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Fina 210 > Lesson 1: Real Estate Investment > Flashcards

Lesson 1: Real Estate Investment Flashcards

1
Q

which return is higher between stocks, bonds, and Real Estate?

A

Real Estate usually

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2
Q

which has less risk between stocks, bonds, and Real Estate?

A

Real Estate

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3
Q

Who are the major players in Real Estate?

A
  • Tenants
  • Governments
  • Banks
  • Investors
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4
Q

Who are the minor players in Real Estate?

A
  • Notary - lawyers
  • Real estate broker
  • Home inspector
  • Contractor
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5
Q

what is capital gain in RE

A

Major profit from real estate

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6
Q

true or false

The longer you keep the real estate investment, the higher will be your capital gain

A

true

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7
Q

what is the purpose of RE

A

to buy land and all physical properties attached to it, such as houses, trees, fences, and so on

goal is to generate income by selling or renting it

For example, some people might buy a house to sell it in 10 years when property value has increased; others might buy an apartment building and rent the apartments to create profit

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8
Q

what does the RE risk and return depend on?

A

depends on the market’s cycle

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9
Q

when does the REI cycle experience excess?

A

when supply of properties is high

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10
Q

when is a good time to buy but not to sell?

A

when the cycle experiences excess

results in a decrease in property values

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11
Q

what factors affect the real estate market?

A

interest rates

taxes

legal restrictions

local or provincial economy

population mobility

vacancy

property location

public opinion of the property

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12
Q

what are the real estate investment advantages?

A

Risk is low compared to other types of investments

Appreciation of real estate increases annually

Down payment is accessible

Net return will most likely be high

Tax rates are beneficial to REI

REI builds up on equity

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13
Q

residential real estate increases in value each year by how much?

A

5% per year

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14
Q

why is RE low risk?

A

because property is used as security

financing can cover up to 90% of the amount needed to buy a property

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15
Q

how are tax rates beneficial to REI?

A

Canadian laws allow contributors several advantages that go from tax-free to tax savings on capital gains

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16
Q

how does payments on the mortgage mean acquiring equity?

A

because you own more and more

you clear your debts

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17
Q

what are the disadvantages of RE

A

Basic knowledge is essential to make sound decisions

Cash is not available immediately

REI is a long-term investment

Advice from experts is necessary

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18
Q

tenant

A

the person staying on your land

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19
Q

equity investor

A

you boy

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20
Q

bank

A

mortgage lender

Lends you money in order to make interest out of the money you borrowed in order to buy real estate

They will also use your property as collateral or guarantee when they give you the loan

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21
Q

government

A

makes sure everything is legal

federal, provincial, municipal

Encourages you invest in real estate in order to collect taxes from you

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22
Q

Landlord-tenant law

A

contains law for and between the landlord and the tenant

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23
Q

what are the three limitations to ownership

A
  • The government has police power – they can enter your property without your permission
  • Taxation – the government believes they have he right to value your property every four or five years and tax your property
  • Eminent domain – the government has the right to take away your property and give you fair market value because they need your property to build a hospital for example
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24
Q

what are the three limitations to ownership

A
  • The government has police power – they can enter your property without your permission
  • Taxation – the government believes they have he right to value your property every four or five years and tax your property
  • Eminent domain – the government has the right to take away your property and give you fair market value because they need your property to build a hospital for example
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25
Q

what the eminent domain

A

the government has the right to take away your property and give you fair market value because they need your property to build a hospital for example

26
Q

what is an equity investor

A

basically a landlord

the person or entity that acquires the real estate investment

equity investor assesses how the REI will be taken, as an individual or as an organization

27
Q

how does the equity investor analyze how the REI will be taken (individual or organization)

A

will analyse questions such as:

how the organization will be created and how marketable it is

who the partners will be

how each partner will share liabilities

what the taxation opportunities and constraints for the specific organization are

28
Q

what are the most common forms of equity investors?

A

▪ Individual
▪ Corporation
▪ Partnership
▪ Real Estate Investment Trust (REIT)

29
Q

mortgage lender

A

mortgage lender is the entity that lends the money that the equity investor needs to start a real estate investment

30
Q

who are the most common mortgage lenders?

A

▪ Another individual
▪ Insurance companies
▪ Banks
▪ Real Estate Investment Trust (REIT)

31
Q

tenant

A

is the one who buys the right of possession and use of a property from the equity investor

32
Q

what are the different possible purposes of the property acquired by the tenant?

A

▪ Residential
▪ Commercial
▪ Industrial
▪ Special purposes (theatre, sports, reception halls, etc.)

33
Q

government

A

regulates the relationship between participants

restricts participants with the imposition of taxes

34
Q

what are the different levels that the government can influence participation

A

▪ Federal
▪ Provincial
▪ Municipal

35
Q

what is the relationship between the Equity Investor and the Mortgage Lender?

A
  • The equity investor borrows money from the mortgage lender.
  • As a provider that will include the principal plus the interest generated through time.
  • The mortgage lender gets a mortgage document as collateral
36
Q

what does the document that the mortgage lender receive as collateral specify?

A

the method of payment

could consist of the repayment of interest first and principal at the end, or the repayment of both principal and interest in each amortization

37
Q

what is the relationship between the Equity Investor and the Tenant?

A
  • The equity investor leases the right to use a property to the tenant.
  • The tenant pays rent to the equity investor to use the property
38
Q

what does the lease document between the Equity Investor and the Tenant specify?

A

establishes the attributions and restrictions involved in using the property

39
Q

what is the relationship between the Equity Investor and the Government?

A
  • The equity investor pays taxes to the government.
  • The government sets restrictions on owners, such as police power, taxation and eminent domain.
  • Police may enter a property without requiring the owner’s permission.

  • Most taxes are on income and capital gains
  • Appealing to eminent domain
40
Q

what is the relationship between Mortgage Lenders and the Government?

A
  • The mortgage lender’s relationship to other participants in the REI is regulated by the government.
  • The government imposes restrictions on mortgage lenders
  • The government also sets mortgage laws on debt service or mortgage payments for equity investors
41
Q

what do the restrictions that the government set on mortgage lenders depend on?

A

will depend on the nature of the mortgage lender;

for example, restrictions on banks will be different from restrictions on corporations

42
Q

what is the relationship between the Tenant and the Government?

A
  • The government regulates the use that the tenant can make of the property on lease.
  • Landlord–tenant law has evolved to detail not only legal aspects between a landlord and tenant but also the actions that tenants should take to protect the property, such as the installment of fire alarms, smoke detectors, and so on.
43
Q

what are the five steps to the Real Estate Investment Process?

A
  1. Identify investor’s objectives, goals and constraints
  2. Analyze investment climate and market conditions
  3. Develop financial analysis
  4. Apply decision-making criteria
  5. Investment decision
44
Q
  1. Identify investor’s objectives, goals and constraints

what is the equity investor’s goal?

A

The equity investor is interested in the cash flow that will generate the REI.

45
Q
  1. Identify investor’s objectives, goals and constraints

what is the mortgage lender’s goal?

A

mortgage lender’s goal is to obtain a rate of return from the money lent to the equity investor

46
Q
  1. Identify investor’s objectives, goals and constraints

what is the tenant’s goal?

A

tenant does not receive an immediate income, but will be concerned with the legal rights to use the property

47
Q
  1. Identify investor’s objectives, goals and constraints

what is the government’s goal?

A

government is responsible for regulating the relationships between the other major participants in the REI process

it also places restrictions on real estate

48
Q
  1. Analyze investment climate and market conditions

The market environment

A

This analysis identifies supply and demand in the real estate market

at local, provincial, and state levels and how they affect the REI

49
Q
  1. Analyze investment climate and market conditions

The legal environment

A

Analysing the legal opportunities and limitations that a REI may entail will play an important role in the acquisition decision and also in the rest of the REI process

50
Q
  1. Analyze investment climate and market conditions

The tax environment

A

knowing the taxation system and the impact that it will have on the expected income will help in making the right investment decision

51
Q
  1. Develop financial analysis
A

• The financial analysis deals with financial calculations that will allow you to anticipate the cash flow of the REI

52
Q

what questions will the financial analysis allow us to answer?

A
  • How much is profit per year?
  • How much is the mortgage payment?
  • How much is the capital gain when I sell?
  • How much will taxes diminish my profit?
  • How much will taxes decrease my capital gains?
53
Q
  1. Apply decision-making criteria
A

you apply decision-making criteria to decide how much you are able or willing to pay for a property to obtain the desired rate of return

54
Q
  1. Apply decision-making criteria
A

you apply decision-making criteria to decide how much you are able or willing to pay for a property to obtain the desired rate of return

55
Q
  1. Apply decision-making criteria

Rules of Thumb Techniques:

A

which measure the payback period necessary to regain what was invested to acquire a property

the methods needed to achieve the highest rate of return

56
Q

what are the known techniques of the Rules of Thumb Techniques?

A

payback method

return on investment (ROI)

return on equity (ROE)

return on asset (ROA)

gross income multiplier (GIM)

net operating multiplier (NIM)

overall capitalization method (OCR)

57
Q
  1. Apply decision-making criteria

Discounted Cash Flow Techniques

A

calculate the value today of the REI future cash flow

These techniques take time value of money into consideration

include:

discounted payback period method

net present value method

internat rate of return

profitability index method

58
Q
  1. Apply decision-making criteria

Traditional Valuation Techniques

A

estimate the value of the property that will be used in the REI

59
Q

what are the Traditional Valuation Techniques

A

cost approach

net income approach

market (sales) comparable approach

60
Q
  1. Investment decision
A

you make the decision according to the previous steps

if the previous steps don’t incite you to buy, you restart the whole different analysis with different properties

61
Q

why would one use a broker?

A
  1. Saves you time, money and risk
  2. Specialized information
  3. More time for you
  4. Makes the best offers
  5. Shared experience

Fina 210 (28 decks)

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