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Real Estate Class > Unit 9: Investment Real Estate > Flashcards

Unit 9: Investment Real Estate Flashcards

1
Q

Nature of Investment (general)

A

Outlay of an investor’s money in hopes of income and profit.
Goal - high ROI

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2
Q

Equity is

A

the investor’s money

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3
Q

ROI is on

A

Cash invested

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4
Q

Yield is

A

Annual percent ROI

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5
Q

Leverage

A

Using other people’s money to buy an assett

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6
Q

Positive and Negative Leverage

A

Positive - Return greater than cost

Negative - Return less than cost

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7
Q

Maxium Leverage

A

The highest rate of return from the highest LTV.

Example, using 100k to buy 1 property outright, or breaking it up to finance 4 properties

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8
Q

Appreciation

A

The ability to sell property without losing initial cash investment

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9
Q

Stocks- how it stacks up

A 
Partial ownership of a company, originally to raise money, now traded on secondary market. Dividends as profit. Vote on company decisions. 
Rate of Return: Yes
Tax Advantage: No
Leverage: Maybe
Equity Buildup: Yes
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10
Q

Bonds- how it stacks up

A

Issued to raise money, are a loan from you to company, will be paid back, not much interest. Bought and sold on secondary market.

Rate of Return: Yes
Tax Advantage: Maybe
Leverage: No
Equity Buildup: No

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11
Q

Mutual Funds- how it stacks up

A

Professional mgmt & diversification (group of company stocks, not just 1)
Pooling assets of many investors, pursuing investment objective, gives buying power to individuals that they could never have gotten alone.

Rate of Return: Yes
Tax Advantage: No
Leverage: No
Equity Buildup: No

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12
Q

Insurance and Annuities- how it stacks up

A

Tax deferred growth, income for life, death benefit. Annuity: Take a series of payments or a lump sum.
Life Insurance - Pay for life, beneficiaries get $ upon your death.
Depends on paying ability of ins co.

Rate of Return: Yes
Tax Advantage: No
Leverage: No
Equity Buildup: Maybe

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13
Q

Cash and Cash Equivilent- how it stacks up

A

Treasury bills, money market mutual funds, Cert deposit, passbook savings. Keeps cash liquid.

Rate of Return: No
Tax Advantage: No
Leverage: No
Equity Buildup: No

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14
Q

Retirement Plans- how it stacks up

A

Tax deferred investments - retirement plans and municipal bonds. Traditions & Roth IRA, 401k, CESA, Profit Sharing

Rate of Return: Yes
Tax Advantage: Yes
Leverage: No
Equity Buildup: Yes

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15
Q

Real Estate - how it stacks up

A

Rate of Return: Yes
Tax Advantage: Yes
Leverage: Yes
Equity Buildup: Yes

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16
Q

Advantages of Real Estate

A
  1. Relatively high yields (profit)
    - Growth, tax savings, principal reduction
  2. Leveraging opportunities - creative financing
  3. Income tax flexibility
    - depreciate over 27.5 years residential
    - 39 years commercial
  4. High degree personal control - rent, refi, terms of sale
  5. Equity build up - principal reduction and value growth
  6. Hedges against inflation - rents and value tend to rise with the market
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17
Q

Real estate disadvantages

A
  1. Illiquidity
  2. Large capital requirements - aquisition, reserves, mortgage
  3. Necessary CONSTANT MANAGEMENT - MAJOR
  4. Landlordism
  5. Risk
18
Q

Types of Real Estate Investments - Residential

A

Single family
Condo
Multi Family

19
Q

Types of Real Estate Investments - Commercial

A 
Retail
Retail Commercial
Shopping Center
Offices
Industrial - manufacturing, distribution, assembly
Hotels/motels
Special Purpose
Land
Agriculture
Business Opportunities
20
Q

Business Broker

A

A licensee who specializes in the sale, purchase, or lease of businesses

21
Q

Investment prop Analyalysis - Relationship to market

A

Look at Local and National Economy

22
Q

Investment prop Analyalysis - Location

A

SITUS indicates the influence on value created by location
Destination Properties
Origin Properties - export activities out of area

23
Q

Investment prop Analyalysis - Physcial Characteristics: Building

A
  1. REPLACEMENT COST sets max price
  2. Investment value influenced by:
    Exterior condition
    Interior condition
    Buildting Operating expenses
    NOT market activity - looking for buy and hold
24
Q

Investment prop Analyalysis - Physcial Characteristics:

Physical Characteristics - site

A

Sqft, front footage, acre,
Look at topography
Highest and best use

25
Q

Legal Characteristics of investment prop

A 
Sole Proprietorship
Tenancies in Common
Limited Partnerships
Sub S or Sub C coprt
Real Estate Investment Trust (REIT)
26
Q

Risk Characteristic

A
  1. Legal Risk
  2. Litigation
  3. Business risk - budet v actual
  4. Financial - can you pay?
  5. Interst rate risk - goes way up on your ARM
  6. Liquidity - what if you need cash?
  7. Market risk - drops market value, increased vacancie, increased rate
27
Q

Potential Gross Income - PGI

A

Total annual income that a property COULD produce if 100% occupied and no vacancy or collection losses are incurred.

  • If leased, based on current rent
  • If vacant, based on market rent
28
Q

Vacancy and Collection Loss

A

Income lost due to vacancy or default on rent

Usually a percentage of square footage in relation to the rest of the building

29
Q

Other Income (OI)

A 
Income received other than rent -
common areas
vending
laundry
parking space
sigage for your retail tenants to pay to use
30
Q

Effective Gross Income

A

The anticipated income restulting from the resulting Potential gross income less vacancy and collections, with Other Income Added int
PGI - V&C + OI = EGI

31
Q

Operating Expenses -fixed and variable

A

Recurring expenses that are essintial to continuous operation & use of property

Fixed: Don’t change with occupancy

  • Taxes
  • Building Insurance

Variable - DO change with occupancy

  • Utilities
  • Payroll and admin
  • Manaagement

MORTGAGE NOT INCLUDED IN OPERATING EXPENSES

32
Q

Reserve

A

NON CASH set aside for replacement of short term items

33
Q

Net Operating Income

A

Income produced AFTER V&C and operating expenses, but BEFORE deducting Mortgage, depreciation or income taxes.

34
Q

Net Operating Income =

A

Effective Gross Income - Operating Expenses

35
Q

Whole Math Formula

A
  1. Start with PGI
  2. Subtract the V&C
  3. Add in OE
    4.This gives you your EFFECTIVE GROSS INCOME
    5.Now subtract the OPERATING EXPENSES from the EFFECTIVE GROSS INCOME
  4. This gives you your NET OPERATING INCOME
    Now you can find your CAP RATE
36
Q

Operating Expense Ratio - percentage expenses of Effective Gross Income

A

To find that percent,
Divide the Operating Expense by the EGI
So if it’s 40%, then 60% would be your Net Operating Income.

37
Q

CAP RATE

A

INCOME
___________
Rate x Value

So you need 2 of the 3 of these to find the othe one

38
Q

Gross Rent Multiplier

A

Gross Rent Is MONTLY
Sales Price divided by monthly gross rent =gross rent multiplier

Gross rent multiplier x monthly gross rent = value

39
Q

Gross Income Multiplier

A

Gross Income is ANNUALY
Sales Price divided by annual gross income is = Gross Income Multiplier

Gross Income multiplier x annual gross income = value

40
Q

3 Approaches to Value

A
  1. Sales Comp Approach
  2. Cost Depreciation Approach
  3. Income Approach - income producing properties
41
Q

Reconcilliation of 3 Approaches to Value

A
  1. Appraiser will prioritize most appropriate approach

2. Will NOT average all 3.

Real Estate Class (12 decks)

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