Real Estate Fixed-Income Investment, Equity Investments Flashcards
Residential Mortgages, ratios used to assess credit risk
- Debt to Income ratios, front-end ratio for housing costs and back-end ratio for housing and other types of debt like credit cards and car loands. Maximum are 28% and 36%.
- LVR or Loan to Value Ratio, if LVR> 100%, mortgage is said to be Under water or upside down
- Credit scores
DTI, LVR and Credit Scores
Commercial mortgages, Credit risk ratios
- LVR, typical for a CMBS is 60%, for rmbs, it is 80%
- Interest Coverage Ratio, typical for cmbs is 1.2;
- DSCR:
- Fixed charge coverage ratio.
2,3 and 4 have NOI in the numerator.
What is an MBS?
What are the most common types of MBS?
Security backed by a pool of mortgages.
Pass- through MBS, simplest type, and CMO’s
What is the difference between pass through MBS and CMO?
They are both fixed income securities backed by a pool of loans
Pass through MBS, the simplest MBS, Interest and principal payments are passed through to investors;
CMO’s, subcategory of pass through MBS: Investors self-select tranches in which investors have different priorities in terms of principal and interest payments.
Who dominate the RMBS market
- Ginnie Mae;
- Fannie Mae, and
- Freddie Mac.
What is the process of pooling and selling mortgages called?
Securitization
What are the different types of CMO’s?
SAP PTF
- Sequential pay ( pays a predetermined share of interest) to each tranche, principal is based on the seniority of the tranche;
- Accrual tranche or Z-bonds, zero coupon Bonds;
- Principal only and interest only
- Planned Amortization Class (PAC) tranche, group of investors are provided a predictable stream of cash flow;
- Targeted Amortization Class (TAC), similar to PAC, with prepayment ranges narrower and more complex.
- Floating rate tranche, inverse floater;
Why are Residential mortgages not attractive to investors?
What was done about this?
- The prepayment risk;
- Structured products reduce risk for many investors by allowing them to choose maturities and risk exposures.
Tranches: Maturities and risk exposures
What is the key risk of CMBS?
Default risk
What is a REIT?
What is the main necessary requirement of a REIT?
- Investments in real estate made directly through properties, or mortgages;
- At least 75% of the income must come from properties or mortgages
What do REITS do for investors?
They are liquid and and provide a simple way to gain exposure to real estate in portfolios
What are the 3 types of REIT?
What is the main requirements as far as distribution of dividends is concerned?
What is the main advantage as far as taxes are concerned?
- Equity (75% or more in the equity of private real estate deals)::
- Mortgage (75% or more of investment in real estate debt)
- Hybrid
They are to distribute 90% of their income.
There is no corporate income taxation since it is a trust.
What are the 2 common methods of valuing real estate equity investment?
- The DCF or Income approach;
- Comparable sales price
DS
What are the common private Real Estate investment vehicles?
- Private Equity Real Estate Funds are pooled private investor capital in private real estate
- Commingled Real Estate Funds (CREF), privately placed pooled capital that is invested in real estate;
- Syndications, raise capital and hire an expert;
- Joint ventures, two or more parties who wish to undertake a real estate project.
- Limited partnerships, they combine the benefit of partnerships, including tax (no corporate taxation), and income distiribution benefits, with the limited liabiliaty feature of a corporate investment. GP manages the funds while pension funds, endowments, and hni provide the funds
PCSJL
What are the public Real Estate investment vehicles?
- Open- End Real Estate Mutual Funds
- Closed-End Real Estate Mutual Funds
- ETF based on Real Estate Indices
- Options and Futures on Real Estate Indices
- Equity REIT, 75 % or more of the underlying real estate claims must be equity claims, rather than mortgage claims.
