Unit 9: Investment Real Estate

Question 1

Nature of Investment (general)

Answer 1

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

Question 2

Equity is

Answer 2

the investor’s money

Question 3

ROI is on

Answer 3

Cash invested

Question 4

Yield is

Answer 4

Annual percent ROI

Question 5

Leverage

Answer 5

Using other people’s money to buy an assett

Question 6

Positive and Negative Leverage

Answer 6

Positive - Return greater than cost

Negative - Return less than cost

Question 7

Maxium Leverage

Answer 7

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

Question 8

Appreciation

Answer 8

The ability to sell property without losing initial cash investment

Question 9

Stocks- how it stacks up

Answer 9

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

Question 10

Bonds- how it stacks up

Answer 10

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

Question 11

Mutual Funds- how it stacks up

Answer 11

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

Question 12

Insurance and Annuities- how it stacks up

Answer 12

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

Question 13

Cash and Cash Equivilent- how it stacks up

Answer 13

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

Question 14

Retirement Plans- how it stacks up

Answer 14

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

Question 15

Real Estate - how it stacks up

Answer 15

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

Question 16

Advantages of Real Estate

Answer 16

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

Question 17

Real estate disadvantages

Answer 17

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

Question 18

Types of Real Estate Investments - Residential

Answer 18

Single family
Condo
Multi Family

Question 19

Types of Real Estate Investments - Commercial

Answer 19

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

Question 20

Business Broker

Answer 20

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

Question 21

Investment prop Analyalysis - Relationship to market

Answer 21

Look at Local and National Economy

Question 22

Investment prop Analyalysis - Location

Answer 22

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

Question 23

Investment prop Analyalysis - Physcial Characteristics: Building

Answer 23

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

Question 24

Investment prop Analyalysis - Physcial Characteristics:

Physical Characteristics - site

Answer 24

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

Question 25

Legal Characteristics of investment prop

Answer 25

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

Question 26

Risk Characteristic

Answer 26

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

Question 27

Potential Gross Income - PGI

Answer 27

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

Question 28

Vacancy and Collection Loss

Answer 28

Income lost due to vacancy or default on rent | Usually a percentage of square footage in relation to the rest of the building

Question 29

Other Income (OI)

Answer 29

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

Question 30

Effective Gross Income

Answer 30

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

Question 31

Operating Expenses -fixed and variable

Answer 31

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

Question 32

Reserve

Answer 32

NON CASH set aside for replacement of short term items

Question 33

Net Operating Income

Answer 33

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

Question 34

Net Operating Income =

Answer 34

Effective Gross Income - Operating Expenses

Question 35

Whole Math Formula

Answer 35

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 6. This gives you your NET OPERATING INCOME Now you can find your CAP RATE

Question 36

Operating Expense Ratio - percentage expenses of Effective Gross Income

Answer 36

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

Question 37

CAP RATE

Answer 37

INCOME ___________ Rate x Value So you need 2 of the 3 of these to find the othe one

Question 38

Gross Rent Multiplier

Answer 38

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

Question 39

Gross Income Multiplier

Answer 39

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

Question 40

3 Approaches to Value

Answer 40

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

Question 41

Reconcilliation of 3 Approaches to Value

Answer 41

1. Appraiser will prioritize most appropriate approach | 2. Will NOT average all 3.