COPYRIGHTED MATERIAL
Real Estate Investment Trust. Want to invest in commercial real estate, but don’t really have the capital (money) for a big down payment and really don’t see yourself as a landlord or have any interest in property management? Real Estate Investment Trusts (REITs pronounced “ REETS” ) are a popular way small investors can participate in the ownership and potential profits of commercial real estate without the huge buy in costs or ownership management headaches. REITs pool the funds of many investors. The pooled capital is used to purchase the type of properties the REIT specializes in, such as hotels, office complexes, or shopping centers. The investor buys shares of the REIT, often through the stock exchange. The REIT manages the property for the investors. How Real Estate Builds Wealth. Residential real estate builds wealth through amortization and appreciation . Wealth is built through commercial real estate in much the same way. Over the years, the owner pays down the mortgage and hopefully, experiences appreciation of the property’s value. Commercial real estate has another important wealth building aspect: income . The landlord collects monthly rent from the tenants. The difference between what the landlord collects in rent and pays out in expenses (mortgage payment, property taxes, maintenance, and other costs of operation) is called cash flow . If a property has a positive cash flow , the income covers all of the property’s expenses. If it has a negative cash flow , the income is not enough to cover the expenses. Many commercial properties occasionally experience a negative cash flow, requiring the landlord to pay out of pocket or dig into cash reserves to cover the expenses. This can be a temporary problem, for example if a tenant leaves and there is a vacancy. It is a risk of owning commercial real estate. A good commercial property with a positive cash flow may appreciate in value over time and provide the investor with a long term income stream. In a REIT, the rental income generated by the property is passed through the REIT to investors. Reflect on Learning: What are the differences between residential real estate and commercial real estate? In what ways does real estate build wealth? Answer: appreciation and an income stream. Do you understand the difference between a positive cash flow and a negative cash flow? PRODUCT PREVIEW Other Investments: Collections Collectibles. Stamps, coins, art, antiques, motorcycles, toys… People collect all sorts of things! A collectible is any asset that appreciates in value over time because it is rare and desired . Collections aren’t a traditional asset class in the sense of adding diversification to an investment portfolio. Often collecting is just a hobby, but many people consider it a means of investing. Experts tell us that collections are rarely great investments. This is because collections can be hard to value and are not very liquid. It can take several years to convert a collection to cash. It requires finding another collector who has an interest in the particular collectible, plus the desire and capital to purchase it. How Collections Build Wealth. If you are inclined to collect, experts recommend limiting a collection to a small portion of your investment portfolio and becoming very knowledgable about it. For example, if you collect coins, immerse yourself in numismatics. Join interest groups, read articles, and learn everything you can about coins and the coin market. Follow values as you would any other type of investment. Be patient, because value is rarely Treasure Hunt In 1990, a bargain hunter in Pennsylvania spent $4 for a flea market painting because he liked the frame. When he opened it up, he found an original printing of the Declaration of Independence which he later sold for $2,420,000. Fin Lit Trivia Fin Lit Trivia Fin Lit
Chapter 11 | Investing 101 204
Made with FlippingBook - Online catalogs