Alternative Investment 101
Charateristics
Charateristics that generally apply include:
- Lower liquidity than traditional investments
- Accurate market values difficult to determine
- Limited historical performance data
Exchange Traded Funds (ETF)
Special type of fund that invests in a portfolio of stocks or bonds designed to mimic performance of a specified index
Advantage of ETFs
- Efficient method of diversification
- Trade similar to traditional equity investments
- Some ETFs patterned after indexes with active future/ option market and better risk management
- Exact composition is known at all time
- Typically, very efficient operating expense ratio; no load to purchase or redeem shares
- Decreased capital gains tax liability
Disadvantage of ETFs
- Some countries have fewer indexes than U.S. for ETFs to track (results in mid- or low-cap stocks no being well represented)
- Ability to trade intraday may not be significant to investors with longer time horizon
- ETFs with low trading volume may have large bid-ask spreads
- Larger investors may choose to directly invest in an index portfolio, resulting in lower expenses/ lower tax consequences
Valuation of Real Estate Investments
- Valuation method: cost method, sales comparison method, and income method.
- Income method uses a discounted cash flow model similar to that for a perpetuity:
Value = NOI/ Market cap rate
- Net operating income (NOI) equals gross operating income less estimated vacancy, collections, and other operating expenses, (including property taxes, but excluding income taxes). NOI does not include depreciation of financing costs.
-END-
Tags: Alternative Investment, ETF, Real Estate