Investing Flashcards
Investment
The pursuit of a future return by delaying consumption and taking risk
Real estate investment
The use of debt and/or equity to purchase in income producing property (unless REIT stocks)
Holding period
Amount of time we hold an investment
5-10 years
Real estate = long-term
Discount rate
Required rate of return
Expect 8-10%, partly bc of debt
Capitalization rate
True annual rate of return
Why do we invest in real estate
Periodic cash flow- rent Price appreciation Diversification- not volatile Increase equity-mortgage reduction Leverage-use debt to make money Tax shelter Hedge against inflation Estate building Pride of ownership
Cash-flow from operations
On going rent collection and payment of operating and other expenses
-Making money off the rent
Cash-flow from reversion
Cash received when investment property is sold
-Cash upon resale
Potential gross income (PGI)
Maximum rent you can make
Building area for collecting rents-NLA
(usually priced by net leasable area)
Debt capital
What you owe
Equity capital
What you own
Market rent analysis and estimate
Estimate market rent for subject property using comparable rentals
How is vacancy expressed?
As a % of PGI
-for current and expected space not occupied and non-payment of rent owed
Natural vacancy
A natural level of vacancy that exists to allow for movement of tenants
What are the differing types of vacancy?
Space not rented Collection loss (failure to pay) Natural vacancy (time in between tenants)
Effective gross income (EGI)
Anticipated income from the operating of a property after adjusting for vacancy and collection losses
-“Income after vacancy”
Operating expenses classification
Fixed expenses
Variable expenses
Replacement reserves
**Operating expenses
Property taxes Property insurance Utilities (variable) Maintenance Management Advertising
Net operating income (NOI)
Anticipated income from the operation of a property after adjusting for operating expenses
Before-tax cash flow
Income after debt
After-tax cash flow
Income after income taxes
Reversion
Cash after you sell the asset
Cash flow from sale of property
Sale price - selling expenses (commission)] = net sales price - mortgage balance = before tax equity reversion - capital gains taxes = after tax equity reversion
