L17: Real Estate Investments & Business Brokerage

Question 1

Investment “Basis”

Answer 1

On investors initial cost of a property
EX: purchase price + capital improvements - Depreciation

NB: only investment properties can be depreciated, not primary residences

Question 2

Positive vs Negative Leverage

Answer 2

Leverage = investment strategy of taking on debt in order to realize a greater return

Positive leverage = when cost of interest on loan is less than the profit from the investment

Negative leverage = when cost of loan is higher than profit (creates negative cash flow)

Question 3

Rate of Return

Answer 3

The net gain or loss of an investment overtime

Rate of return = investment/return

Question 4

Advantages of investing in real estate (5)

Answer 4

• rate of return
• tax advantages
• hedge against inflation (appreciation & rising rent offset inflation)
• leverage (property as collateral for loans)
• equity build up

Question 5

Disadvantages of invested in real estate (5)

Answer 5

• illiquidity (the larger/expensive/specialized, higher illiquidity)
• micromarkets
• cost (too many professionals to close deals, i.e. attorney, agents, etc.)
• management
• risk (space market risk: changes that impact number of tenants; capital market risk: changes in finance market; default risk: personal finance)

Question 6

2 types of business valuation

Answer 6

1) Liquidation Value (no plan to keep business running)
* how much money the business would be worth if it was stripped for parts, may include intangible assets but nothing unique to it

2) Going Concern Value (assumes business will continue as is)
* value of business including all intangibles
* Goodwill and brand are part of valuation
* it should be higher than liquidation value, otherwise should just liquidate

Question 7

Goodwill

Answer 7

Businesses’ reputation + good name + customer base

Goodwill value = going concern value - value of tangible assets

Question 8

4 approaches to business valuation

Answer 8

1) comparable sales analysis (comps)
2) cost approach (asset based approach; only tangibles)
3) income analysis (uses cap rate to assets & income)
4) liquidation analysis

Question 9

Tax shelter

Answer 9

Any strategy used to minimize the amount of taxable income and consequently reduce the taxes owed to the government