Lesson 1: Real Estate Investment Flashcards
which return is higher between stocks, bonds, and Real Estate?
Real Estate usually
which has less risk between stocks, bonds, and Real Estate?
Real Estate
Who are the major players in Real Estate?
- Tenants
- Governments
- Banks
- Investors
Who are the minor players in Real Estate?
- Notary - lawyers
- Real estate broker
- Home inspector
- Contractor
what is capital gain in RE
Major profit from real estate
true or false
The longer you keep the real estate investment, the higher will be your capital gain
true
what is the purpose of RE
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
what does the RE risk and return depend on?
depends on the market’s cycle
when does the REI cycle experience excess?
when supply of properties is high
when is a good time to buy but not to sell?
when the cycle experiences excess
results in a decrease in property values
what factors affect the real estate market?
interest rates
taxes
legal restrictions
local or provincial economy
population mobility
vacancy
property location
public opinion of the property
what are the real estate investment advantages?
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
residential real estate increases in value each year by how much?
5% per year
why is RE low risk?
because property is used as security
financing can cover up to 90% of the amount needed to buy a property
how are tax rates beneficial to REI?
Canadian laws allow contributors several advantages that go from tax-free to tax savings on capital gains
how does payments on the mortgage mean acquiring equity?
because you own more and more
you clear your debts
what are the disadvantages of RE
Basic knowledge is essential to make sound decisions
Cash is not available immediately
REI is a long-term investment
Advice from experts is necessary
tenant
the person staying on your land
equity investor
you boy
bank
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
government
makes sure everything is legal
federal, provincial, municipal
Encourages you invest in real estate in order to collect taxes from you
Landlord-tenant law
contains law for and between the landlord and the tenant
what are the three limitations to ownership
- 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
what are the three limitations to ownership
- 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
what the 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
what is an equity investor
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
how does the equity investor analyze how the REI will be taken (individual or organization)
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
what are the most common forms of equity investors?
▪ Individual
▪ Corporation
▪ Partnership
▪ Real Estate Investment Trust (REIT)
mortgage lender
mortgage lender is the entity that lends the money that the equity investor needs to start a real estate investment
who are the most common mortgage lenders?
▪ Another individual
▪ Insurance companies
▪ Banks
▪ Real Estate Investment Trust (REIT)
tenant
is the one who buys the right of possession and use of a property from the equity investor
what are the different possible purposes of the property acquired by the tenant?
▪ Residential
▪ Commercial
▪ Industrial
▪ Special purposes (theatre, sports, reception halls, etc.)
government
regulates the relationship between participants
restricts participants with the imposition of taxes
what are the different levels that the government can influence participation
▪ Federal
▪ Provincial
▪ Municipal
what is the relationship between the Equity Investor and the Mortgage Lender?
- 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
what does the document that the mortgage lender receive as collateral specify?
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
what is the relationship between the Equity Investor and the Tenant?
- 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
what does the lease document between the Equity Investor and the Tenant specify?
establishes the attributions and restrictions involved in using the property
what is the relationship between the Equity Investor and the Government?
- 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
what is the relationship between Mortgage Lenders and the Government?
- 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
what do the restrictions that the government set on mortgage lenders depend on?
will depend on the nature of the mortgage lender;
for example, restrictions on banks will be different from restrictions on corporations
what is the relationship between the Tenant and the Government?
- 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.
what are the five steps to the Real Estate Investment Process?
- Identify investor’s objectives, goals and constraints
- Analyze investment climate and market conditions
- Develop financial analysis
- Apply decision-making criteria
- Investment decision
- Identify investor’s objectives, goals and constraints
what is the equity investor’s goal?
The equity investor is interested in the cash flow that will generate the REI.
- Identify investor’s objectives, goals and constraints
what is the mortgage lender’s goal?
mortgage lender’s goal is to obtain a rate of return from the money lent to the equity investor
- Identify investor’s objectives, goals and constraints
what is the tenant’s goal?
tenant does not receive an immediate income, but will be concerned with the legal rights to use the property
- Identify investor’s objectives, goals and constraints
what is the government’s goal?
government is responsible for regulating the relationships between the other major participants in the REI process
it also places restrictions on real estate
- Analyze investment climate and market conditions
The market environment
This analysis identifies supply and demand in the real estate market
at local, provincial, and state levels and how they affect the REI
- Analyze investment climate and market conditions
The legal environment
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
- Analyze investment climate and market conditions
The tax environment
knowing the taxation system and the impact that it will have on the expected income will help in making the right investment decision
- Develop financial analysis
• The financial analysis deals with financial calculations that will allow you to anticipate the cash flow of the REI
what questions will the financial analysis allow us to answer?
- 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?
- Apply decision-making criteria
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
- Apply decision-making criteria
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
- Apply decision-making criteria
Rules of Thumb Techniques:
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
what are the known techniques of the Rules of Thumb Techniques?
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)
- Apply decision-making criteria
Discounted Cash Flow Techniques
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
- Apply decision-making criteria
Traditional Valuation Techniques
estimate the value of the property that will be used in the REI
what are the Traditional Valuation Techniques
cost approach
net income approach
market (sales) comparable approach
- Investment decision
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
why would one use a broker?
- Saves you time, money and risk
- Specialized information
- More time for you
- Makes the best offers
- Shared experience
