investments ______ provide protection against purchasing power risk. A)usually B)always C)never D)without exception E)at no time in the past or future will

Real estate investments provide _____protection against inflation. A)consistent B)unusual C)exceptional D)some E)no

Many developers,lenders,and investors were victims of deflation in commercial real estate beginning in the: A)1960s. B)1980s. C)late 1970s. D)early 1970s. E)1990s.

Illiquidity in real estate means that: A)you can quickly find someone who is willing to pay full value to purchase the property. B)you don't have a water well on the property. C)you cannot quickly sell the property without a loss in value. D)you don't have financial leverage. E)there is an efficient market for the property.

Diversification in direct real estate investments is: A)difficult. B)easy. C)always available. D)limited because of the small size of most real estate projects. E)never available.

Which one of the following real estate investments provides various levels of diversification? A)REITs B)Ginnie Maes C)Freddie Macs D)Other syndicates E)All of these

The ability of investors to deduct their real estate losses from wages,salaries,dividends,and interest is an aspect of a real estate syndicate that: A)no longer exists. B)is strengthened by the Tax Reform Act of 1986. C)has remained unchanged since 1980. D)improves the liquidity of real estate syndicates. E)is available only to limited partners.

Presently,you are required to use which method of depreciation in real estate investments? A)Sum-of-the-digits B)Straight-line C)Rule of 78s D)Last In First Out E)First In First Out

For residential real estate investments,the depreciation period is ____________ years. A)7 1/2 B)17 1/2 C)20 1/2 D)27 1/2 E)31 1/2

For all types of real estate investments,except residential ones,the depreciation period is ____________ years. A)7 1/2 B)17 1/2 C)20 1/2 D)27 1/2 E)31 1/2

The investment tax credit has been eliminated entirely for all types of real estate except: A)low-income housing projects. B)single-family dwellings. C)shopping centers. D)raw land. E)developed land.

Which of the following is a possible disadvantage of real estate investments? A)Lack of involvement in property maintenance B)Hedge against inflation C)Illiquidity D)Lack of financial risk E)Capital requirements for total venture may be high

Which of the following can be a management problem when investing directly in real estate? A)Maintaining the rental property B)Inability to sell your interest in a limited partnership C)Disagreements among syndicate members D)Limited financial liability E)Financial planners do not support buying small properties.

During which of the following economic periods is the price of a precious metal,such as gold,silver or platinum,likely to increase? A)Recession B)Depression C)Peace time D)Deflationary E)Inflationary

Investors buy precious metals as a safe haven during: A)a recession. B)a depression. C)an economic upheaval. D)deflation. E)political stability.

Easing of international tensions or disinflation cause gold prices to: A)skyrocket. B)increase moderately. C)remain stable. D)decline. E)change, but the direction of the change cannot be predicted.

Increasing interest rates in the economy cause gold prices to: A)skyrocket. B)increase moderately. C)remain stable. D)decline. E)change, but the direction of the change cannot be predicted.

In general,the price of gold: A)is stable. B)fluctuates daily. C)changes monthly. D)is unaffected by political upheavals. E)is unaffected by economic conditions.

The basic unit of gold bullion is one _____ of 0.995 fine gold. A)kilogram. B)troy ounce. C)pound. D)ton. E)wafer.

On larger gold bars,dealers and banks add a ____________ percent premium over the pure gold bullion value. A)1 to 2 B)3 to 5 C)5 to 8 D)6 to 7 E)9 to 12

Popular gold bullion coins today include: A)Australia's kangaroo nugget. B)Canadian gold maple leaf. C)Mexican 50 peso. D)Chinese Panda. E)All of these.

Jeremy Fischer has just purchased 20 American eagle gold coins from a broker.What type of investment does he hold? A)Direct investment in real estate B)Indirect investment in real estate C)Precious metals D)Ceramics E)Gems

Brian Wilson has several baseball cards passed down to him from his grandfather.He is particularly proud of the signed Hank Aaron baseball card that he has.What type of investment does he hold? A)Direct investment in real estate B)Indirect investment in real estate C)Precious metals D)Collectibles E)Gems

Lynn Roy owns three,two-carat diamonds that she received from her grandmother who did not believe in banks or stocks and bonds.What type of investment does she hold? A)Direct investment in real estate B)Indirect investment in real estate C)Precious metals D)Collectibles E)Precious stones

If a gold bullion bar does not remain in the possession of the dealer or bank that sells it,what must happen before it can be resold? A)It must be made into coins. B)It must be pounded flat. C)It must be reassayed. D)It must be turned into jewelry. E)It must be taxed.

It is much easier today to find and trade in collectibles than it was in prior years.Which one of the following is primarily the reason for this? A)Telephone B)Web (Internet) C)Magazines D)Plane travel E)Automobiles

A vacation home is deemed a second home so long as you rent it no more than ________ per year. A)one month B)14 days C)7 days D)8 weeks E)4 weeks

What is the approximate annual depreciation for tax purposes on residential real estate purchased at a cost of $200,000? A)$6,349 B)$20,000 C)$2,750 D)$7,273 E)$6,667

Austin has invested $25,000 as one of 10 limited partners in a large shopping center that was purchased for $800,000.The shopping center has been unsuccessful and the four general partners fear that the property could be foreclosed upon soon.What is the most Austin might lose if the project fails? A)$80,000 B)$57,143 C)$200,000 D)$25,000 E)$20,000

An advantage of purchasing diamonds for investors is that: A)diamonds are not easily turned into cash. B)diamonds are small and easy to conceal. C)diamonds are largely controlled by DeBeers Consolidated Mines of South Africa. D)the grading of diamonds is not an exact science. E)diamonds are typically bought at retail and sold at wholesale.

Home ownership rates are highest among those individuals in which age group? A)Under 34 B)35 - 44 C)45 - 54 D)55 - 64 E)65 and over

De Beers Consolidated Mines of South Africa controls what percent of the world's supply of rough diamonds? A)50 B)65 C)75 D)85 E)95

In 2011,which country was the world's largest producer of gold? A)China B)Australia C)U.S. D)Russia E)Canada

Which of the following is not a characteristic used to grade certified diamonds? A)Weight B)Country of origin C)Clarity D)Quality of cut E)Color

The primary reason people buy a vacation home is: A)to use as a family vacation retreat. B)for tax reasons. C)for rental income. D)for their grown children to live in. E)to eventually use it as their primary residence.

A REIT is a firm that pools investor funds and invests them in real estate or uses them to make what kind of loans? A)New car loans B)Construction loans C)Mortgage loans D)Both construction and mortgage loans E)Car, construction, and mortgage loans

The first gold bullion coin ever produced by the U.S.government was issued in what year? A)1963 B)1968 C)1975 D)1980 E)1986

Coin dealers,precious metals dealers,and some banks sell gold bullion in amounts ranging from _____ grams to 500 ounces or more. A)5 B)10 C)25 D)50 E)There is no minimum order.

Besides gold,other metals that are used as a hedge against inflation include the following,except: A)silver. B)aluminum. C)platinum. D)palladium. E)rhodium.

Which of the following has lessened the appeal of investing in real estate? A)Hedge against inflation B)Professional management C)Financial leverage D)Tax Reform Act of 1986 E)National Association of Realtors

At the beginning of 2016,home ownership in the United States: A)had soared since 1997. B)was lower than in 1997. C)had increased dramatically since 2004. D)was the same as in 1997. E)was unchanged since 2004.

Over the past 30 years,the median price of existing homes has increased an average of more than _____ percent every year. A)5 B)6 C)7 D)10 E)11

According to the National Association of Realtors,home values nearly double every _____ years. A)5 B)6 C)7 D)10 E)11

Austin has invested $50,000 as one of 5 general partners in a large shopping center that was purchased for $900,000.The shopping center has been unsuccessful and the 15 unlimited partners fear that the property could be foreclosed upon soon.What amount is Austin liable for if the project fails? A)$60,000 B)$18,000 C)$180,000 D)$900,000 E)$50,000

What is the approximate annual depreciation for tax purposes on other types of real estate besides residential real estate if the property was purchased at a cost of $300,000? A)$10,000 B)$11,111 C)$3,000 D)$9,524 E)$10,909

Which of the following do not create management problems? A)REITs B)mortgages C)participation certificates D)limited partnerships E)None of these create management problems.

Suppose you invested $10,000 of your own money and had a $90,000 mortgage with interest rate of 6.5 percent.After one year,you sell the property for $140,000.What is your gross profit? A)$10,000 B)$90,000 C)$130,000 D)$50,000 E)$40,000

What are the possible advantages and possible disadvantages of investing in real estate?

Explain the relationship between real estate syndicates and REITs.

Explain the difference between direct and indirect investments in real estate.Give examples of each.

What advantages do real estate investments offer?

What are some possible disadvantages of real estate investments?

Mary Simpson bought a rental property for $200,000 cash.Later she sold the property for $230,000.What was her profit and return on this investment?

Explain what factors drive up gold prices and what factors decrease gold prices.

Your parents own a vacation home and find it more difficult to spend as much time there as they once did.They are thinking about continuing to use it as a vacation retreat but also want to periodically rent it and use it as an investment.Discuss the issues they should consider when making this decision.