Real Estate Investment Flashcards
types of real estate
residential real estate
commercial real estate
residential real estate
single family homes
commercial real estate
income producing properties including:
-multi family homes
-office buildings
-retail space
-hotels
benefits of home ownership
fixed housing costs
price appreciation
home equity
the value of the home - the mortgage on said home
increases in home equity
home value appreciation + debt repayment
other financial benefits of home ownership
retirement savings
generational wealth
retirement savings
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
generational wealth
when people pass away, they can pass on the asset to their children
home purchase options
single family homes
multi family homes
condo
single family homes
most expensive option, as it gives you the most privacy
multi family homes
more affordable than single family because you can rent out the second home, and use the rent to help pay your mortgage
condo
single family unit as part of a multi unit property. similar to owning an apartment. cheaper, because you do not own the land
401-k Loans
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
primary home purchase considerations
property taxes
property taxes
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
benefits of real estate equity investing
current income
capital appreciation & inflation hedge
diversification
current income
rent
as inflation increases, value of property will increase
cash flow will increase as rent increases
capital appreciation & inflation hedge
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
diversification
real estate is not highly correlated to stocks and bonds
comparable sales approach
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 *
the following factors would need to be adjusted for in comparable sales approach of commercial real estate valuation
location
age
condition
size= sales prices are in a cost per square foot which is dependent on the above factors
income approach
discounted cash flows, by taking the net operating income divided by the capitalization rate
capitalization rate is the
discount rate minus the growth rate
cost approach
if you needed to purchase land and develop the building, what would the cost be? that’s the value.
commercial real estate lending factors
loan to value
outlook of area the property is in
debt service coverage
occupancy break even
personal guarantor net worth
loan to value LTV
the loan being made / the market value of the property
typically you want ~70% or lower
outlook of area the property is in
does the investor have a forward-looking view on the area? do they expect values to appreciate or depreciate?
debt service coverage
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
occupancy break even
what portion of the property could be unoccupied, and still service the debt?
personal guarantor net worth
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
public real estate securities are the
easiest way to purchase real estate
public real estate securities
real estate investment trusts (REITs)
real estate operating companies (REOCs)
mortgage REITS
real estate investment trusts (REITs)
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
real estate operating companies (REOCs)
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
mortgage REITs
REITs that invest in the fixed income (mortgage) aspect of real estate, rather than owning said real estate
advantages to publicly traded real estate
easier to liquidate positions
lower minimum investment
limited liability
access to premium properties
active professional management
due diligence in REITs
current rents vs market rents
tenet concentration
tenet financial health
balance sheet
quality of management
current rents vs market rents
if rents have declined, then forward looking cash flows will decline
tenet concentration
are a meaningful portion of cash flows owed from one tenet
tenet financial health
how likely are tenets to file for bankruptcy
balance sheet
how much leverage is on the REIT? how much operational deterioration can the REIT suffer and still service said debt
