Investing

Question 1

Investment

Answer 1

The pursuit of a future return by delaying consumption and taking risk

Question 2

Real estate investment

Answer 2

The use of debt and/or equity to purchase in income producing property (unless REIT stocks)

Question 3

Holding period

Answer 3

Amount of time we hold an investment
5-10 years
Real estate = long-term

Question 4

Discount rate

Answer 4

Required rate of return

Expect 8-10%, partly bc of debt

Question 5

Capitalization rate

Answer 5

True annual rate of return

Question 6

Why do we invest in real estate

Answer 6

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

Question 7

Cash-flow from operations

Answer 7

On going rent collection and payment of operating and other expenses
-Making money off the rent

Question 8

Cash-flow from reversion

Answer 8

Cash received when investment property is sold

-Cash upon resale

Question 9

Potential gross income (PGI)

Answer 9

Maximum rent you can make
Building area for collecting rents-NLA
(usually priced by net leasable area)

Question 10

Debt capital

Answer 10

What you owe

Question 11

Equity capital

Answer 11

What you own

Question 12

Market rent analysis and estimate

Answer 12

Estimate market rent for subject property using comparable rentals

Question 13

How is vacancy expressed?

Answer 13

As a % of PGI

-for current and expected space not occupied and non-payment of rent owed

Question 14

Natural vacancy

Answer 14

A natural level of vacancy that exists to allow for movement of tenants

Question 15

What are the differing types of vacancy?

Answer 15

Space not rented
Collection loss (failure to pay)
Natural vacancy (time in between tenants)

Question 16

Effective gross income (EGI)

Answer 16

Anticipated income from the operating of a property after adjusting for vacancy and collection losses
-“Income after vacancy”

Question 17

Operating expenses classification

Answer 17

Fixed expenses
Variable expenses
Replacement reserves

Question 18

**Operating expenses

Answer 18

Property taxes
Property insurance
Utilities (variable)
Maintenance
Management
Advertising

Question 19

Net operating income (NOI)

Answer 19

Anticipated income from the operation of a property after adjusting for operating expenses

Question 20

Before-tax cash flow

Answer 20

Income after debt

Question 21

After-tax cash flow

Answer 21

Income after income taxes

Question 22

Reversion

Answer 22

Cash after you sell the asset

Question 23

Cash flow from sale of property

Answer 23

Sale price
- selling expenses (commission)]
= net sales price
- mortgage balance
= before tax equity reversion
- capital gains taxes
= after tax equity reversion