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Real Estate > Chapter 14 Powerpoint > Flashcards

Chapter 14 Powerpoint Flashcards

1
Q

What key financial decisions do commercial real estate investors have to make or face when evaluating their investments?

A
  • Where does the money come from
  • Cash flow the property will generate (aka rent monthly/annually)
  • Insurance (cheap vs expensive insurance that covers less or more)
    -Capex (ex: renovating and putting a new roof, new parking lot, etc)
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2
Q

True/False: Managers can make decisions to influence their cashflows.

A

True

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3
Q

True/False: You are working to maximize cashflows (what’s in your pocket).

A

True

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4
Q

What is investment value?

A

Maximum price an investor is willing to pay for an ownership interest.

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5
Q

What is real estate valuation?

A

Estimate future net cash flows.
Convert into estimate of present value.

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6
Q

How are investment decisions made?

A

Comparing estimate of present value to the required equity investment (“Time Zero”).

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7
Q

What is the formula for cash flow?

A

revenue-expenses= cash flow

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8
Q

What are examples of revenue?

A

leases, rent, other income

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9
Q

What are examples of expenses?

A

insurance, taxes, utilities

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10
Q

What are factors that must be considered in the valuation of an income producing property?

A

Magnitude of expected cash flows.
Timing of expected cash flows.
Riskiness of expected cash flows.

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11
Q

What does magnitude of expected cashflows mean?

A

predicting how much cash flow will get (how big and what do you expect)

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12
Q

What does timing of expected cash flows mean?

A

When will you get the cash flow? How long will you hold the asset? How often are you getting money?

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13
Q

True/False: Initial cost should be more than cash flow at sale.

A

False: Initial cost should be less than cash flow at sale (you want to make money)

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14
Q

What is compounding operations?

A

Future value of a lump sum. Future value of an annuity.
(Compounding Operations: If you put money in now, it grows over time)

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15
Q

What is an annuity?

A

You will be given or pay X amount of money over a period of time

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16
Q

What is discounting operations?

A

Present value of a lump sum.
Present value of an annuity.

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17
Q

Is cashflow now worth more than cashflow later?

A

Yes cashflow now is worth more because you can grow it over time and put it somewhere to grow.

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18
Q

What is opportunity cost

A

The benefits you could have received, but lost, by choosing a different option. (i.e. skipping a class to study, but by going to class you lost studying time)

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19
Q

What is present value?

A

An amount at time “zero.”

20
Q

What is future value?

A

A single cash flow at any future time point.

21
Q

What is payment (PMT)?

A

A repeating amount of cash inflow or outflow, flow normally begins at end of first period, sometimes at time zero.

22
Q

What is ordinary annuity (A)?

A

Another name for PMT.

23
Q

What is a lump sum?

A

Any future cash inflow or outflow occurring only once.

24
Q

What is “N” in the financial calculator?

A

The number of compounding (or discounting) periods. If received annually for five years, then N=5; if they are received monthly then N=60.

25
Q

What is “I” in the financial calculator??

A

The periodic (usually monthly or annually) interest rate. If received annually then I=an annual interest rate; if received monthly, then I=Interest Rate/12

26
Q

What is “PV” in the financial calculator?

A

The lump sum amount invested at time zero.

27
Q

What is “PMT” in the financial calculator?

A

The periodic level payment or receipt (annuity). This may be a fixed mortgage payment or a lease payment.

28
Q

What is “FV” in the financial calculator?

A

The lump sum cash flow or the future value of an investment. In real estate, may be the net cash flow expected at the time of sale at the end of a holding period (N) or could be the remaining balance on a mortgage loan after a certain number of payments.

29
Q

What does the word “deposit” mean in a word problem?

A

it is a payment; also negative (-)

30
Q

What needs to happen to your values when you deposit monthly rather than yearly?

A

multiple the N by 12. Divide interest by 12. Divide the payment by 12.

31
Q

What is the different between ordinary annuity and annuity due?

A

Ordinary annuity payments occur at the end. Annuity due payments happen at the beginning. (think of where the word annuity is)

32
Q

If interest is compounded quarterly, what happens to “N”?

A

You multiply it by 4

33
Q

If interest is compounded quarterly, what happens to “I”?

A

you divide it by 4

34
Q
  • Explain and use the net present value decision rule.
A

if NPV > 0; reject if NPV < 0.

35
Q

What should you assume if the problem does not say beginning or end?

A

end

36
Q

Expected future cash flows from direct investments in CRE typically comes from what two sources?

A

rental operations and eventual sale of the property

37
Q

What excel sheet would you use to find the sale price of a property with uneven cash flows?

A

NPV Uneven cashflows

38
Q

How to get NPV from purchase price and sale price

A

Sale price-purchase price

39
Q

What is minimum rate of return?

A

A rate you can get on an alternate investment

40
Q

What is the anchor point for your discount rate?

A

treasury rate; based online

41
Q

Explain the importance of risk in the cash flow valuation process.

A

Risk is critical because future cash flows are uncertain. Higher risk demands higher required returns, influencing valuation.
Adjusting for risk ensures accurate representation of the asset’s value under uncertainty.

42
Q

If the going-in IRR of an investment opportunity EXCEEDS the investor’s IRR, then the investment ______ be undertaken.

A

should

43
Q

If the going-in IRR is LESS than the investor’s IRR, the investment _____ be undertaken.

A

shouldnt

44
Q

What does IRR mean?

A

The discount rate that makes the NPV zero.

45
Q

If the IRR is greater than the discount rate, what does that mean?

A

It is a viable investment

46
Q

If 𝐼𝑅𝑅= DiscountRate, what does that mean?

A

the investment is neutral

47
Q
A

Real Estate (7 decks)

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