Page 77 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes 7. Real Estate Investment: Real estate has historically been useful in a portfolio for both
income and capital gains. Home ownership, in itself, is a form of equity investment, as is
the ownership of a second or vacation home, since these properties generally appreciate
in value. Other types of real estate, such as residential and commercial rental property, can
create income streams as well as potential long-term capital gains.
Real estate investments can be made directly, with a purchase in your own name or
through investments in limited partnerships, mutual funds, or Real Estate Investment
Trusts (REIT). REIT is a company organized to invest in real estate. Shares are generally
traded in the organized exchanges.

Advantages

1. The potential for high return in real estate exists due, in part to the frequent use of financial
leverage.
2. There are potential tax advantages in real estate, as well. First, for personal use residential
property, there is the opportunity to deduct interest paid (first and second homes, within
limitations)
3. Some consider real estate a good hedge against inflation.
4. Good quality carefully selected income property will generally produce a positive cash
flow.
5. As a real estate owner, you may be in a position to take your gains from real estate
through refinancing the property without having to sell the property, therein triggering
a taxable capital gain. Real estate is advantageous in this respect, because good quality
properties can be used to secure mortgage loans up to a relatively high percentage of
current value.

Disadvantages

1. There is generally limited marketability in real estate (depending on the nature and
location of the property).
2. There is also a lack of liquidity, in that there is no guarantee that the property can be
disposed of at its original value, especially if it must be done within a short period of time.
3. A relatively large initial investment often is required to buy real estate.
4. If ownership in investment property is held directly by the investor, there are many
“hands-on” management duties that must be performed.
Self Assessment

State True or False:
6. Non-security forms of investment include all those investments, which are not quoted in
any stock market and are not freely marketable.
7. In India, nearly 60% of the household savings go into such savings schemes as Post office
savings schemes, life insurance, provident funds, etc.
8. Floating rate bonds have a fixed interest rate.
9. Money market securities pay continuously fluctuating rate of interest that over somewhere
between the rate of inflation and the rate paid by the long-term debt instruments.
10. Warrants are generally non-detachable from the bond but they trade separately.

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