Real Estate Investment

Question 1

types of real estate

Answer 1

residential real estate
commercial real estate

Question 2

residential real estate

Answer 2

single family homes

Question 3

commercial real estate

Answer 3

income producing properties including:
-multi family homes
-office buildings
-retail space
-hotels

Question 4

benefits of home ownership

Answer 4

fixed housing costs
price appreciation

Question 5

home equity

Answer 5

the value of the home - the mortgage on said home

Question 6

increases in home equity

Answer 6

home value appreciation + debt repayment

Question 7

other financial benefits of home ownership

Answer 7

retirement savings
generational wealth

Question 8

retirement savings

Answer 8

in retirement the only housing expense will be property taxes. As a result, the individual does not need to save as much. If need be, you can sell the house, buy a smaller house, and use the extra funds in retirement

Question 9

generational wealth

Answer 9

when people pass away, they can pass on the asset to their children

Question 10

home purchase options

Answer 10

single family homes
multi family homes
condo

Question 11

single family homes

Answer 11

most expensive option, as it gives you the most privacy

Question 12

multi family homes

Answer 12

more affordable than single family because you can rent out the second home, and use the rent to help pay your mortgage

Question 13

condo

Answer 13

single family unit as part of a multi unit property. similar to owning an apartment. cheaper, because you do not own the land

Question 14

401-k Loans

Answer 14

you are able to borrow up to the lesser of $50,000 of half of your 401K balance for the use of a down payment on your first home
-there are minimal fees
-you are required to pay this back with interest, but you are paying interest to yourself

Question 15

primary home purchase considerations

Answer 15

property taxes

Question 16

property taxes

Answer 16

this is an annual cost paid to the town in which the property is located. It is critical that you compare property taxes among towns. Higher property taxes can add as much as $1,000/month to your monthly mortgage

Question 17

benefits of real estate equity investing

Answer 17

current income
capital appreciation & inflation hedge
diversification

Question 18

current income

Answer 18

rent
as inflation increases, value of property will increase
cash flow will increase as rent increases

Question 19

capital appreciation & inflation hedge

Answer 19

real estate tends to increase at least in line with inflation. inflation causes rent to increase, which in turn increases expected cash flows from the property. increased cash flow increases value

Question 20

diversification

Answer 20

real estate is not highly correlated to stocks and bonds

Question 21

comparable sales approach

Answer 21

bases the valuation on recent transactions of comparable transactions, then adjust for differences in the characteristics
-most meaningful approach- as it takes market factors into account
-most widely used in practice *

Question 22

the following factors would need to be adjusted for in comparable sales approach of commercial real estate valuation

Answer 22

location
age
condition
size= sales prices are in a cost per square foot which is dependent on the above factors

Question 23

income approach

Answer 23

discounted cash flows, by taking the net operating income divided by the capitalization rate

Question 24

capitalization rate is the

Answer 24

discount rate minus the growth rate

Question 25

cost approach

Answer 25

if you needed to purchase land and develop the building, what would the cost be? that’s the value.

Question 26

commercial real estate lending factors

Answer 26

loan to value
outlook of area the property is in
debt service coverage
occupancy break even
personal guarantor net worth

Question 27

loan to value LTV

Answer 27

the loan being made / the market value of the property

typically you want ~70% or lower

Question 28

outlook of area the property is in

Answer 28

does the investor have a forward-looking view on the area? do they expect values to appreciate or depreciate?

Question 29

debt service coverage

Answer 29

net operating income generated by the property/ cash outflow required to service the mortgage

net operating income is rent less the overhead required to run the property
you want higher debt service coverage

Question 30

occupancy break even

Answer 30

what portion of the property could be unoccupied, and still service the debt?

Question 31

personal guarantor net worth

Answer 31

is the borrower providing a guarantee, and if so what is their net worth? if it is less than the loan balance, it is not a meaningful enhancement

Question 32

public real estate securities are the

Answer 32

easiest way to purchase real estate

Question 33

public real estate securities

Answer 33

real estate investment trusts (REITs)
real estate operating companies (REOCs)
mortgage REITS

Question 34

real estate investment trusts (REITs)

Answer 34

tax advantaged trusts which are typically exempt from corporate income tax. equity REITs are actively managed portfolios of income producing property

typically diversified by geography and other factors
*you can have access to premium properties, manhattan

Question 35

real estate operating companies (REOCs)

Answer 35

the exact same as a REIT, but it does not have the tax advantages. some reasons that an entity cannot be classified as a REIT would be:
-it develops and sells real estate
-its in a country that does not allow tax-advantaged REITs

Question 36

mortgage REITs

Answer 36

REITs that invest in the fixed income (mortgage) aspect of real estate, rather than owning said real estate

Question 37

advantages to publicly traded real estate

Answer 37

easier to liquidate positions
lower minimum investment
limited liability
access to premium properties
active professional management

Question 38

due diligence in REITs

Answer 38

current rents vs market rents
tenet concentration
tenet financial health
balance sheet
quality of management

Question 39

current rents vs market rents

Answer 39

if rents have declined, then forward looking cash flows will decline

Question 40

tenet concentration

Answer 40

are a meaningful portion of cash flows owed from one tenet

Question 41

tenet financial health

Answer 41

how likely are tenets to file for bankruptcy

Question 42

balance sheet

Answer 42

how much leverage is on the REIT? how much operational deterioration can the REIT suffer and still service said debt