Professional Documents
Culture Documents
Investment Analysis
Equity Investment
Motivations for Investing in Income
Properties
Rate of Return
Price Appreciation
Diversification
Tax Benefits
11-2
Market Characteristics
Real Estate Cycle
Large Market in number and size of properties
Competitive
Fragmented Ownership
Overdevelopment Potential
The cycle differs for different property types.
11-3
Exhibit 11-1
The Real Estate Cycle
11-4
Investment Strategies
Investing in Core Properties
Investing in Core Properties with a Value
Add Strategy
Property Sector Investing
Contrarian Investing
Market Timing
Growth Investing
Value Investing
11-5
Investment Strategies
Strategy as to Size of Property
Strategy as to Tenants
Arbitrage Investing
Turnaround/Special Situations
Opportunistic Investing
Investing in Trophy or Blue Chip
Properties
Development
11-6
Market Analysis
Evaluation of supply and demand for a
type of property
Absorption
Supply of Space
Market Rents
Forecasting Supply, Demand, Market
Rents, and Occupancy
11-7
Investment Analysis
Internal Rate of Return (IRR)
The discount rate at which the net present
value of the cash flows is equal to 0.
If IRR >= r; accept Project
If IRR < r; reject Project
Where r is the discount rate, or more
colloquially, the hurdle rate
11-8
Investment Analysis
Net Present Value
A way to solve for the initial price that an investor may
pay given a specified discount rate.
Discounted value of the cash flows.
The discount rate is the rate of return that an investor
will require in order to make this investment.
If we include the initial equity investment in this
calculation, we can solve for the difference and see
how much more or less the investor may pay and still
receive a rate that is equivalent to their discount rate.
11-9
Debt Financing
Equity Dividend = NOI - DS
NOI = Net Operating Income
DS = Debt Service
11-10
Debt Financing
Equity Dividend Rate =
Equity Dividend/Initial Equity Investment
Sometimes referred to as unleveraged cash on cash
rate.
Debt Financing
Example 11-1:
$1,000,000 Property;
95% allocated to building and 5% to land
70% LTV; 7% Interest Rate, 30 Years
$700,000 debt; $300,000 equity
Monthly Payment = $4657.11
DS = 12 x $4657.11 = $55,885
NOI1 = $85,000
11-12
11-14
Taxation
Four Classes of Real Property
Real Estate held as a personal
residence
Real Estate held for sale to others
dealer property
Real Estate held for use in a trade or
business trade or business property
Real Estate held as an investment for the
production of income investment
property
11-15
Portfolio Income
Interest, dividends, and capital gains
Passive Income
Rents from real estate, and royalties from
oil and gas rights
11-16
11-17
2nd Exception
Broad exception for real estate professionals from
the Passive Activity Loss rules.
For many of you, if you enter the real estate
business, this will apply to you.
11-18
Depreciation Basis
The original cost basis includes all costs
associated with acquiring the property and
transferring the title
Land value cannot be depreciated
The depreciable basis is the total value
that can be depreciated over the recovery
period
Depreciable Basis = Cost Basis Land
Amount
11-19
Depreciation
Depreciation
Depreciable Basis / Recovery Period
11-22
$85,000
- $48,775
$ 1,680
11-23
11-26
11-27
11-28