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1 Chapter 25/27
CHAPTER 27/25: Investing in Real Estate
I. Discuss the Benefits of Real Estate Investing
A. Cash Flow
B. Tax Shelter
C. 1987-1988 Tax Rules
D. Loss Limitations
II. Give examples of Calculating Depreciation
III. Define Gain on Sale, and give examples Explain capital gain taxes and the future.
A. At-Risk Rules
B. Installment Sales
C. Construction-Period Expense
D. Investment Tax Credits
E. Rehabilitation Tax Credits
F. Low-Income Housing Credit
G. Explain the "Watch List" of new tax
developments
VI. Define Equity Build-Up
VII. Define Leverage
VIII. Explain the alternatives of Property Selection
A. Vacant Land
B. Houses and Condominiums
C. Small Apartment Buildings
D. Medium-Sized Buildings
E. Large Apartment Buildings
F. Office Buildings Tie into economic base, age distribution, and
govemmen-
IX. Explain how investment Timing affects an taI impact on real estate issues.
investment
A. Initial Land Purchase
B. The Project Completion date
C. First Decade aging
D. Second Decade aging
E. Third & Fourth Decades aging
F. Explain how Building Recycling and
Demolition affect an investment decision
X. Define and discuss GLITAMAD
XI. Explain the process of Developing a Personal Emphasize how much an investor must know to
make a
Investment Strategy property investment strategy. It's education, not
a 3-hour
A. Risk Taking "hype" seminar, that makes good investments.
B. Debt Repayment
C. Valuing an Investment
XII. Discuss the use of Limited Partnerships in Emphasize and discuss other ownership issues
from earlier
investments chapters and compare.
A. Property Purchaser Methods
B. Property Management
C. Financial Liability
D. Investment Diversification
E. Service Fees
F. Pitfalls
G. Master Limited Partnerships
Chapter 25/27 2
XIII. Explain the federal and state Disclosure Laws Explain the lack of investor control.
a(ecting real estate investments
A. The Prospectus
B. Blue-Sky Laws
C. Governmental "Regulation" Stress education and risk-taking as a free
XIV. Show how effort and Courage are the final enterprise theory -- no one can guarantee
success.
determinations
Chapter 27 in hard back text, Real Estate Principles, and chapter
25 in soft back text, Real Estate an Introduction to the
Profession.
Real estate investors basically take two risks: They may never
obtain a return on their investment, and they may never
recover their investment. This chapter introduces you to the
benefit and dangers of investing. Cash 4ow, tax shelters, loss
limitations, capital gain, tax law changes, equity buildup, and
leverage are just a few of the topics covered. The chapter also
deals with property selection, investment timing, development
of a personal investment strategy, valuing of an investment,
limited partnership, and disclosure laws. The chapter concludes
with a brief discussion on the effort and courage it takes to be
an investor.
3 Chapter 25/27
Page Ref.
Hard 27 Soft 25
back back Topic Teaching Tips
453 447 Opening Remarks Start this chapter with a general overview of the advantages of
investing in real estate, then survey the class to determine their
attitude toward the advantages and disadvantages of investing in
real estate versus stocks and bonds versus precious metals and
minerals versus deposits (e.g., money market accounts), etc.
453 450 Benefits of Real Stress: Be certain to stress each of the bold printed terms in this
Estate Investing chapter. They are critical to understanding an investor's
"language."
454 451 Tax Rules Stress: The minimum depreciation period for residential real
estate is 27 1/2 years. It is 39 years for commercial property. If pur-
chased before 1987, property is depreciated at whatever deprecia-
tion it started with.
456 452 Depreciation Stress: Distinguish straight-line depreciation and accelerated
Calculation depreciation. Also, land may not be depreciated.
457 452 Capital Gains Stress: New capital gain rates. Affect real estate investment?
458 454 Watch List Local Distinction: Address any new, pending, or speculative tax
changes.
458 454 Equity Build-Up Stress: when one sells a property for $100,000 he does not
necessarily put $100,000 into his pocket. Only the equity goes
into the owner's pocket.
458 455 Leverage Stress: In the 1970s and early 1980s, when real estate prices
increased so rapidly, it made sense to "borrow money to make
money." Today, however, an investor must compare carefully the
cost of borrowed money versus his return.
459 -- Property Selection Stress: Briefly address the pros and cons of each of these
investments. Stress that each investor's needs are unique.
459 -- Vacant land Stress: Vacant land is not a good tax shelter, but may be a good
investment if there is sufficient demand to cause a significant
increase in value.
462 455 Investment Timing Stress: All properties go through a long-term cycle: new, stable,
declining. See Figure 27.2 (page 465).
465 -- Valuing an Investment Stress: Figure 27.3 (page 466), appraiser versus investor.
466 456 Limited Partnerships Stress: The tree advantages of a limited partnership and why it
has become popular.
Chapter 25/27 4
Page Ref.
Hard 27 Soft 25
back back Topic Teaching Tips
471 457 Wrap-Up 1. Explain equity build-up. (Each mortgage payment reduces the
amount owed on the loan; appreciation of the property
increases what it will sell for. The new sale price minus the
amount remaining on the loan is equity build-up.)
2. What are the minimum depreciation periods for residential
and commercial property purchased today?
(Residential is 27 1/2 and commercial is 39 years.)
3. When in the life cycle of improved real estate investments is
the least risky? (When the building is finished and filled
with tenants, but that is the time with the least return. The
most risky is at the beginning and the end of the cycle.)
4. How do the appraiser and the investor's view of value differ?
(An appraiser solves for value; the investor solves for return.)
5. What are some of the reasons for the popularity of limited
partnerships? (Allows the small investor to get in, general
partner does the work, limited financial liability.)
6. Explain the difference between negative and positive cash
flow? (Positive is the money left over, cash in the pocket
versus negative when the investor must contribute money to
keep the project going.)
