REITs & Wealth Building

Learn what Real Estate Investment Trusts are and how you can use them to build wealth…

 

In the current economy there are many investment choices.

 

An often overlooked but potentially rewarding investment choice is a REIT, however they are not as popular as many other investment choices but could possibly offer you a better rate of return than many popular investment options.

 

In this discussion TheWealthIncreaser.com will detail how you can make REITs a part of your portfolio and how you can use them to help build wealth more efficiently.

 

A “Real Estate Investment Trust” or REIT (pronounced REET) is an investment option that became available to investors many years ago (1960’s) and there popularity has grown over the years, however they are not as popular an option among many.  As an investor you have many investment choices–such as stocks, bonds, mutual funds, commodities and options (no pun intended) among others.

 

REITs are now offered around the world and is seen as an economical way to get into real estate without incurring the actual cost and expense of actually owning real estate.

 

The acceptance of investing in global real estate securities has grown over the years but there remains room for growth as developing markets continue to rise.

 

The REIT industry struggled beginning in 2007 as the global financial crisis kicked in. In response to the global credit crisis, listed REITs responded by paying off debt and re-equitizing (selling stock to get cash) their balance sheets.

 

https://en.wikipedia.org/wiki/Real_estate_investment_trust

 

At this time (October 2019), REITs are worth consideration as a part of your portfolio as they have in many years outperformed the S&P and other market indices when it comes to rate of return.

 

real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate.

 

REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouseshospitalsshopping centershotels and timberlands.  Many REITs engage in financing real estate in an effort to increase their returns.

 

REITs can be publicly traded on major exchanges, publicly registered but non-listed, or private. 

 

The two main types of REITs are equity REITs and mortgage REITs and this discussion will primarily focus on equity REITS.

 

A REIT (Real Estate Investment Trust) gives investors of all sizes access to income producing commercial real estate without the hassle of actually owning commercial real estate.

 

REITs have been increasing in popularity and they are designed to hold a range of real estate assets that are primarily commercial that provide investors the opportunity to invest in real estate with limited risk exposure.

 

For many investors, investing in this way represent the simplest, most cost-effective way to add real estate to their investment portfolio—without having to identify, manage  and sell properties themselves.

 

But not all REITs are created equal!

 

Your earning potential varies based on several factors, such as your investment sector, costs, fees and how you decide to participate in general.

.

REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors.  These real estate companies have to meet a number of requirements to qualify as REITs.  Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.

 

REIT-owned real estate can be found in many countries, in every state in the United States–including local communities–and is an important economic engine for spurring growth in the world economy.

 

By purchasing real estate using a REIT you benefit through the properties they own, finance and operate.

 

REITs are real estate working for you without the hassle of locating, managing and selling!.

 

Again a real estate investment trust (“REIT”) is a company that provides you the opportunity to choose an investment vehicle which owns, operates or finances income-producing real estate–so that you won’t have to.

 

REITs provide “all” investors the chance to own valuable real estate, present the opportunity to access dividend-based income and total returns, and help many areas around the world move forward economically in a more efficient manner.

 

REITs “allow anyone” who is willing to invest–the  same opportunity” to invest as they have to invest in other industries.

 

You can purchase a REIT through the purchase of individual company stock or through a mutual fund or exchange traded fund (ETF).

 

The stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy, manage or finance property.

 

Over 80 million Americans alone invest in REIT stocks through their 401(k) and other retirement plans.

 

Assets that REITs  can own

 

In total, REITs of all types collectively own  trillions in gross assets across the U.S. alone, with stock-exchange (publicly owned)  listed REITs owning over $2 trillion in assets, representing more than 500,000 properties. U.S. listed REITs have an equity market capitalization of more than $1 trillion.

 

You can go to the following links to learn more about REITs

 

 

Always realize that REITs can invest in a wide variety of real estate property types, including offices, apartment buildings, warehouses, retail centers, medical facilities, data centers, cell towers, infrastructure and hotels among others.

 

Many REITs have limited focus or focus on a particular property type, but some hold multiples types of properties in their portfolios as well.

 

In the following paragraphs you can learn about many of the more popular “property sectors” that REITs invest in:

 

Office REITs

Office REITs own and manage office real estate and rent space in those properties to tenants and they can range from skyscrapers in large cities to small offices in rural and suburban areas.. They may focus on certain areas such as central business districts or suburban areas or rural areas. They may even focus on  specific classes of tenants, such as government agencies, technology, medical etcetera.

 

Industrial REITs

Industrial REITs own and manage industrial space such as warehouses and distribution centers and are particularly popular at  this time with the explosion of ecommerce and the demand for same day and next day delivery in many areas.

 

Retail REITs

Retail REITs own and manage retail real estate and rent space to tenants at large regional malls, outlet centers, grocery-anchored shopping centers, strip malls that are anchored by big box retailers and other similar developments of a retail nature.  Most retail REITs are structured in a way that the tenants pay both rent and the majority of operating expenses for the property.

 

Hotel REITs

Hotel REITs own and manage hotels and resorts and rent space in those properties at varying levels of service and amenities.  They serve the casual traveler to business customers and all those in between.

 

Residential REITs

Residential REITs own and manage  residences and rent space in those properties.   REITs that specialize in apartment buildings, student housing, manufactured homes and single-family homes among others are very popular at this time.  Many focus on geographical or “hot” areas of growth or certain classes of residential properties.

 

Health Care REITs

Health Care REITs own and manage health care-related real estate and collect rent from tenants in senior living facilities, hospice care facilities, medical office buildings, skilled nursing facilities and the like.

 

Self-storage REITs

Self-storage REITs own and manage self storage facilities and collect rent from customers and are seeing a boon in many areas. Self-storage REITs rent space to both individuals and businesses and are very popular at this time in many areas of the United States.

 

Infrastructure REITs

Infrastructure REITs own and manage infrastructure and collect rent from tenants and include fiber cable investments, wireless infrastructure investments, telecommunications towers and energy pipelines among others.

 

Data Center REITs

Data Center REITs own and manage facilities that customers use to safely store data and help keep servers and data safe, including providing uninterruptable power supplies, air-cooled chillers and physical security for companies large and small.

 

Diversified REITs

Diversified REITs own and manage a mix of property types and collect rent from tenants. They may include a combination of the REITs mentioned above including others such as timber REITS.

 

Specialty REITs

Specialty REITs own and manage a unique mix of property types and collect rent from tenants such as  movie theaters, casinos, farmland and outdoor advertising sites.

 

Throughout history real estate has generally proven to be an above average long-term investment!

 

When you purchase property it often comes with a large down-payment, therefore investing in REITs may be a great alternative to you owning real estate directly and help you build your wealth in a less painful way.

 

Keep in mind that if you own REITs you cannot:

 

*Deduct depreciation as Rental or Business expense

*Deduct other expenses associated with the properties in the portfolio

*Directly own property (you hold no title to real estate directly)

*Generally deduct dividends at the more favorable capital gains rate (must use ordinary income rate)

 

Most REITs will deduct those expenses associated with the properties and they are required by the IRS to return a minimum of 90% of its taxable income back to shareholders each year, therefore REITs pay dividends and also have the potential for growth.  Most investors think of REITs as slow growth vehicles that pay big dividends. However in 2019, the REITs, as an industry, have outperformed and may be worth considering as part of your portfolio.

 

If you invest in a 401k or other retirement plan you probably already invest in REITs in an indirect way.  However, directly investing with REITs may be worth considering as part of your asset allocation.  They can be of real importance if they are inside of your retirement account as they have the potential to provide you solid returns along with a delay or avoidance of tax payments for a period of time.

 

To reiterate, REITs generate income, and 90 percent of that “taxable income” must be distributed to the shareholders on a regular basis.  REITs make money from the properties they purchase by renting, leasing and/or selling them.

 

https://www.investopedia.com/ask/answers/060415/what-average-annual-return-typical-long-term-investment-real-estate-sector.asp

 

 

Conclusion

 

Investing in income-generating real estate can be a great way to increase your net worth and may be worth considering.

 

Because directly investing in real estate, particularly commercial real estate, is simply out of reach financially for many–a REIT which allows you to pool your resources with other small investors and invest in large-scale commercial real estate as a group may be a better option.

 

REITs (pronounced like “treats”) allow you to get into commercial real estate and benefit from the returns in a more cost efficient and less riskier manner.

 

In this discussion you learned that REIT stands for real estate investment trust and is thought of  by many as  a “real estate stock.”

 

Essentially, REITs are corporations that own and manage a portfolio of real estate properties and mortgages.  Anyone can buy shares in a “publicly traded” REIT.

 

They offer the benefits of real estate ownership without the headaches or expense of property management!

 

Keep in mind that not all REITs are created or managed equally.  Investing in some types of REITs also provides the important advantages of liquidity and diversity.  You can sell shares quickly and they are normally easily sold.  And because you’re investing in a portfolio of properties rather than a single building, you face less financial or investment risk.

 

­REITs­ came about in the 1960’s, when Congress decided that smaller investors should also be able to invest in large-scale, income-producing real estate.  Congress determined that the best way to do this was to follow the model of investing that was already in existence in other industries that traded on the exchanges.

 

Remember, a company must distribute at least 90 percent of its “taxable income” to its shareholders each year to qualify as a REIT.

 

Most REITs pay out 100 percent of their taxable income.  In order to maintain its status as a pass-through entity, a REIT deducts these dividends from its corporate taxable income.  A pass-through entity does not have to pay corporate federal or state income tax–it passes the responsibility of paying these taxes onto its shareholders (i.e. you if you owned shares in a REIT).

 

REITs cannot pass tax losses through to investors, however!

 

Because of the high demand for real estate funds, President Eisenhower in 1960 signed the real estate investment trust tax provision qualifying REITs as pass-through entities.

 

A corporation must meet several other requirements to qualify as a REIT and gain pass-through entity status such as:

 

  • Be structured as corporation, business trust, or similar association
  • Be managed by a board of directors or trustees
  • Offer fully transferable shares
  • Have at least 100 shareholders
  • Pay dividends of at least 90 percent of the REIT’s taxable income
  • Have no more than 50 percent of its shares held by five or fewer individuals during the last half of each taxable year
  • Hold at least 75 percent of total investment assets in real estate
  • Have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries
  • Derive at least 75 percent of gross income from rents or mortgage interest

 

­At least 95 percent of a REIT’s gross income must come from financial investments (in other words, it must pass the 95-percent income test).  These include rents, dividends, interest and capital gains.  In addition, at least 75 percent of its income must come from certain real estate sources (the 75-percent income test), including rents from real property, gains from the sale or other disposition of real property, and income and gain derived from foreclosure of property.

 

Tax Reporting

 

You would receive a schedule 1099-DIV from your REIT and you would include that income on your tax return.  By providing the tax reporting documents to your tax professional they would include the dividends on your tax return and you would pay taxes at the appropriate rate depending on your filing status and income level.

 

The Dividends from REITs are almost always “ordinary income” as opposed to “qualified dividends” that would be taxed at the lower capital gains rate.

 

Box 1 of the 1099-DIV is where a REIT reports such dividends!

 

Payments from REITs are referred to as “dividends,” but they are not the same as the dividends that you are probably familiar with when you buy stock.

 

A REIT generates income in different ways than stocks, REIT dividends include the following:

 

  1. Ordinary income: Money made from collecting rent or mortgage payments.
  2. Capital gains: Money made from selling property for more than the REIT paid for it.
  3. Return of capital: This is essentially the REIT giving you some of your own money back.

 

In general, “what happens in the REIT” dictates the tax treatment.

 

Capital gains distributions, for example, are subject to capital gains taxes.  If no properties in the portfolio of the REIT was sold during the year you would only have ordinary income and/or return of capital on your 1099-DIV.

 

As a practical matter you will normally receive a 1099-DIV that will have a portion of the Dividends designated as:

 

  • Return of Capital–dependent on how much you invest in the REIT and how much has been already designated as return of capital on prior year 1099-DIV forms
  • Ordinary Income–will almost always receive on 1099-DIV unless REIT had a loss for the tax year, and
  • Capital Gains–dependent on the type of REIT and the sectors the REIT invests in and if properties in the sectors were sold for a gain during the tax year

 

In closing, a real estate investment trust (REIT) allows you to:

 

* have ownership interest,  but not manage income-generating real estate or related assets

*invest in the collection of properties that a REIT would manage, and you would benefit from the dividends earned and capital gains

*be part of a group that would also bear the cost of taxes and any other losses incurred

*be able to build up your financial portfolio without directly buying real estate

*potentially have a lower up front cost and an ownership interest in commercial real estate

 

The main difference between a REIT and a real estate company is that a real estate company develops properties to resell them, while REITs acquire and develop properties to own, hold and manage–but may sell at a future date.

 

They can be looked at from a different angle by envisioning a REIT as a “mutual fund” for real estate” that contain property sectors and/or mortgage backed securities that are aggregated and contain all of the requirements discussed above that must be met–so that the REIT can maintain their pass-through tax advantage status–according to IRS guidelines.

 

Always be aware of the difference between an Equity REIT and a Mortgage REIT that are now on the market.

 

In this discussion we have primarily discussed equity REITs, however always keep in mind that mortgage REITs that invest in mortgage backed securities are also available.

 

  • Equity REIT companies procure business properties such as shopping malls, hotels, office buildings and commercial buildings, then rent out the spaces.  After deducting all operational costs, equity REITs pay dividends in the form of return of capital and ordinary dividends to their shareholders annually.  The dividends also include any appreciation of the property(s) and gain from sale (capital gains)Equity REITs have been discussed in this article quite extensively.

 

  • A mortgage REIT or mREIT, provides mortgage financing or obtains mortgage-backed securities and earns income from the interest from such properties. Mortgage REITs can either be on residential or commercial properties. In fact, some REIT companies deal with both (hybrid). Due to their high potential for leverage, mortgage REITs are a rather risky investment, as they gain profits from interest, which is something that can change.  Mortgage REITs have not been discussed in great detail in this article–however you must be aware of their existence as they too may be worth considering and adding to your asset portfolio.

 

NOTE: A HYBRID REIT which includes equity and mortgage backed securities are also offered by some REITs

 

As a potential investor you must also determine if the REIT you are considering to invest in is private (a private REIT does not need to disclose as much information as public REITs do) or public (a public REIT is registered with the Securities and Exchange Commission and trades on national stock exchanges).

 

By not having to publicly disclose information to the public a private REIT could lead to management making the wrong investment decision and you not knowing about those decisions. Public REITs offer investors more exposure to properties across the world than do private REITs and more information about investment activity would normally be publicly available for those who are considering investing in a Public REIT.

 

And an even greater incentive for you to seriously consider adding REITS to your asset allocation at this time is the fact that you can now under the new tax law enacted in 2017 possibly deduct 20% of MLP or REIT income as qualified business income,  thereby lowering your taxable income.

 

All the best toward your REIT and Wealth Building success…

 

 

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Be sure to do additional research as the links below are provided for convenience but does not represent an endorsement by TheWealthIncreaser.com

 

Public REITs:

NAREIT

Sure Dividend

 

Private REITs:

Non-traded REITs 101 Investor Junkie

Fundrise is a private REIT that offer reasonable fees and low initial investment.

  • Diverse portfolio of private real estate deals
  • Minimum investment of $500 to $1,000
  • Management and advisory fees add up to about 1%, but be aware of other fees

Fundrise’s proprietary eREITs® https://fundrise.com/start-investing?cta=inline-get-started-textare the next evolution in REITs, combining innovative technology and direct access to private market real estate, all at lower costs

 

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Investment Choices & Wealth Building

Learn why knowing how to choose your “Investments” in a wise manner is critical for your “Wealth Building” success…

 

In today’s economy there are a number of choices or investment options for you to choose from after you have determined your cash flow position, maximized your credit position and looked into the future of your finances in a comprehensive manner.

 

In this discussion TheWealthIncreaser.com will discuss several investment options—along with the tax angle that you can use to build wealth more efficiently in the economy that we are now in.

 

You can invest in stocks, mutual funds, bonds, MLP’s, real estate, futures, precious metals and many others—and it is important that you understand your potential tax position going in.

 

Although the creator of TheWealthIncreaser.com has been quite busy this tax season, the inspiration to create this page occurred as many of my clients over the past few weeks made investment choices and had capital gains and an increase in their net worth in the 2018 tax year.

 

STOCKS & MUTUAL FUNDS

 

First and foremost you must understand the difference between short-term and long-term gains and you must know the tax treatment of investments when they are “inside” or “outside” of your retirement account.

 

In addition you want to be aware of when and if you can carry losses forward and from what type of investment.

 

If your investments are outside of your retirement accounts your purchase price, sale price and how long you hold the investment is key! 

 

If your investments are inside of your retirement accounts you may avoid or defer taxation until a future date–normally retirement or at the time of withdrawal!

 

If your investment is held for less than a year outside of your retirement account(s)–you will have a short-term gain and you will be taxed at your ordinary income tax rate (if you have your 2018 tax return get it out and look at line 10 of form 1040 page 2 to see where you fall as far as taxation) that could range from 0% (lower end of spectrum) to 40.8% (higher end of spectrum).

 

If you hold your investment for one year and one day you will get the more favorable rate that is determined by your taxable income (long term capital gains rate that could range from 0% to a maximum of 23.8%).  If your brokerage or mutual fund company sell during the year and “they don’t specify a date” or if they state “various” on the 1099–your gain will be taxed as “ordinary income” unless you can prove that the stock or mutual fund was held for one year and one day.

 

If you have a combination of short and long-term capital gains and capital losses you can offset the gains against the losses.

 

However, you must offset short term losses against your short term gains and long-term losses against your long-term gains —you then aggregate your losses and if they exceed your gains you can use the losses to offset your taxes.  If the losses exceed $3,000 you can carry them forward up to a maximum of $3,000 per tax year until it is used up.

 

Qualified stock dividends (stock held 60 days before or after the ex-dividend date) are also taxed at capital gain rates and if the stock dividend is unqualified it would be taxed at your “ordinary income” rate (which is usually a higher rate) and would be entered on your tax return as “ordinary dividends” on line 3b of your 2018 tax return.

 

If you invest in a mutual fund or your investments are handled by a brokerage they will normally spell out the differences on their 1099’s that you get around tax time.

 

They will also normally provide you your cost basis (the purchase price adjusted for tax purposes).

 

Always remember that it is important to adjust your cost basis for re-invested dividends.

 

You pay tax on re-invested dividends in the same manner as if you received cash.  The good news is you won’t be taxed twice because your cost basis will be adjusted upward as a result of the dividend re-investment and again most brokerage companies will do this for you.

 

When you decide to sell your stocks or mutual funds you have four options to choose from:

 

  • FIFO or first in-first out
  • LIFO or last in-first out
  • Use the average cost per share
  • Specify certain shares

 

Be aware that there are caveats and regulations that apply when categorizing for tax purpose so be sure you use competent tax professionals.

 

If you own stocks or mutual funds you may have to pay tax on the capital gains even if you don’t physically utilize the gain!

 

If you have a desire to avoid capital gains consider an index fund that only pays dividends or a tax efficient fund that avoids both capital gains and dividends.

 

Also if your fund has foreign holdings they will withhold taxes paid on dividends and if box 7 on 1099-DIV has an entry that means foreign taxes were paid.

 

You can use the foreign tax credit (U.S. residents) to reduce some or all of those taxes or you can choose the deduction (reduces your taxable income—use form 1116).

 

BONDS, MLP’S & REAL ESTATE

 

There are a number of bonds and the taxation depends on what type you own:

 

  • Corporate–taxed at ordinary income rates

 

  • Treasury–income is subject to federal but not state

 

  • Municipal–income is not subject to Federal and if issued and purchased in your home state may avoid state and local

 

  • Series I and EE bonds—taxation depends on how you use the proceeds at maturity or cashing in of bond

 

In most cases Master Limited Partnership‘s and Real Estate Investment Trust‘s are taxed at ordinary income tax rates.  Under the new tax law enacted in 2017 you may be able to deduct 20% of MLP or REIT income as qualified business income.

 

If you buy and sell real estate such as a personal residence and you meet the 2 out of 5 year rule—you have a tax free gain up to $250,000 if single and $500,000 if married filing joint.

 

If you sell rental property that property will be subject to recapture of depreciation (the depreciation that you took or had the option to take will be added back thus reducing your overall gain) and will be taxed at your ordinary income rate if held for less than one year and your “capital gains rate” if held for one year or more (see capital gain rates below).

 

1031 exchange may allow you to avoid or delay taxes and is an effective tool that is utilized by serious seasoned real estate investors and may be worth considering–depending on your goals.

 

Long-Term Capital Gains Rate:

 

0% if you are single and your taxable income is $38,599 or less or if you are married $77,199 or less

 

15% if you are single and your taxable income is between $77,200 and $425,800 or if you are married and your taxable income is between $77,200 and $479,000

 

20% if you are single and your taxable income is above $425,800 and married above $479,000

 

Note: If your modified adjusted gross income is above $200,000 if you are a single filer and $250,000 if you are married filing jointly you have to pay a 3.8% net investment income tax, potentially bumping your capital gains rate to 18.8% or 23.8% respectively.

 

If on your K-1 (if you have holdings in a trust, partnership or S-corporation) some portion is a return of capital—you may not owe taxes on that amount—your tax professional should be aware of whether you will owe taxes based on the data on your K-1.

 

FUTURES & PRECIOUS METALS

 

Profits from futures trading are generally taxed at 60% long-term capital gains and 40% short-term gains no matter how long you held the contract.

 

When you buy or sell option contracts on an exchange, the tax rules are the same as for stocks that was mentioned earlier in this discussion.

 

The taxation of options can be tricky and is beyond the scope of this discussion, however it is worth mentioning that you will need a tax professional who is familiar with option taxation.

 

Precious metals are often classified by the IRS as a collectible—rather than an investment and they would be taxed at 28% (long-term).

 

ETF’s or exchange traded funds that invest in precious metals are also taxed at the 28% rate.  Funds and ETF’s that invest in mining stocks of precious metals generally get the same capital gains rate as any stock fund!

 

OTHER

 

With the advent of  cryptocurrency such as bitcoin, block chains and other more complex investments, the taxation is not clear in some instances at this time as regulations are underway or the tax treatment is not clearly defined.

 

Most investments will normally be taxed in the U.S. if a gain is going in your pocket or it is traceable and it is important that you have a tax professional who has experience in handling the type of investments you now invest in—or you anticipate investing in during your lifetime.

 

CONCLUSION

 

You have a vast number of investment choices available and it is important that you have mastered your credit, you understand your life stage, you have an emergency fund that will add an additional layer of protection in case your investments don’t materialize as you planned, you are on track with your retirement income and you review your finances on a consistent basis.

 

Another key point worth mentioning is you “must know” how the taxation of your investment income will occur in the state that you now reside in–and/or anticipate moving to in your future!

 

By doing all of the above you will put yourself on a serious path toward wealth building and you will enjoy life along the way.

 

You can build wealth in a worry-free way and win throughout your financial life because you took the time (when others chose not to) to look at investments on the front end and knew ahead of time the tax ramifications that lied ahead in your future.

 

All the best toward your investment choices and future success…

 

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Bond Frequently Asked Questions

 

Bond Frequently Asked Questions

 Learn more about bonds and bond funds by reviewing common questions that many have asked about bonds…

 

Q: What can I do to position myself for successful bond investing?

A: It is important that you “have all your bases covered” prior to starting on your bond investing or any investing as it is important that you have reduced or eliminated your debt to an acceptable level, you have a properly funded emergency fund (or you are working toward that goal), you understand credit—and you have looked at your finances in a comprehensive way.

By doing the above you put yourself in position for lasting success and you make your bond investing (or any investing) more likely to succeed—and even if you are unsuccessful your living conditions won’t be adversely affected.

 

Q: What is a bond?

A: a bond is a debt instrument used by corporations (and government entities) to help fund their growth.  Bonds are issued in increments of $1,000 and are sold at either a discount (below $1,000) or at a premium (above $1,000) and yield and yield to maturity is used to determine rates of return.

Interest rate movement will play a large factor in determining the actual yield or yield to maturity.  Bonds come in all durations with short, intermediate, and long-term available on the markets.

Governments also issue bonds (i.e. series EE and Series I) directly to individuals as well and they also issue municipal bonds  and treasuries among others.

 

Q: What is a bond fund?

A: a bond fund is a collection of bonds and can be mixed in any number of ways such as corporate and government, long-term only, short, intermediate and long-term, national and international and many other ways that a bond fund manager sees fit to create.

 

Q: What is the difference among corporate, municipal, government, international, series EE, series I and junk bonds?

 

  • Corporate bonds are a debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company’s physical assets may be used as collateral for bonds.

 

  • Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems etcetera. Generally, the interest on municipal bonds is exempt from federal income tax, however some municipalities issue both taxable and non-taxable munis.   Pension funds and foreign investors normally don’t get the tax break.

 

  • Government bonds are a debt security issued by a government to support government spending. Before investing in government bonds, investors need to assess several risks associated with the country, such as country risk, political risk, inflation risk and interest rate risk, although the government usually has low credit risk. Federal government bonds in the United States include savings bonds, Treasury bonds and Treasury inflation-protected securities (TIPS).

 

  • International bonds are a debt investment that is issued in a country by a non-domestic entity.  International bonds are issued in your country but are purchased outside of the country in which you reside and are purchased in your  country’s currency.  They pay interest at specific intervals, and pay the principal amount back to the bond’s buyer (you) at maturity in the same manner as domestic bonds.

 

  • Series EE bonds are a “non-marketable”, interest-bearing U.S. government savings bond that is guaranteed to at least double in value over the initial term of the bond, typically 20 years. Most Series EE bonds have a total interest-paying life that extends beyond the original maturity date, up to 30 years from issuance.

 

  • Series I bonds are a non-marketable, interest-bearing U.S. government savings bond that earns a combined: 1) fixed interest rate; and. 2) variable inflation rate (adjusted semiannually).  Series I bonds are meant to give investors a return plus protection on their purchasing power.  Series EE and I bonds are considered “non-marketable” savings bonds meaning they can’t be bought and sold in the marketplace.  The can be redeemed at many banks and financial institutions.

 

  • Junk bonds are a fixed-income instrument that refers to a high-yield or non-investment grade bond. Junk bonds carry a credit rating of BB or lower by Standard & Poor’s (S&P), or Ba or below by Moody’s Investors Service. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds.

 

They do well when the economy is growing rapidly and stocks are rising.

 

Q: What are bond rating agencies and how do they operate?

A: There are a number of bond rating agencies and they include Weiss, S & P’s, Moody’s, Fitch and several others and they rate corporations, cities, counties, states and national government’s based on their ability or perceived ability to repay their debt.

In a sense it is based on the financial strength that they bring forward based on their past, present and projected ability to repay their debt obligations.

  

Q: What is the bond rating of the United States?

A: With the United States being the strongest economy in the world in the minds of many it is a big surprise for many when they learn that the United States does not have the highest bond rating.

The United States was recently downgraded from AAA to AA by Moody’s and Standard & Poors (several credit rating agencies around the world have downgraded their credit ratings of the U.S. federal government, including Standard & Poor’s (S&P) which reduced the country’s rating from AAA (outstanding) to AA+ (excellent) on August 5, 2011.

 

Q: If the interest rate rises what will happen to bond prices?

A: The bond price “will fall” as there is an inverse relationship (opposite relationship) to bond prices–meaning if interest rates fall bond prices will rise.

 

Q: What is YTM or Yield to Maturity and how do I determine what my YTM is prior to purchasing a bond?

A: Yield to Maturity takes into consideration the interest (coupon payments) during the period of bond ownership up until the bond is sold at its maturity date—thus YTM.

Yield on the other hand only includes the coupon payments that you will receive on an annual basis.

You can possibly get the YTM or projected YTM from your broker or other published financial publications.

 

Q: What is duration as it relates to bonds?

A: Duration is a measure of a bonds interest rate sensitivity.  You can use a bonds duration to make a better decision as to whether the bond will rise or fall based on interest rate movement.

 

Q: How are bonds taxed?

A: Many are taxed depending on whether they are inside or outside of a retirement account and the taxation is based on the interest received during the year.

If they are inside of your retirement account they may avoid taxation until withdrawals or retirement distributions begin to occur.  Some bonds (depends on the type) are taxed on an annual basis and some are taxed at maturity and those that are used for certain purposes may avoid taxation altogether.

 

Q: What is the biggest risk that I will normally face if I invest in bonds?

A: Market activity is the real key especially as it relates to rising inflation.  If inflation is stable or not moving upward much, interest rate movement will normally be stable as well and bond investments will remain a good play.

When a large number of bondholders move over to stocks for varying reasons that too can be a cause for concern.

However, rising inflation is something you must be aware of and if you are a bond owner you want to be aware of that movement so that you can countermove and limit your losses or protect your gains—in a timelier manner.

 

Q: What is bond laddering and how can I ladder my portfolio to increase my returns?

A: You can ladder your portfolio by purchasing bonds at different times and purchasing bonds with differing durations.

For example you can purchase short, intermediate and long-term bonds at differing intervals such as every 6 months, every year or every other year for a specified period of time—and that will help protect your gains or limit your losses.

 

Q: What is my number 1 concern if I decide to invest in bonds?

A: Depending on the type of bond you invest in inflation is normally the major concern as it will devalue the real worth of future interest payments and usually results in higher interest rates that will bring down the bond’s current market value.

 

Q: What is an inverted yield curve and how will it affect my bond investments?

A: It usually means the economy is slowing and moving into a recession.  Investors may forecast lower interest rates and pull money out of bonds and put into cash, stocks or mutual funds.

 

Q: How are bonds typically sold?

A: Usually in multiples of $1,000 if you purchase from a broker. Bond funds and mutual funds may offer investment of a lower amount.  Series EE and I bonds can be purchased for as little as $50.

 

Q: If a company liquidates where do I as a bondholder fall in claiming whatever cash becomes available as a result of the liquidation (bankruptcy)?

 

A: The good news is that bondholders are first in line to be paid during bankruptcy proceedings.  You would be considered a general creditor, along with employees, contractors and suppliers–stockholders would be the last in line.

 

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Cash Flow & Investing in Your Future

Learn how you can invest and build wealth more efficiently in the current economy by knowing where your money goes on a monthly basis…

 

It is important that you have a workable understanding of how your monthly cash flow will affect your future outcomes.

 

In this discussion TheWealthIncreaser.com will look at ways that you can effectively manage your cash flow in the current economy, as you age–and during your retirement years.

 

By knowing this information at this time (right now) you can more effectively plan your and your family’s future so that you can take the vacations that you desire, do more on a monthly basis with your kids and grand-kids, donate time and money to your favorite charitable organization(s), enjoy entertainment in a way that makes your life more meaningful and pursue other goals that are dear to you and your family.

 

There is nothing that you can do to change certain things in your life that may have happened to you in the past.

 

However, if you make the decision at this time to look at your finances and your future in a more intelligent, consistent and proactive manner you CAN change the outcome of your investments and live the type of retirement that you desire.

 

You Must Know Your Current Cash Flow

 

It is imperative that you at this time take a serious look at your monthly inflows and outflows of income and expenses from all sources.

 

Does your income exceed your expenses on a monthly basis or is there a shortfall? 

 

This is something that you must know so that you can build wealth and invest in your future in a way that will ensure that you will attain realistic results.

 

You must at this time define your monthly income, gather your monthly expenses and determine if you have discretionary income that you can use to save more efficiently or pursue other goals that you may have.

 

With your knowledge and understanding of just this information you will put yourself well ahead of those in the general population and you will be showing a serious intent to improve your living condition for yourself and your family.

 

You Must Know Your Cash Flow at the Various Stages in Your Life

 

Now that you have a handle on your current financial condition as it relates to your monthly cash flow, you can now plan for your future.

 

Will you make a serious commitment to know where your monthly income and expenses are at this time–or will you procrastinate?

 

You can now pay off or pay down your debt, make the decision to get more income, increase your retirement contributions, and make other adjustments based on your lifestyle and where you want to go in your future.

 

You Must Know Your Cash Flow During Your Retirement Years

 

After you have invested in your future in a way that would take you toward your retirement number you must know your income from all sources along with your monthly expenses during your retirement years.

 

Did you plan appropriately and in a manner that allows your monthly income from all sources to pay your monthly expenses for the next 20 to 30 years (your remaining life expectancy) or is it likely there will be a shortfall that would force you to continue working?

 

Will you have a substantial excess that will allow you to leave a legacy for your heirs?

 

Those and other probing type questions are what you must ask yourself and answer appropriately during this time so that you won’t have to look back in regret during your retirement time.

 

Conclusion

 

It is imperative that you have an overview of your life stages at this time so that you can invest in a wise manner at the various stages in your life.

 

It is also important that you measure the success that you achieve at the various stages in your life on your ability to pay your monthly expenses during your retirement years in a manner that allows you to do just that—and have money left over for the enjoyment of life that you desire during your retirement years.

 

Will you have the monthly income from all sources (social security, 401k, pension income, investments and other sources) that will allow you to live at a comfortable level after the payment of all of your mandatory monthly expenses?

 

If you don’t see it happening after sincerely analyzing your finances at this time—NOW is the time to alter your planning to make it happen!

 

In addition to aiming for your “retirement number” be sure to also aim for your “ability to pay your monthly bills” and have cash left over for the enjoyment of life on a monthly basis.

 

Your “retirement number” is a lofty goal, however it may not bring you the monthly income that you need to pay your expenses and live at the level that you desire during your retirement years or your remaining years on earth based on your life expectancy.

 

Be sure to look at your finances in a comprehensive manner at this time so that you will minimize or reduce any future surprise as it relates to your inflow and outflow of cash on a monthly basis.

 

If your monthly income does not look like it will cover your monthly expenses based on your analysis at this time, it is your responsibility to come up with more income or pay off or pay down your debt so that you can get your debt to a level that allows you to get the numbers on a monthly basis—as far as your income and expenses—to turn in your favor.

 

Will you need 60%, 75% or 85% of your current income to live at the level that you desire?

 

It is up to you at this time to determine the path that you will take as far as making your retirement years a more pleasurable experience as you complete your journey on planet earth.

 

Always remember that joy and confusion cannot live in the same house!  Make the decision now to see your retirement years with clarity by investing the time NOW to achieve and live the way that you desire LATER (during your retirement years).

 

Now is the time that you go after what you desire with real zest.

Now is the time that you give it your best.

 

You must at this time know–your cash flow!

You must at this time decide to pursue results that will show!

It is up to you to aim high or low!

Now is the time that you reap what you sow by planting (planning) in advance so “you” will know!

 

All the best to your cash flow and retirement success as you pursue your future with more zest…

 

Go to Calcutlator.net to calculate your current monthly cash flow number…

Go to T Rowe Price for free 30 second retirement projection calculator…

Go to Kiplinger.com for your retirement number calculator,,,

Go to 100 money saving tips that can help improve your cash flow…

Go to Net Worth & Wealth Building page on this site to learn about your Net Worth and how it relates to your Cash Flow,,,

 

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Net Worth & Wealth Building

Learn why it is imperative that you know your net worth as you pursue your wealth building efforts…

 

In the current economic environment there are many who are trying to get ahead financially.

 

Although that is a lofty goal, many have no clue or are totally unaware of where they now stand financially as it relates to their finances and particularly their net worth as they attempt to build wealth.

 

In this discussion TheWealthIncreaser.com will integrate your understanding of how you can manage your finances on a daily basis with the knowledge that you need to know that can help you  “increase of your net worth” and ultimately your wealth–so that you can live in a manner that will bring you the joy that you desire on a continuous basis!

 

It is very important that you have a real understanding of what you own (your current assets) and what you owe (your current liabilities) as that is a critical factor as you move forward in your financial life.  It is also very important that you at this time come to the full realization that your “Self Worth” is far more important than your “Net Worth” as you build wealth!

 

In simple form, theory and practice you can determine your net worth by creating a personal balance sheet so that you will know what you own and what you owe (assets minus liabilities equal net worth) and create a level of comfort or discomfort within your mind–depending on the “outcome of the number that you come up with”–as it relates to your net worth at this time.

 

However, even if the number that you come up with is not of your liking, you can change all of that by making the decision to do so and then putting an action plan in place that will take you to where you need or desire to be.

 

If your net worth is not at an acceptable level, you can take real steps that can assure that you will get your finances to an acceptable level or to the level that will make life more meaningful and enjoyable for you and your family!

 

If your net worth is at an acceptable level you can continue to make good decisions as it relates to your finances and build the type of wealth that will take you toward the net worth that you desire or toward  the net worth that will make life “more enjoyable” for you and your family.

 

You can start on a journey of improving your net worth so that you can do what you really desire to do during your lifetime by taking several important steps:

 

1)      Know how to use personal financial statements to your advantage

If you approach your finances with the creation and understanding of a personal budget or cash flow statement you can put yourself in position to make the right–or at a minimum a good decision as it relates to your financial future.

 

You also need to create a personal income statement if you desire even more clarity about where you are headed as far as your finances are concerned.  You can look at your personal income statement in the same manner as your cash flow statement—however it is on a 12 month or annual basis, whereas your cash flow statement or budget is on a monthly basis.

 

In addition, a personal balance sheet will provide you the knowledge of where you stand financially as far as your net worth is concerned.

 

The higher your net worth, the better off you are doing financially.  You can purchase Managing & Improving Your Credit & Finances for this Millennium and learn about ways that you can attack your net worth before and after you retire in ways you may have never imagined.

 

You can go to Kiplinger.com, right now to see where you now stand as far as your net worth is concerned.  Be sure you have accurate numbers as it relates to your assets and liabilities.

 

By doing so you can put yourself in better position to achieve the goals that you desire to attain during your lifetime.

 

2)      Know how to manage your credit effectively throughout your lifetime

It is important that you skillfully manage your credit affairs and you don’t let creditor’s skillfully manage you where you operate from a disadvantage.

 

Why should you operate from a vantage point of disadvantage when you can have creditor’s operate from a point of disadvantage—if you gain and utilize the right knowledge.

 

By mastering what it takes to manage your credit effectively throughout your lifetime you put yourself in position to achieve at an optimal level throughout your lifetime and at the same time put yourself in position to use credit wisely or in a manner where you come out ahead!

 

3)      Know all areas of your finances that you must address—and then address those areas appropriately

By knowing and understanding your personal financial statements, knowing how to skillfully manage your credit and having a real understanding of where you want to take your future you are now ready to look at your finances in a comprehensive manner and make moves based on that analysis that will help further increase your net worth as you build wealth.

 

By knowing all areas of your finances that you must address and acting in a positive way on that knowledge you can put yourself in position to attain many of the goals that you may have thought about—but never thought you would achieve during your lifetime.

 

At this stage you would put together written plans that would lead you toward reaching your goals in a realistic manner.

 

Conclusion:

 

By using financial statements to your advantage by reviewing your current cash flow and making improvements where needed, cutting your expenses and getting more income (if you need to do so) you are getting on a real path toward increasing your net worth.

 

However, you can’t stop there!

 

You must know what you own (your assets) and what you owe (your liabilities) so that you can readily determine your net worth.

 

Your goal on an annual basis is to always increase your net worth!

 

In reality, there may be setbacks along the way and that is why you must also properly establish an emergency fund if you have not already done so.

 

In addition,  you must manage your credit optimally and not let your credit manage you (pull you in directions that are not of “your” choosing).  You must further look at ways that you can manage your insurance, investments, taxes, education funding, estate planning/wills and retirement planning in a way that will take you toward your goals in a more effective and efficient manner.

 

It is in your best short and long term interest to know your net worth at the earliest stage possible and to make plans to improve your net worth at the earliest time possible.

 

It is your responsibility to know where you stand financially and it is your responsibility to put in place a plan that will reduce or eliminate your debt so that you can start on a serious journey to building wealth and increasing your net worth.

 

Your sincere approach to eliminating debt, increasing your income and building wealth in a manner that truly serves your best interest is a major factor in helping you get on a fast track path to making life more enjoyable for you, your loved ones—and others as you navigate through life on planet earth.

 

Always remember that the more focused you are toward improving your net worththe more mental energy you can pull up from inside your mind  that can take you toward your goals more efficiently.

 

Be sure to put your goals in writing to help clarify your intent so that you can focus your resources (financial and non-financial) on things that really matter in your life.  By doing so you will increase your net worth and build your wealth more efficiently over the coming years.

 

All the best to your new net worth success…

 

Calculate your net worth now at Kiplinger.com net worth page…

Learn how to invest in a wiser manner so that you can get the returns that you desire…

Learn why your “Self Worth” is far more important than your “Net Worth” as you build wealth…

 

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