Real Estate

For most investors, real estate represents the largest part of their net worth; over two-thirds of all American families own a home. If you are an estate planning specialist, you will likely have clients that are interested in investing in real estate. Real estate investment trusts (REITs) are companies that own and operate income-generating real estate. There are also a number of mutual funds that invest solely in REITs. The four most common types of equity REITs are office buildings, residential (apartments), regional malls and shopping centers. You can learn more about all of these topics in estate planning courses.

Investing in a House

There are two key points to keep in mind as an estate planning specialist when analyzing the benefits of home owner-ship. First, national price appreciation of residential real estate has historically been modest. Over past 30 years (ending 12/31/2007), house prices increased 6.0% annually vs. 4.1% for inflation, according to Freddie Mac. Factoring in the declines in 2008, 2009 and 2010, residential real estate annualized return figures drop by at least one full percentage point. Second, home ownership is expensive. It is comparable to owning a mutual fund or variable annuity that charges 3% annually (homeowner’s insurance, property taxes, and maintenance costs) and also has a back-end sales charge of 6-7% (the real estate selling commission plus closing costs). Annual expenses are higher than 3% if improvements or monthly mortgage costs are included. This type of investment clearly needs a lot of research, which you can learn how to do via estate planning courses.

Bank Loan Funds

A relatively new category, bank loan funds allow the interest-rate sensitive investor to receive a high level of current income with low volatility. Also referred to as “prime rate” funds, the portfolios are comprised of bank loans. In this case, the bank lends money to borrowers who frequently have less than stellar credit profiles. The proceeds are often used for leveraged buyouts. The bank then packages these loans and sells them to institutional investors and mutual funds.

There are two major selling points to prime rate, or bank loan, funds. First, yield can be quite appealing, even compared to intermediate- or long-term bonds. Second, the yields are adjusted quarterly. These adjustable-rate funds come close to eliminating interest-rate risk. Keep in mind that when interest rates fall, so do the yields on these securities.

The three negatives to bank loan funds are: (1) losses are possible, (2) limited liquidity, and (3) high fees. Over the past decade, prime-rate funds have only had one negative year. Some bank loan funds borrow money so that they can leverage their holdings.

Enhanced Appreciation Notes

Enhanced appreciation notes (EANs) are designed to provide some or all of the stock market’s upside potential, while partially or fully insulating the investor from downside risk (note: some of these securities have no downside protection). EANs are usually linked to major indexes and provide an enhanced participation on the upside-up to a limit, or cap (note: index returns for EANs never include dividends). For example, an EAN may be structured so that the investor gets 1.25% to 3% for every 1% increase in the index. If the ratio is 1.25-to-1 and the index went up 10% (excluding any dividend) during the life of the EAN, the investor would receive a total return of 12.5%.

Issuers usually cap the upside potential of EANs. As an example, if the participation rate is 200% or 300% on the upside, the cap for the year may be 13-20%. Some EANs provide a level of downside protection, described as a percentage of the investor’s principal. For example, the first 10-20% of the loss may be fully absorbed by the issuer; the investor would then incur any loss in excess of this figure. This means that the investor has no chance of loss provided the index never exceeds the level of downside protection provided by the issuer.

Typically, the barrier is set at 70-75% of the initial level (the value of the index when the investor buys the EAN). If the covered loss is ever breached (20% or 25% in this example), the investor would have full downside exposure past the point of protection.

Conclusion

In summary, there are many options to consider when helping your clients pick a good investment. Whether you are an estate planning specialist or a financial advisor, you must make sure you are educated about whichever products you decide to offer to your client. Estate planning courses are just one way to learn the information you will need to know.

Author Bio: Cory Bowman is Director of Ops at the Institute of Business Finance. IBF has helped thousands of members of the financial services industry attain designations. For more information about IBF, estate planning courses, or training to be an estate planning specialist, visit http://www.icfs.com

Category: Finances
Keywords: estate planning courses, estate planning specialist