Chapter 07
Investments in Real Assets
Real assets are physical or tangible assets that have intrinsic value due to their substance and
properties. These assets are typically used in investment contexts and are distinct from
financial assets, such as stocks or bonds, which derive their value from a contractual claim.
Examples of Real Assets:- Real Estate, gold and silver, diamond etc.
★ Advantages of Real Assets
1) Inflation Hedge
Real assets, such as real estate or commodities(gold,silver), tend to rise in value with inflation,
protecting purchasing power.
2) Portfolio Diversification
Real assets typically have a low correlation with traditional financial assets, such as stocks and
bonds, reducing overall portfolio risk.
3) Tangible Value
These assets have intrinsic, physical value, which means they are less prone to sudden
devaluation or volatility compared to financial assets like stocks.
4) Global Demand
Real assets, like precious metals and natural resources, often retain or grow in demand globally,
especially during periods of geopolitical or economic instability.
5) Tax Advantages
Some real assets, such as real estate, offer tax benefits through depreciation, deductions, and
capital gains treatments.
★ Disadvantage of Real Assets
► Lack of large, liquid, efficient markets
► Larger commissions & spreads compared to securities
► No current income except from real estate
► Storage and insurance costs
► Unit costs may be high
► High Initial Investment Costs
► Cyclical hysteria or overreactions periodically occur (timing may be tricky)
★ Real estate as an investment
► Homes
▸ Duplexes
▸ Apartments
► Offices
► Industrial buildings
► Shopping centers
► Hotels and motels
► Undeveloped land
★ Types of Mortgages
1. Fixed-Rate Mortgages
Definition: The interest rate remains constant throughout the life of the loan.
Key Features:
√ Predictable monthly payments.
√ Typically available in 15-year, 20-year, or 30-year terms.
Best For: Borrowers who prefer stability and plan to stay in their homes long-term.
2. Variable-Rate Mortgages (VRMs)
Definition: The interest rate changes periodically based on market conditions.
Key Features:
√ Monthly payments may increase or decrease depending on the interest rate adjustment.
√ Often tied to a benchmark, like LIBOR or SOFR.
Best For: Borrowers comfortable with market fluctuations or those planning to refinance or sell
before significant rate changes.
3. Adjustable-Rate Mortgages (ARMs)
Definition: A hybrid mortgage with an initial fixed rate for a set period, followed by variable rates.
Key Features:
√ Common options include 5/1, 7/1, or 10/1 ARMs, where the first number indicates years of
fixed rates, and the second indicates annual adjustments.
√ Caps may limit the frequency or amount of rate changes.
Best For: Borrowers looking for lower initial rates and those who anticipate moving or
refinancing before the fixed period ends.
★ Forms of Real Estate Ownership
Ownership of real estate can take many forms:
1) Individual or Regular Partnership
2) Syndicate or Limited Partnership
3) Real estate investment trust (REIT)
1) Individual ownership or regular partnership
▸ Simplest way from a legal viewpoint
▸ Take advantage of personal knowledge of local markets and changing conditions to enhance
returns
• Well-defined center of responsibility often leads to quick corrective actions
▸ Often lacks ability to pool adequate capital to engage in large-scale investments
► Often lacks expertise to develop wide range of investments
▸ Unlimited liability for the investor
2) Syndicate or Limited Partnership
Syndicate:
A group of investors pool their resources to purchase and manage real estate.
Often structured as a limited liability company (LLC) or corporation.
Suitable for larger projects like commercial properties or multifamily housing.
Limited Partnership:
Includes both general partners (who manage the property and assume full liability) and limited
partners (who provide capital but have limited liability and decision-making authority).
Limited partnerships are a common choice for real estate development projects because they
balance risk and investment opportunities.
3) Real Estate Investment Trust
► Similar to mutual funds or investment companies
► Trade on organized exchanges or over-the-counter
► Pool investor funds
► No minimum investment other than cost of share
► Most liquid type of real estate investment
► Large secondary market
▸ Must distribute at least 95% of income as cash dividend
