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    Topic 12 Topic 12 I. The Nature & Scope of I. The Nature & Scope of Real Estate Investments Real Estate Investments

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    Shruti Agarwal
    1. Real estate is artificially delineated space referenced to a fixed point on earth that generates income over time through its use. 2. Real estate investments are evaluated using various traditional approaches like investment value, internal rate of return (IRV), and modern approaches like present value, internal rate of return, and risk analysis. 3. Key factors in evaluating real estate investments are potential income, expenses, financing, and capitalization rates. Models like the capital revenue model and market revenue model are used to analyze required rents and justified investment values.

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    Topic 12 Topic 12 I. The Nature & Scope of I. The Nature & Scope of Real Estate Investments Real Estate Investments

    Uploaded by

    Shruti Agarwal
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    1. Real estate is artificially delineated space referenced to a fixed point on earth that generates income over time through its use. 2. Real estate investments are evaluated using various traditional approaches like investment value, internal rate of return (IRV), and modern approaches like present value, internal rate of return, and risk analysis. 3. Key factors in evaluating real estate investments are potential income, expenses, financing, and capitalization rates. Models like the capital revenue model and market revenue model are used to analyze required rents and justified investment values.

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    1. Real estate is artificially delineated space referenced to a fixed point on earth that generates income over time through its use. 2. Real estate investments are evaluated using various traditional approaches like investment value, internal rate of return (IRV), and modern approaches like present value, internal rate of return, and risk analysis. 3. Key factors in evaluating real estate investments are potential income, expenses, financing, and capitalization rates. Models like the capital revenue model and market revenue model are used to analyze required rents and justified investment values.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    10 views29 pages

    Topic 12 Topic 12 I. The Nature & Scope of I. The Nature & Scope of Real Estate Investments Real Estate Investments

    Uploaded by

    Shruti Agarwal
    1. Real estate is artificially delineated space referenced to a fixed point on earth that generates income over time through its use. 2. Real estate investments are evaluated using various traditional approaches like investment value, internal rate of return (IRV), and modern approaches like present value, internal rate of return, and risk analysis. 3. Key factors in evaluating real estate investments are potential income, expenses, financing, and capitalization rates. Models like the capital revenue model and market revenue model are used to analyze required rents and justified investment values.

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    Download as PPT, PDF, TXT or read online from Scribd
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    of 29

    Real Estate Investments

    Topic 12 I. The Nature & Scope of Real Estate Investments

    A. Definition of Real Estate


    

    Real Estate is artificially delineated space referenced to a fixed point on the surface of the earth with a fourth dimension of time. It is built to house an economic activity that is subject to cultural preferences and restricted by the public infrastructure.

    Concepts
    

    SpaceSpace-Time Product
    Real estate is a space-time product, that is, spaceit generates income over time in exchange for the use of space. Examples: apartments, football tickets, wedding receptions

    D. Characteristics
    

    The Real Estate Market Characteristics:


    1. 2. 3. 4. 5. Highly Stratified, Local Markets Heterogeneous Product Private, not Public, Transactions Unsophisticated Investors Unorganized Market

    E. Investor Motivations
             

    1. Pride in Ownership 2. Personal Control 3. Self-use and Occupancy Self4. Estate Building 5. Security of Capital 6. High Operating Yield 7. Leverage 8. Tax Shelter 9. Capital Appreciation 10. Portfolio Diversification

    F. Investment Disadvantages and Risks


    1.  2.  3.  4.  5.  6.
    

    Illiquid Management Depreciation of Value Government Controls Real Estate Cycles Legal Complexity

    G. Participants
    1.  2.  3.  4.  5.  6.  7.
    

    Builder/developer Syndicator Property Manager Construction Lender Permanent Lender Managing Equity Investor Passive Equity Investor

    Real Estate Investments


    Topic 12 II. Overview of Investment Decision Process

    A. Framework for Real Estate Investment Studies


    

    1. Strategy
    Develop an overall investment philosophy

    2. Analysis
    Measuring return

    3. Decisions
    Risk and return evaluations

    4. Investment Transaction  5. Feedback


    

    B. Investment Analysis vs. Feasibility Analysis


    

    1. Investment and Investment Analysis


    a. Capital Assets b. Equity c. Debt d. NOI e. Lender/Equity Relation f. Maximizing Wealth g. Return and Risk

    B. Investment Analysis vs. Feasibility Analysis (continued)


    

    2. Feasibility and Feasibility Analysis


    a. Site in Search of a Use b. Use in Search of a Site c. Investor Looking for the Best Investment Alternative

    3. Investment Life Cycles


    a. Property Life Cycle b. Ownership Life Cycle c. Investor Life Cycle

    B. Investment Analysis vs. Feasibility Analysis (continued)


    

    4. Ownership Life Cycle


    a. Acquisition b. Operation c. Disposal/Termination

    5. Investor Life Cycle


    a. b. c. d. Young Investor Middle Aged Investor Older Investor Institutional Investor

    Real Estate Investments


    Topic 12 III. Decision Making Approaches to Real Estate Investment

    B. Traditional Financial Decision Making Approaches


    

    1. Investment Value Approach


    a. Invest if: V u C b. Reject if: V C

    2. IRV
    Assumes:

    I R V

    a. Productivity = NOI o b. NOI is stabilized c. Holding period is infinite d. Capital is recaptured from income, except land

    Stabilized NOI
    

    Ye = 10.5% PV Year NOI * PV factor 1 $53,918 * .904977 $48,795 2 56,645 * .818984 46.391 3 59,352 * .741162 43,989 4 62,037 * .670735 41,610 5 64,698 * .607000 39,272 6 67,185 * .549321 36,906 Sum = $256,963

    Stabilized NOI (continued)


    Stabilized NOI = PV of 7NOI/PV of Annuity  Stabilized NOI = $256,963 / 4.292179  Stabilized NOI = $59,868
    

    Estimating Re
     Consider:

    a. Real Rate of Return b. Inflation c. Risk Premium

    C. Modern Capital Budgeting Approaches


    1.  2.  3.  4.
    

    The Present Value Model Internal Rate of Return Modified Internal Rate of Return Risk Analysis

    a. Ratio and Sensitivity b. Simulation c. Elasticity

    Investment Principles
    1. The investor should buy the assumptions that create the yield rather than the yield itself.  2. The investor should be as concerned about what to offer the next buyer as with what he is buying.  3. The investor should price the property apart from the tax advantages.
    

    Investment Principles
    4. The investor must compare alternatives.  5. The investor should understand the potential profit and risk in terms of DOLLARS. DOLLARS.
    

    Sources of Return from a Real Estate Investment


    Cash flow from operations  Tax Savings  Equity buildup from loan amortization  Loan refinancing proceeds  Appreciation of property value (sales proceeds)
    

    The Market Revenue Model : (Back Door)


    Market Rents Equity Acct. - Reserves - Vacancy CTO z Re JEA = (1 - BEP) x x BEP = Cash Margin

    - RE Taxes - Operating Exp. CASH FOR DEBT z Rm

    +
    Justified Investment Value

    JMA

    The Capital Revenue Model: (Front Door)


    Cost of Project Equity = (1 - m) x Amount x Re CTO x m= Debt Amount x Rm ADS

    +
    NOI
    + Operating Expenses + Real Estate Taxes + Vacancy Allowance PGI

    PGI/Net Leasable Area = Required Rent to be Charged

    Example Data
      

    1. Project Cost: $7,000,000 2. M = .80 3. Loan Terms: .064, 20 yrs, annual pmts.
    Hence, Rm = .09

      

    4. RE Taxes = 10% Operating Expenses = 30% Vacancy Allowance = 5% Market Rents = $4.00/S.F. Reserve Account = $44,000 Re = 14%

    Example Data (continued)


    1.  2.  3.  4.  5.  6.  7.
    

    Cost of Project: $7,000,000 Loan to Value: 0.800 Mortgage Constant: 0.140 Mortgage Constant: 0.129 Operating Expenses: $343,000 Vacancy Losses: $55,500 Net Leasable Area: 260,000

    Capital Revenue Model (CRM)


             

    Cost of Project: Equity Amount: Cash Throwoff: Debt Amount: Annual Debt Service: Net Operating Income: Plus Operating Expenses: Plus Vacancy Losses: Equals Potential Gross Income: PGI/Net Leasable Area Equals REQUIRED RENT:

    $7,000,000 $1,400,000 $ 196,000 $5,600,000 $ 504,000 $ 700,000 $ 343,000 $ 55,500 $1,098,500 $4.225

    Example Data (continued)


    1.  2.  3.  4.  5.  6.  7.
    

    Cost of Project: $7,000,000 Loan to Value: 0.800 Equity Dividend Rate: 0.140 Mortgage Constant: 0.129 Operating Expenses: 37.21% Vacancy Losses: 5.00% Net Leasable Area: 80,000

    Market Revenue Model (MRM)


              

    Market Rents: $1,100,000 Cash Retained for Equity Account: $ 166,500 Less Reserves: $ 44,000 Less Vacancy: $ 55,500 Equals Cash Throw-Off: Throw$ 67,000 Divided by Re Equals Just. Eq. Amt.: $ 478,571 Account Allowing for Monies-Out: Monies$ 943,500 Less Operating Expenses: $ 333,000 Less Real Estate Taxes: $ 10,000 Equals Cash for Debt: $ 600,500 Divided by Rm Equals Just. Debt Amt.:$6,672,222

    Market Revenue Model (MRM) (continued)


    

    Justified Investment Value: $7,150,793

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