Real Estate Investments Mateen Pekan
Definition of Real Estate ď Ž
Real Estate is artificially delineated space references to a fixed point on the surface of the earth with a fourth dimension of time. It is built to house an economic activity that is subject to cultural preferences and restricted by the public infrastructure.
Concepts ď Ž
Space--Time Product • Real estate is a space-time product, that is it generates income over time in exchange for the use of space. Examples: apartments, football tickets, wedding receptions
Characteristics
The Real Estate Market Characteristics: • • • • •
1. 2. 3. 4. 5.
Highly Stratified, Local Markets Heterogeneous Product Private, not Public, Transactions Unsophisticated Investors Unorganized Market
Framework for Real Estate Investment Studies
1. Strategy • Develop an overall investment philosophy
2. Analysis • Measuring return
3. Decisions • Risk and return evaluations
4. Investment Transaction 5. Feedback
Investment Analysis vs. Feasibility Analysis (continued)
2. Feasibility and Feasibility Analysis • • •
a. b. c.
Site in Search of a Use Use in Search of a Site Investor Looking for the Best Investment Alternative
3. Investment Life Cycles • • •
a. b. c.
Property Life Cycle Ownership Life Cycle Investor Life Cycle
Traditional Financial Decision Making Approaches
1. Investment Value Approach • a. Invest if: V C • b. Reject if: V C
2. IRV
I
• Assumes: – a. – b. – c. – d.
Productivity = NOI NOI is stabilized o Holding period is infinite Capital is recaptured from income, except land
R
V
Stabilized NOI Ye = 10.5% Year NOI * PV factor PV 1 $53,918 * .904977 $48,795 2 56,645 * .818984 46.391 3 59,352 * .741162 43,989 4 62,037 * .670735 41,610 5 64,698 * .607000 39,272 6 67,185 * .549321 36,906 Sum = $256,963 ď Ž
Stabilized NOI (continued) Stabilized NOI = PV of NOI/PV of Annuity Stabilized NOI = $256,963 / 4.292179 Stabilized NOI = $59,868
Investment Principles 1. The investor should buy the assumptions that create the yield rather than the yield itself. 2. The investor should be as concerned about what to offer the next buyer as with what he is buying 3. The investor should price the property apart from the tax advantages.
The Market Revenue Model : (Back Door) Market Rents Equity Acct.
= (1 - BEP) x
x BEP =
Cash Margin
- Reserves - Vacancy
- RE Taxes - Operating Exp.
CTO
CASH FOR DEBT
Re
Rm
JEA
JMA
+ Justified Investment Value
The Capital Revenue Model: (Front Door) Cost of Project Equity = (1 - m) x Amount
x m=
Debt Amount
x Re
x Rm
CTO
ADS
+ NOI + Operating Expenses + Real Estate Taxes + Vacancy Allowance PGI
PGI/Net Leasable Area = Required Rent to be Charged