Chapter 1 Introduction to Investments Flashcards
What are four standard and financial evaluation techniques typically applied to investments/production decisions.
1) Break-Even Analysis-a financial evaluation technique that maintains that if a project contributes any return greater than its variable costs, the. project should be undertaken.
2) Payback Analysis-a financial evaluation technique that evaluates the length of time required to pay the investor back for the quantity of capital inputs.
3) Net Present Value Analysis-a financial evaluation technique that evaluates an investment in terms of the difference between the cost of n initial investment and its future cash flow stream.
4) Internal Rate of Return (IRR)-A measure of investment performance; the rate of return on capital that is generated or capable of being generated within an investment or portfolio over a period of ownership
What is meant by the term eminent domain?
The right of a government or properly authorized entity to take private property for public use.
Define Ad Valorem.
Taxes levied on real estate based on value.
With a few exception, capital growth is usually recognized when the asset is:
a. purchased
b. improved
c. appraised
d. sold
d. sold
Capital ROI is defined as:
a. how quickly an investment can be converted into cash.
b. the return on an investment as appreciation in value over a period of time.
c. the loss of value over time.
d. the return on an investment while it is being held.
b. the return on an investment as appreciation in value over a period of time.
What do scarcity and utility mean, as they relate to the characteristics of real estate?
Scarcity-Real estate is limited. The quantity of land on planet Earth is fixed with little possibility of creating more.
Utility-Real estate has the power of economic good. It fills a human need or provides a desired service.
What is the difference between a capital investment and income?
A capital investment is one in which monies are invested to produce or increase asset value. Whereas income generated from the rental of a building is recognized on an income statement in the period in which it is earned, capital or value growth is not recognized until an asset is sold.
Each parcel of real estate has the characteristic of being:
a. mortgaged.
b. rented.
c. valuable.
d. unique.
d. unique
From an investors standpoint, a fair rate of return, inflation rates, perceived risk, and a profit motive are all factors involved in:
a. building interest rates.
b. selecting investment properties.
c. building discount rates.
d. estimating capital gains.
b. selecting investment properties
List the seven valuation criteria specific to real property.
1) Location and Construction-historically the location determined the value. The building was simply to protect the production line. Anything spent on the building decreased the profits. Environmental regulations make a property that complies with them more valuable than one which does not.
2) Production of Growth Capital-investment returns realized from the increase in the value of the property and not from the income produced by the property.’
3) Production of Income-Idea that buildings produce income is newer than the idea that they are worth something. Building are built to be rented now.
4) Durability-Quality construction is cost effective over time. Shorter payback periods typically mean lower quality and therefore higher maintenance costs over the life of the property.
First four criteria are considerations for purchasing or leasing real estate. Last three criteria are associated with facility management.
5) Response to Change-The ability to change the building to suit the needs of changing tenants.
6) Enhancement of Activities Within a Building-The value of the building is affected by what happens inside of it. Most obvious example is the emphasis on energy management since the 1970s. Easy to measure.
7) Productivity-How does the construction/operation of the building contribute to the productivity of the business operating in it. Difficult to Measure.
Explain the rule of 72.
An approximation of how many years will be required to double a capital investment. It is determined by dividing the yield into the number 72.
What is the overall goal of the property manager?
The goal of the property manager is to keep the building full of tenants and running efficiently, maximizing net income for the owner while minimizing risks.
Define Churn Rate.
The annual rate of reconfiguration, relocation, or other physical change in a facility. It is expressed as a percentage of square feet or population involved in the change.
While scarcity and utility are important, what is the most important factor when considering real estate as an investment?
Location
Which power gives the government the right to take title to intestate property without heirs?
Escheat
