Inheriting $$$: Investing in Government Securities & Real Estate - Essay Sample

You have just inherited $$$ from a distant relative. How will you invest it? Explain your choices. Will real estate be an element in your decision? Why or why not?

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I would invest part of the money in government treasury bonds and bills. While the bonds takes a longer time to mature, the bills are short term investment (Claessens, Klingebiel& Schmukler2007). Government securities have low default rates as compared to securities from commercial corporations. Therefore, investing in treasury bonds and bills would guarantee a steady flow of income due to the coupon interest rate earned. I would also invest in banknotes under the floating rate regime whereby at the end of the investment period, I will receive my initial investment and the earnings as per the LIBOR rate.

Real estate would also be part of my investment elements. Investing in rental houses offers a wide range of benefits both for individual investors and corporations. Some of the benefits are tax exemptions, financial security, a guaranteed flow of income, appreciation of the property value due to factors such as inflation and an investors has no personal liabilities (Ling & Archer 2012).

What are the advantages of using an LLC as the ownership form for investing in income-producing real estate? Be sure to contrast the LLC ownership form with other options.

Limited liability companies offers a wide range of benefits for investors. Unlike for an individual investor, LLC investors have limited personal liability (Ling & Archer 2012). Personal liability in sole proprietorship risks both the real estate holding and other properties owned by the owner in case of a lawsuit. However, LLC investor's properties shielded, and they can only be held liable up to the value invested in the company (Goforth, 2007). According to Ling and Archer, C. Corporations and Limited Partnerships are subject to double taxation where both the corporation and the investors are taxed (2012). However, in LLC are shielded from individual tax obligation, and they only report profits and losses at the end of the financial year (Ling & Archer, 2012).

What are the tax benefits associated with home ownership? Why does the United States use the tax code to, in effect, subsidize home ownership?

How did the tax law changes recently enacted reduce those tax subsidies?

Home owner's benefits from tax deductions based on the federal tax act. An individual is allowed to deduct the amount of money that he would be willing to pay if he was a tenant in his own house (Gale, Gruber & Stephens-Davidowitz, 2007). According to Ling and Archer, a homeowner also benefits from mortgage interest payment deduction, property tax, and an exclusion of capital gain of up to $250,000 for a single person and $500,000 for married people from the federal tax deductions. According to Gale et al., the United States government subsidize homeownership to encourage the citizens to acquire their own homes (2007).

According to Nukpezah, the tax laws in the United States have changed to reduce the tax deductions for homeowners (2019). Long term capital gain s more favourable than the short term capital gain in tax deductions. However, the overall capital gain of 23.8% is a blow to the homeowners wishing to benefit from tax deductions (Nukpezah, 2019). Before the new tax policies were enacted, a wide range of expenses were considered for tax deductions. However, depreciation of personal home is not considered as a deductible expense for tax consideration (Ling & Archer, 2012).

Explain what leverage is in the context of real estate investment. Is leverage always beneficial? Provide a numerical example.

According to Brueggeman and Fisher, leverage in the real estate's refers to the use of debt capital or loans in financing a mortgage (2011). An investor borrows partial or full capital from banks or other financial providers to benefit from the capital gains. The reasons for adopting leverage as a way of financing a mortgage may be that the investors do not have enough capital, or he wants to benefit using other people's money. Investing in real estate requires a large amount of money and the risk associated with it is substantially high. Therefore, leverage may not always be beneficial to an investor. Investment does guarantee a steady flow of income. Therefore, in case of a capital loss, a person may be forced to sell his assets to pay the debts.

Capital gain is calculated using several methods. However, the net present value and the internal rate of return are the most common (Ling & Archer, 2012). For example, using the NPV method to determine the future cash flows of an investment. Assuming that an investor borrowed $ 100, 000 from the bank to invest in a real estate and the discounted rate of return is 10%. After one year the cash inflow is $ 105, 000. The net present value of the investment would be give as

105,000\ (1+ 0.1)1-(100, 000) = (4,545.45). The negative present value of the cash flow indicates that the investor cannot meet his financial obligations of repaying the loan.

References

Brueggeman, W. B., & Fisher, J. D. (2011). Real estate finance and investments (pp. 5-6). New York, NY: McGraw-Hill Irwin. Retrieved from https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=Brueggeman%2C+W.+B.%2C+%26+Fisher%2C+J.+D.+%282011%29.+Real+estate+finance+and+investments+%28pp.+5-6%29.+New+York%2C+NY%3A+McGraw-Hill+Irwin&btnG=

Claessens, S., Klingebiel, D., & Schmukler, S. L. (2007). Government bonds in domestic and foreign currency: the role of institutional and macroeconomic factors. Review of International Economics, 15(2), 370-413. Retrieved from https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=Claessens%2C+S.%2C+Klingebiel%2C+D.%2C+%26+Schmukler%2C+S.+L.+%282007%29.+Government+bonds+in+domestic+and+foreign+currency%3A+the+role+of+institutional+and+macroeconomic+factors.+Review+of+International+Economics%2C+15%282%29%2C+370-413&btnG=

Gale, W. G., Gruber, J., & Stephens-Davidowitz, S. I. (2007). Encouraging Homeownership through the Tax Code. Tax Notes, 115(12).

Goforth, C. R. (2007). The Series LLC, and a Series of Difficult Questions. Ark. L. Rev., 60, 385. Retrieved from https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=Goforth%2C+C.+R.+%282007%29.+The+Series+LLC%2C+and+a+Series+of+Difficult+Questions.+Ark.+L.+Rev.%2C+60%2C+385&btnG=

Ling, D., & Archer, W. (2012). Real estate principles: a value approach. McGraw-Hill Higher Education.

Nukpezah, J. A. (2019). Local Financial Emergencies in the USA. In Global Encyclopedia of Public Administration, Public Policy, and Governance (pp. 1-6). Springer, Cham. Retrieved from http://springer.iq-technikum.de/referenceworkentry/10.1007%2F978-3-319-31816-5_3744-1