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Equity Investment

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Transcript

  • 1. Equity Investment & The Investment Decision
  • 2. Real Estate Investment Advantages
    • Pride in Ownership
    • Personal control
    • Self-use & Occupancy
    • Estate Building
    • Security of Capital
    • Operating Cash Flows
    • Leverage
    • Tax Shelter factors
    • Capital Appreciation & Inflation Protection
  • 3. Real Estate Disadvantages
    • Illiquidity
    • Required equity capital
    • Management burden
    • Depreciation of value
    • Government controls
    • Real estate cycles
    • Legal complexity
    • Lack of information & education
  • 4. Trade-Offs: Risk/Return
  • 5.
    • Risks
      • Legal : Zoning, public opinion,
        • public services, etc.
      • Market risks : Marketability study
        • Will it rent? Will it sell?
        • Market study: S&D, Competition
        • Absorption rates: How fast is space being utilized
  • 6. Risks
      • Cost risks:
      • Interest rates
      • Estimates poor
      • Labor
      • Weather
      • Possible Solutions:
      • Guaranteed price contracts
          • Watch out for cushion
      • General contractors: Reputable & bonded
      • Completion bond (Lenders may require)
          • Guarantees price
      • Cost plus contracts: Developer pays costs + fee
  • 7. Return Measures
    • Cash Flow ( Net Spendable ) Pro Forma:
    • Cash on Cash= Net Spendable/Down payment
      • =1100/10000=11%
    $ 1,100.00 Cash Flow Before Tax: $ (12,900.00) Less Debt Service (P&I): $ 14,000.00 Net Operating Income: $ (37,000.00) Less Operating Expenses: $ 51,000.00 Gross Effective Income: $ (9,000.00) Less E(Vacancy): $ 60,000.00 Gross Possible Income: $ 100,000.00 Loan: (DP=$10,000) $ 20,000.00 Equity:
  • 8. Return Measures
    • Rate of return on total capital: = NOI/Total Capital
        • = 14/120 = 11.7%
    • Return on Equity (ROE) = CF Before Tax/Equity
        • = 1.1/20 = 5.5%
    • Favorable leverage: If ROE > ROR
      • If unfavorable leverage:
        • Don't buy
        • Reduce Price
        • Try to lower APR or increase term
        • Raise NOI or lower expenses
        • Restructure (ie., more equity)
  • 9. Return Measures
    • Equity cap rate: = CF before Tax/Equity
        • (ie., required ROE)
      • For example:
        • Your desired cap rate is 14%
        • CF before tax is $1,100
        • Equity value = 1.1/.14 = $7,857
        • Plus loan of $100K
        • Therefore property value = $107,857
    • Risk measures: BEP & Debt Coverage Ratio
  • 10. Discounted CF Analysis
    • Income Cap Rate:
        • NOI/Market Value
        • Compare to other opportunities
    • Do Cash Flow Spread sheet:
    • Ratio Analysis
    • Sensitivity Analysis:
      • What if we change the value of a variable?
    • Scenario Analysis: Worst versus Best?
    • Monte Carlo Analysis:
      • Randomly assign values & check bottom line
  • 11. Investment Analysis Process
    • Strategy: Determine First!!
        • Return/Risk Objectives
        • Ownership Form
        • Market Analysis
        • Screening Criteria
        • Location/Property Analysis
    • Generate Alternatives: Those that pass screen
    • Use Basic Financial Feasibility Model
        • Develop Finance Screens (APRs, CapRates, NOI)
        • Examine Finance Alternatives (Loans, Equity, etc)
  • 12. Investment Analysis Process
    • Negotiate Basic Terms with Seller
        • Price
        • Financing
        • Covenants
        • Escape Clause
    • Do Detailed Feasibility Research
        • Market:
          • Supply & Demand, Competition, Absorption, Vacancy
        • Marketability: Property Condition
        • Legal, Political, Environmental
        • Management & Operations
  • 13. Investment Analysis Process
    • Structure Tax Benefits
        • Cost Recovery
        • Useful Life
        • Passive Loss Limitations
    • Discounted CF Analysis
        • After-Tax CF, DCF, Adjust for Risk
    • Final Negotiations & Closing
    • Management of Property
    • Termination
        • Sell, merger, IPO
  • 14. Control
    • Purchase Price & Terms
    • Form of Ownership
    • Financing amounts, rates, terms
    • Tax structure & Planning
    • Property management
    • Property location
    • Tenants & Lease rates & terms
  • 15. Negotiation
    • Maximize knowledge position First!
    • Set your initial demands far from final objective
        • Probe for bottom line
    • Raise your aspiration level/ deflate your opponent's
    • Buyer:
        • Start with lower price than seller wants
        • Lukewarm attitude
        • Point out defects
        • Mention competitive offers
    • Seller:
        • Mention other offers you have rejected
        • Price is probably going up
        • Negotiate most critical items first and
  • 16. Negotiation (Cont)
    • Concentrate on items that effect profits
        • Down payment, price, contract period
    • Employ conservative concession policy
        • Don't give in or reciprocate/
        • No sportsmanship/
        • Never concede first
        • Never accept a radical counteroffer without analysis
    • Use intermediaries when to your advantage
        • With agent, more time to analyze
        • Advisor: Openly discuss concerns
    • Try for better deal for both parties:
    • Place proof burden & satisfaction on them
        • Prove to you that it is an attractive opportunity
  • 17. Negotiation (Tactics)
    • Standard Practice: Terms are "standard practice"
    • Bogey: “I only can afford $7,500 in cash"
    • Good guy/Bad guy:
        • One makes strong demands ...
        • Opponent is more susceptible to good guy's weaker demands
    • Deadline: Always use them!
    • Nibbling: Get additional minor concessions after major agreement
    • The tie-up: Get the property off the market while you're making decision
  • 18. Property Types
    • Land
      • Most Risky
      • Low income
      • Interest, taxes, insurance
      • Interest deduct income only
      • No depreciation
      • 20-30% ROR for risk
      • Consider
        • Access/Slope
        • Zoning
        • Public services & Utilities
      • Return=capital appreciation
  • 19. Property Types
    • Residential Rental (Houses,Apts,MHs)
      • Management Intensive
      • Good financing
      • Tax shelter
      • High appreciation
      • Know location & physical condition
      • Check neighborhood & proximity to services
      • Good first step for real estate
      • Some income -- mostly capital appreciation
  • 20. Property Types
    • Office Buildings
      • More income/less appreciation
        • Appreciation can be improved w/ maintenance
      • Needs more knowledge for leasing &
        • Property management
      • Types: Downtown vs Suburban
      • Medium vs HiRise vs Garden (Low)
      • Locations: Highways / Shopping Centers
      • Better construction
      • Low tenant turnover ratios
      • Prestigious clients
  • 21. Property Types : Shopping Centers
    • Most sophisticated Investment & Management Expertise
    • Much more income than appreciation/Few Foreclosed!
    • Owned by wealthy investors (TIAA/CREF=Mall of Amer)
    • Types:
      • Neighborhood center: ( Strip): Food, drugs, etc, Built around supermarket/drugstore: 50K Gross leaseable area
      • Community center: + Clothing, furniture, bank, prof: 150K GLA
      • Regional center : Full-line Dept store (Anchor):
      • Reit & Insur=Ownership; 400K GLA
      • Super Regional Centers : Major metro area: 2 anchors,
        • 100-200 stores, Usually % of profits
  • 22. Property Types : Industrial & Special
    • Industrial
      • Warehouses, factories, indust parks
      • Almost all income
      • Not easily converted … increases risk
      • Low risk overall if you have a client
      • Near highways
    • Special Use
      • Need expertise: RE + the application
      • Risky: Be ready to substitute
      • Loans are hard to get … banks ??
      • Requires time commitment
  • 23. Development
    • Overview
        • Combine land, labor, capital &
          • Entrepreneurial ability
        • Good developers can “visualize ” good uses of space
        • Creation of space for play, living & working
        • LT Motive =Income, Mgt, Community/
          • ST Motive =Cap Gain
        • Redevelopment: Restoration of older structure
  • 24. Development
    • Types:
      • Land Prep: Lots of all kinds
        • Sell land to other developers
      • Erect improvements on land
    • Who Develops?
      • Part-time
      • Proprietorship
      • Corporation, etc.
      • Joint ventures (ie., 2 developers)
  • 25. Development Process: Be ready to bail out Stages may be done simultaneously
    • Idea: Can develop over life of project
    • Preliminary Feasibility: Rough cut analysis
        • Are computer programs: Go if profit looks good
    • GainControl: Ground lease(ties you up), option, seller fin
    • Feasibility Analysis & Design :
      • Detailed analysis, Check site, market, legal, financial
    • Finance: Need cash ASAP, should have already talked
    • Construction: Problems: cost overruns & contractor fails
    • Marketing: Lease (don’t lease too early rates change)
    • vs Sale: When … remember trade-offs
  • 26. Redevelopment & trends
    • Redevelopment:
      • Costs are high, structures - obsolete
      • ITCs, grants
      • Popular trend
    • Trends:
      • Mixed use development: One structure
      • Planned unit development (PUD)
      • New towns/Village concept: Integrated approach: work, shop, play, live
  • 27. Professional Help
    • Real Estate Brokers:
      • Get a specialist! Has access to information
    • Appraisers & consultants: Can do DCF
    • Property managers:
      • Has rental & vacancy rates, op. expenses, etc
    • Morgage bankers:
      • Arrange deals & financing alternatives
    • Tax advisers and attorneys
    • Others:
      • Comm banks, Engineers, Architects, Contractors

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