Chapter 17 - Real Estate Investment Analysis and Business Opportunity Brokerage Flashcards
What is an investment?
The outlay of an investor’s money in anticipation of income or profit
What is equity?
An investor’s own money
What is a real estate investment trust (REIT)?
Offers investors the opportunity to invest in income-producing real estate properties
REITs are attractive because:
They offer diversification and liquidity, they are similar to mutual funds, and the offer the advantages of skilled centralized management and continuity of operation
How does on acquire a REIT?
They may be purchased through a stockbroker
What are the types of real estate investments?
Residential Commercial Industrial Agricultural Business opportunities
What is included in residential real estate investments?
Single-family homes, condominiums, apartments, and other multifamily complexes
What is included in commercial real estate investments?
Retail and office properties
Retail properties include downtown commercial properties, shopping centers, and regional malls
What is included in industrial real estate investments?
Manufacturing, assembly, and/or distribution
To be suitable, a site should be located near transportation facilities such as railroad stations, expressways, and airports
What is included in agricultural real estate investments?
Large tracts of land purchased by farsighted investors-developers that lie in the path of foreseeable urban growth
What is included in business opportunity investments?
Sale or lease of a business and goodwill of an existing business, including business assets such as the stock of a corporation
What are the advantages of real estate investments?
Good rate of return Tax advantages Hedge against inflation Leverage Equity buildup
What are the disadvantages of real estate investments?
Illiquidity Market is local in nature Need for expert help Management Risk
What is liquidity?
The ability to sell an investment very quickly without loss of one’s capital
What are the three considerations that influence a building’s investment value?
- Exterior considerations
- Interior considerations
- Building operating expenses
What is risk and what are the two types?
The chance of losing all or part of an investment
Static and dynamic
What is static risk?
Risk that can be transferred to an insurer (such as the risk of vandalism, fire, and so forth)
What is dynamic risk?
Risk that arises from the continual change in the business environment and therefore dynamic risk cannot be transferred to an insurer
What are the risks associated with general business conditions?
Business risk Financial risk Purchasing-power risk Interest-rate risk Liquidity risk Safety risk
What is business risk?
Associated with the degree of variance between budgeted (projected) income and expenses and actual income and expenses
What is financial risk?
Associated with the ability of a property to pay operating expenses from funds provided from operations, borrowing, and equity sources
What is purchasing-power risk?
Related to inflation
In an inflationary period, the ability of a property to produce a good yield may be offset by a corresponding loss of purchasing power due to inflation
What is interest-rate risk?
Example: The only change in a real estate investment is that the interest rate is raised by the lender. The property remains unchanged, the owners remain the same, management does not change. However, with the increase in interest rates, the value of the property as an investment goes down
What is liquidity risk?
The possible loss that may be incurred if the investment has to be converted quickly into cash
What is safety risk?
The possible loss of invested capital (return of investment) and/or expected earnings (return on investment) and risk of default (possible loss of earnings)
What is leverage?
The use of borrowed funds to finance the purchase of an asset; the use of other people’s money to make more money
What is positive leverage?
If the benefits from borrowing exceed the costs of borrowing
What is negative leverage?
If the borrowed funds cost more than they are producing
What are business enterprise brokers?
Normally deal in corporate transactions involving the sale and purchase of businesses that provide goods and/or services
What are business opportunity brokers?
Typically deal in the sale and purchase of smaller businesses, such as sole proprietorships
What types of assets do business brokers usually deal with?
Personal property and goodwill
What is goodwill?
The intangible asset attributed to a business’s reputation and the expectation of continued customer loyalty
What is going concern value?
The value of an established business property compared with the value of just the physical assets of a business that is not yet established (up and running history of the business)
What is the income statement analysis?
Concise summary of all income and expenses of a business for a stated period of time
What is the balance sheet analysis?
Shows the company’s financial position at a stated moment in time, the close of business on the date of the balance sheet
What is the cash flow analysis?
Total amount of money generated from an investment after expenses have been paid
What are the methods of appraising businesses?
Comparable sales analysis
Reproduction or replacement cost less depreciation analysis
Income capitalization analysis
Liquidation analysis
What is comparable sales analysis?
Where records reveal previous sale prices for businesses with a high degree of similarity, the appraiser can use professional judgment to account for existing differences and to arrive at a close approximation of the market value of a business
What is reproduction cost less depreciation analysis?
Appropriate for estimating the value of improvements of any type
The appraiser calculates the amount required to duplicate exactly the business or building being appraised
What is replacement cost less depreciation analysis?
Appropriate for estimating the value of improvements of any type
The appraiser calculates the cost that would result in a business’s (or building’s) having the same use and capabilities as the one being appraised, even though the new business/building might differ physically
What is income capitalization analysis?
Attempts to estimate accurately the present value of expected future benefits (earnings and appreciation of assets) by converting the anticipated income stream into a present value through the use of a capitalization rate
What is liquidation analysis?
Business brokers and financial experts must consider such factors as the ability of the firm to pay off short-term obligations, the value of the inventory on hand, and the liquidation value of preferred stock
Investors who want to invest in office buildings and apartment complexes but want the advantages of liquidity and diversification often consider investing in:
A real estate investment trust
A case in which the interest paid for borrowed funds is less than the overall rate of return to an investor is an example of:
Positive leverage
Business risk (operating business risk) is chance of loss associated with the:
Variance between projected and actual income and expenses
Investment value is:
The worth of an investment property to an individual investor based on the investor’s standards
What should an investor consider in evaluating a real estate investment?
Liquidity
Tax considerations
Stability of income
A phosphate mining facility would be regarded as an:
Origin property
For investment purposes, the value of an investment property should be based on the:
Property’s return and the appreciation it will yield
Intangible assets of a business include:
Goodwill
Customer loyalty
Trademarks
What class of stock must all corporations have?
Common stock
A firm’s working capital is customarily defined as the difference between the firm’s total:
Current assets and total current liabilities
How does business brokerage differ from real estate brokerage?
Intangible assets must be considered
The financial report that indicates a firm’s financial position at a stated moment in time is the:
Balance sheet
The value of an established business property, compared with the value of just the physical assets of a business that is not yet established, is referred to as:
Going concern value
What are a couple of reasons for appraising a business and its assets:
To obtain financing
When a governmental unit intends to exercise its power of eminent domain over a business location
When a business has been destroyed by known or unknown causes
A concise summary of all income and expenses of a business for a stated period of time is the:
Income statement
All of the resources of a business, including tangibles and intangibles, are referred to as the:
Assets
The cost to duplicate exactly the business or building being appraised is the:
Reproduction cost
Investment in an apartment building is regarded as economically feasible if it:
Shows an appropriate return on the investment and recovers the invested capital
Rent is $`1,800 per month plus 3% of gross sales. The total rent for last month was $2,400. The gross sales for the same month were:
$60,000
1,800 / .03 = 60,000
The market value of an apartment building is $350,000. The investor has leveraged $300,000. What is the investor’s equity in the property?
$50,000
350,000 - 300,000 = 50,000
In analyzing the value of a business, the method that is used to determine the value if the business were to bankrupt is called:
Liquidation approach
When an investor uses borrowed money to purchase a piece of investment property he is taking advantage of:
Leverage
What is an income tax term meaning an investment that will reduce or shield other money from income tax?
Tax shelter
When a business has been in operation for a long time, what type of value does it have?
Going concern value
An investor was looking at a sixteen-unit apartment building. Four of the units rented for $600, four for $725, four for $750, and four for $800 per month. The building had monthly expenses of $1,200. If the investor wants an 8% rate of return, how much should he pay for the building?
$1,545,000 600 x 4 x 12 = 28,800 725 x 4 x 12 = 34,800 750 x 4 x 12 = 36,000 800 x 4 x 12 = 38,400 28,800 + 34,800 + 36,000 + 38,400 = 138,000 1,200 x 12 = 14,400 138,000 - 14,400 = 123,600 123,600 / .08 = 1,545,000
The term NOI most nearly means:
The amount of money left after the vacancy rate and operating expenses are deducted
The percentage which expresses the amount of risk that an investor is willing to make is called the:
Cap rate
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
An example of an “intangible” asset for a business would be:
The reputation or goodwill of the business
Accrual accounting is where:
Shows future income and future debts as they are received and invoiced
