Chapter 17 Flashcards
Appreciation is
how much a property grows (or declines) in value in the market year to year
Adjusted basis
the original cost basis of a property reduced by certain deductions and increased by certain improvement costs
Cash Flow
the amount of spendable income after the expenses from operating and interest are deducted from the gross income. Cash flow can be either positive or negative
Capitalization rate
the percent of return for an investor on his money on an investment property
Capitalization
is the method of determining a property’s value by considering the net annual income and the capitalization rate that the investor wants as a return
Capital Gain
is an income tax term for the taxable profit made from the sale of the property or any capital asset
Equity
is the amount of value or interest that an owner has in the property over and above the loans on the property
Leverage
is the use of other people’s money (borrowed) to spread the risk of investment
Liquidity
is how fast the property can be sold. Real estate is less liquid than stocks or bonds
Risk
is chance of loss for an investor
Tax Shelter
is an income tax term meaning an investment which will shield or reduce other money from income tax
Types of Investments
Residential
Commercial
Industrial
Agricultural properties
Advantages of Real Estate investments
- Good rate of return
- Tax advantages
- Hedge against inflation
- Leverage
- Equity build up
Disadvantage of Real Estate investments
- Illiquid - properties are not easy to sell
- Market is local in nature
- Need for expert help
- Management effort
- Risk is always involved.
Real Estate Investment Trust
- Can be purchased through stock brokers just as mutual funds
- Does not have to pay corporate income tax so long as 95% of its income is distributed to its shareholders and each trust must have a group of 100 or more members to hold shares
Income capitalization approach
- Process to determine the property’s value
- Cap rate measures the amount of risk
- The higher the cap rate, the greater the risk
Steps to take for the capitalization approach
- Estimate annual potential gross income.
- Subtract an appropriate allowance for vacancy and collection losses to arrive at an effective gross income.
- Deduct operating expenses. (These do NOT include debt service or mortgage payments). This gives you Net Operating Income. NOI is Net Operating Income.
Divide the capitalization rate to the net operating income to determine market value.
Business brokerage expertise required:
- Knowledge of corporate financing
- Knowledge of bookkeeping and accounting
- Valuation of the business
- Knowledge of laws involved
Steps in the sale of a business
The broker lists the business for sale.
All the assets and liabilities are noted that belong to the business.
Value for the business is established, using some or all of the methods of appraisal.
Subtract the liabilities short and long term from the value of the business.
Check to see if the business is a corporation. If it is, divide the value by the outstanding shares.
Market the business.
Find a buyer and obtain a purchase agreement.
Steps in the sale of a business
The broker lists the business for sale.
All the assets and liabilities are noted that belong to the business.
Value for the business is established, using some or all of the methods of appraisal.
Subtract the liabilities short and long term from the value of the business.
Check to see if the business is a corporation. If it is, divide the value by the outstanding shares.
Market the business.
Find a buyer and obtain a purchase agreement.
What does the term NOI MOST mean?
It is the amount of money left after the vacancy rate and operating expenses are deducted
When an investor was analyzing the risks in a property, he was considering an 8% return on his investment compared to a 10% return. In terms of the purchase price, what will happen?
The higher the risk, the lower the purchase price
