Real estate

Question 1

Reasons to invest in RE are:

Answer 1

1) Current income from collecting rents
2) Price of appreciation of RE
3) Inflation hedge
4) Diversification
5) Tax benefits (in particular in US)

Question 2

Key characteristics of RE as asset class

Answer 2

1) Heterogeneity
2) High unit value - hard to
3) Need for active management
4) High transaction costs / low liquidity
5) High dependence on debt availability
6) Depreciation
7) Difficulties of appraisal

Question 3

Matrix of types of RE investments

Answer 3

Private:
1) Debt - mortgages
2) Equity - direct or via partnership
Public:
1) Debt - MBS
2) Equity - shares of REITs or REOCs

Question 4

RE NOI estimation

Answer 4

Potential gross income includes rental income + other income

Interest and tax expenses are not included

Question 5

Capitalization rate and all risk yield

Answer 5

Cap rate = discount rate - growth rate = NOI(1) / value

ARY = rent(1) / value - applied when tenants are expected to pay all expenses

Question 6

Cost approach

Answer 6

Sets upper limit for the price

Replacement cost + Land price - Obsolescence - Incurable physical deterioration (effective age / economic life)

Question 7

Appraisal-based index

Answer 7

[NOI(t) - CAPEX(t) - dValue(t)]/Value(y-1) - suffers from the appraisal lag

Question 8

Maximum loan amount that RE object can bear

Answer 8

Minimum of two value calculated from LTV and DSCR = NOI(1) / debt service