Renting versus buying can be a difficult choice. Still, according to The Wall Street Journal, almost two-thirds of American households own homes. Many more own rental properties or second vacation homes. By contrast, a Gallup Poll found that only one-half of Americans own stocks.
Home equity is the foundation of personal wealth in the United States, representing about two-thirds of net worth for most American households, per Bloomberg. The expansion of home ownership has been stimulated by government programs and tax advantages to incentivize the purchase of houses. According to a study in Social Forces, home ownership leads to “a stronger economy, better schools, and an invested, proactive citizenry.” Homeowners have higher voting rates and are more involved in civic organizations.
Owning real estate has some unique financial advantages. For example, homeowners can deduct their mortgage interest, mortgage insurance premiums, and property taxes from ordinary income. Also, proceeds from the sale of a house are treated as capital gains for taxes – up to $250,000 of the gain can be excluded from income for a single taxpayer or $500,000 for a couple filing a joint return.
Owning a home or investment real estate offers huge advantages to both society and you individually. Here’s how to get the most out of your investment.
Real Estate as an Investment
Owning an investment property is significantly different than owning the property in which one lives. While investors share many common risks – illiquidity, lack of transparency, political and economic uncertainty – each investment property is unique, varying by use, location, improvement, and permanence. Each investment can be subject to a bewildering collection of tax rules, all of which affect the net return on investment.
Andy Heller, co-author of “Buy Even Lower: The Regular People’s Guide to Real Estate Riches,” notes that most people pay too much for their properties: “The profit is locked in immediately once the investor buys the property. Due to mistakes in analysis, the investor pays too much and then is surprised when he doesn’t make any money.”
Heller advises that success in real estate investing requires:
An old proverb claims, “The art is not in making money, but in keeping it.” Unfortunately, con artists and swindlers are anxious to separate you from your money by means of deception and fraud.
In an interview with BBC Future, Dr. Eryn Newman of the University of Southern California said a positive story that “feels smooth and easy to process” is easy to accept as truth. Con artists are particularly talented in creating believable lies. Falling for their tricks costs U.S. citizens billions every year.
According to Anthony Pratkanis, “Every year, Americans lose over $40 billion in telemarketing, investment, and charity fraud.” However, this amount may be vastly understated because instances of fraud are likely under-reported. According to the Financial Fraud Research Center, up to 65% of victims fail to report their victimization. They typically do not tell the authorities because they lack confidence in the police and the likelihood of restitution. Many are embarrassed by their gullibility.
But in her interview, Dr. Newman claims that gullibility – the tendency to be duped or manipulated by one or more people – does not reflect intelligence. Anybody can fall prey to a financial scheme or scam. Therefore, your best line of defense is to have a thorough understanding of how con artists operate – and how to spot them before they take advantage of you.
Victims of scams – known as “marks” – are often fooled when they hope to get something for nothing or very little. Other victims – often the elderly – may be susceptible due to their good intentions and desire to help others.
While many believe that the typical victim of an investment scam is older and less educated than the general populace, the Financial Fraud Research Center reports that this stereotype is false. The average investment fraud victim is “more likely to be male, relatively wealthy, risk-taking, interested in persuasive statements, open to sales situations, and better educated than the general public.” Martha Deevy, director of the Stanford Center on Longevity’s Financial Security Division, stated in an interview with the American Psychological Association that the typical investment fraud victim is a middle-aged, married, educated, financially literate white male under some financial strain.
Dr. Stephen Greenspan has spent more than a decade studying the problem of gullibility. In the The Wall Street Journal, Dr. Greenspan names four distinct factors that make a person more susceptible to being duped:
The Wall Street Jungle, written by Richard Ney in 1970, compares the field of investments to a shadowy, sometimes impenetrable wilderness filled with dangerous beasts and hidden treasures. Blindly venturing into this unknown world can easily end in disaster.
Often, predators such as con men, thieves, and bandits lurk and set traps for overconfident, naive adventurers foolish enough to believe that a free lunch is possible. Inexperience can lead to a failure to recognize risk (or underestimate it) and result in poor decisions and financial loss.
However, overconfidence is more often the cause of investment catastrophes, especially when coupled with the innate tendency of people to follow the herd. In his 1871 book The Descent of Man, Charles Darwin writes, “Ignorance more frequently begets confidence than does knowledge.”
No investment is free of risk, but the following seven are particularly dangerous. If you want to protect your investments, read this guide carefully.
The Most Dangerous Investments
1. Penny Stocks
Common stocks trading for less than $5 per share are called “penny stocks” by the Security and Exchange Commission. Their stock prices are quoted on the “pink sheets,” an over-the-counter market that connects traders electronically. The companies are not required to register with the SEC and typically do not file periodic or annual reports with the Commission.
Penny stocks are the preferred vehicle for “pump and dump” schemes, fraudulently manipulating prices upward to sell owned shares with huge profits. Testifying before the House Subcommittee on Finance and Hazardous Materials, Committee on Commerce, SEC Director Richard H. Walker stated that organized crime families have been actively involved in manipulating penny stock since the 1970s. The New York Times reported activities of the New York and Russian mafias in two New York brokerage firms: White Rock Partners & Company and State Street Capital Markets Corporation.
Penny stocks attract gangsters and con men because they are easy to manipulate due to the lack of the following:
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