Chapter 17, Problem 17.1PQ1

Summary Introduction

To determine:

Four examples of direct investments in real estate.

Introduction: Direct investment in real estate refers to a type of investment in which investor own the legal title of the property.

Answer to Problem 17.1PQ1

Solution:

Four examples of direct investments in real estate are:

• Vacation home.
• Commercial property.
• Undeveloped land.
• Investing in foreclosures.

Explanation of Solution

Four examples of direct investments in real estate are:

• Vacation home: Vacation home is another home purchased by the person to enjoy their holidays. Income tax department deals them as second home if the person don't lent it for more than 14 days in a year. If person don't lent it for more than 14 days in a year then he can claim tax deduction on principle and interest amount. If one lent their home regularly then their deduction depends up on the regular maintenance and size of the house.
• Commercial property: Commercial property is another property of the person that produces rental or lease income. It can be duplex, fourplex or any other apartment building. In tax law, deduction are only available on the amount of depreciation, mortgage interest, property tax and other rental expenses up to the amount o rental income. In some exception cases deduction are allowed over and above the amount of rental income.
• Undeveloped land: People purchase undeveloped land with the purpose of selling it further after sub division of land but it poses a great risk as all the money of the investor get invested in only one investment and the price of property may fall in the event of economic downturn or building slowdown.
• Investing in foreclosures: Foreclosures refers to those properties on which the real borrower has failed to make installment payment and the property is sized by the lender. When lender sells the property and the person who bought the property, the whole process of buying and selling the property is known as investing in foreclosures. Sometimes one may invest in foreclosure before the property seized by the lender, by changing the borrower and paying his installment. In this case, interest rate may be high, so one must see all documents carefully before investing in foreclosing. In the sale of seized property, one may get at 30-40% discount but in some area bidding start only 5% below the price so making profit on that is hard. One must also consider looking to the law of property of every state before making any investment.

Hence, these are the four examples of direct investments in real estate.