Real estate investment

Michael S Robinson Utah
Michael S Robinson UtahReal Estate Investment, Solar Developer, SEO
Real Estate
Real Estate: an Important Asset Class
●
Until recent stock market boom, single family
homes value in US approximated value of entire
stock market.
●
Home mortgages 1999: $4.62 trillion Consumer
credit is only 1.46 trillion. US National debt held
by public is only $3 trillion
(Source: FRB, Balance Sheets for US Economy)
Real Estate Partnerships
●
Real estate limited partnerships represent the most
important example of a Direct Participation Program
(DPP), a class of investments that also includes oil and
gas exploration programs and equipment leasing programs
●
“Direct participation:” DPPs are “flow-throw vehicles”
and investors can deduct program losses on personal taxes
●
“Tax shelters” until the Tax Reform Act of 1986: losses
used to offset “passive income.” Now, genuine businesses.
●
DPPs escape the corporate profits tax
●
IRS requirements, notably limitation of life
Limited Partnership Structure
●
General partner runs the business, does not have
limited liability
●
General partner must own at least 1%
●
Limited Partners are passive investors, with
limited liability, rights to vote, can replace general
partner
●
General partner or associate usually runs the
offering to sell units to investors
●
Give additional performance-oriented
compensation to the general partner
Accredited Investors
●
Regulation D: Accredited investors include
individuals with net worth in excess of $1 million
or with income in excess of $200,000 ($300,000
joint income) in each of the last two years
●
National Association of Securities Dealers
(NASD) requires suitability files and suitability
tests for DPPs
Real estate investment trusts (REITS)
●
Real Estate Investment Trusts (REITs) were
created by US Congress in 1960 to allow small
investors access to real estate investments.
●
Before 1960, public companies that owned real
estate would be considered businesses, for which
their earnings would be subject to corporate
profits tax. So, until 1960, real estate was
typically owned by partnerships, not suitable for
small investors.
●
Today, institutions invest in REITs too.
Restrictions on REITs
●
75% of assets must be in real estate or cash
●
75% of income must be from real estate
●
90% of their income must be from real estate,
dividend, interest & capital gains
●
95% of income must be paid out
●
No more than 30% of income from sale of
properties held less than four years
– These prevent regular businesses from being REITS
The 3 REIT Booms
●
First boom: Late 1960s: interest rates rose above
deposit rate ceilings at banks, depositors fled to
mortgage REITs. But, with recession of 1974,
many REITs defaulted. Economic Recovery Tax
Act of 1981 favored partnerships.
●
Second boom: Tax Reform Act of 1986
eliminated advantages of partnerships, so
investors switched to REITs.
●
Third boom: Starting 1992, many private real
estate companies found it advantageous to go
public as REITs, specialized REITs developed.
History of Mortgages
●
In 1920s, 5-year term loans common, balloon
payment due in five years, or refinance or sell
house.
●
In 1930s, decline in nominal home prices and rise
in unemployment caused massive defaults
●
Mortgage lending industry turned to long-term
annuities
Kinds of Mortgages
●
Conventional, fixed rate mortgage
●
Adjustable rate mortgage (ARM)
●
Price level adjusted mortgage (PLAM) payment
adjusted to inflation so constant in real terms
●
Dual rate mortgages (DRAMs) same as PLAM
but interest rate floats
●
Shared appreciation mortgages (SAMs)
●
First mortgages: on purchase of home
●
Home equity loans
Conventional Mortgages
●
Homeowners’ fixed rate mortgage: an annuity
whose present value equals the initial loan.
●
Traditionally, payments are monthly and
compounding is monthly. With maturity m years
and mortgage rate r we have:
Mortgage balance=monthly payment×
[ 1
r /12
−
1
(r/12)(1+r /12)12M ]
Real estate investment
Fannie Mae
●
Federal National Mortgage Association, created
by Congress in 1938 to create a secondary market
for FHA approved mortgages. Borrows money,
buys & holds mortgages.
●
1944 allowed to buy VA (Veteran Admin. Loans)
●
1954 Congress makes Fannie Mae a “mixed
ownership corp., with private owners
●
1968 Pres. Johnson signs bill making Fannie a
fully private corporation
●
1976 Conventional loans outnumber FHA & VA
●
Still does not do jumbo loans (above $275000)
Behavior of Single Family Home Prices
●
Not a random walk, substantial inertia
●
Occasional booms and busts
●
Shared movements over wide regions of country,
but not shared over entire country
●
Boom of late 1980s infected many of largest cities
of world
Characteristics of Real Estate Booms
●
Case Shiller Surveys of Homeowners 1988, 2003
●
Surveyed recent homebuyers in Anaheim CA
(boom), Milwaukee WI (no boom) and Boston
MA (post-boom)
●
Nearly 1000 responses each survey
1970 1975 1980 1985 1990 1995 2000 2005
0
20
40
60
80
100
120
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
9000000
Figure 5 Los Angeles Real Home Price Index and Employment
Column M
Column D
1975 1980 1985 1990 1995 2000 2005
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
Figure 8 Milwaukee Real Home Price Index and Employment
Column J
Column K
Long-Term Expectations
“On average over the next ten years, how much do
you expect the value of your home to change each
year?”
Los Angeles Milwaukee
1988 2003 1988 2003
14.3% 13.1% 7.3% 11.7%
Fears of Being Left Out
“Housing prices are booming. Unless I buy now, I
won’t be able to afford a house in the future.”
Los AngelesMilwaukee
1988 20031988 2003
Agree79.5% 48.8% 27.8% 36.4%
Disagree 20.5% 51.2% 72.2% 63.6%
Perceptions of Excitement
“There has been a good deal of excitement
surrounding recent housing price changes. I
Sometimes I think I may have been influenced by
it.”
Los AngelesMilwaukee
1988 20031988 2003
Yes 54.3% 46.1% 21.5% 34.8%
No 45.7% 53.9% 78.5% 65.2%
Word-of-Mouth Communication
“In conversations with friends and associates over
the last few months, conditions in the housing
market were discussed.”
Los AngelesMilwaukee
1988 20031988 2003
Frequently 52.9% 32.9% 20.0% 27.6%
“Real Estate is Best Investment”
“Real estate is the best investment for long-term holders, who can just
buy and hold through the ups and downs of the market.”
Los Angeles Milwaukee
2003 2003
1. Strongly agree 53.7% 31.3%
2. Agree somewhat 33.1% 45.9%
3. Neutral 10.3% 11.3%
4. Disagree somewhat 2.7% 9.1%
5. Strongly disagree 0.0% 2.1%
Effects of Real Estate Booms &Crashes
●
Default rate on mortgages is function of loan to
value ratio, which declines as prices rise, rises as
prices fall.
●
Mortgage insurance companies suffered massive
losses in 1980s with decline of real estate prices
in Texas. MGIC in great trouble then.
Real Estate Market Today
●
Late 1990s have shown solid price increases in
many cities
●
San Francisco increased 28% 1999 III to 2000 III,
fell 4.5% between 2001-I and 2001-IV .
●
More low downpayment loans today
●
Risk of stock market decline harming real estate
market, thereby the PMIs, and mortgage lenders
Figure 5 Los Angeles Real Home Price Index and Employment
0
20
40
60
80
100
120
1970 1975 1980 1985 1990 1995 2000 2005
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
9000000
Real Price
employment
Figure 5 Los Angeles Real Home Price Index and Employment
0
20
40
60
80
100
120
1970 1975 1980 1985 1990 1995 2000 2005
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
9000000
Real Price
employment
Thankyou
Michael S robinson
8880 Call center
Dr Suite 1000
Sacramento
www.ohana-homesolutions.com
1 of 27

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Real estate investment

  • 2. Real Estate: an Important Asset Class ● Until recent stock market boom, single family homes value in US approximated value of entire stock market. ● Home mortgages 1999: $4.62 trillion Consumer credit is only 1.46 trillion. US National debt held by public is only $3 trillion (Source: FRB, Balance Sheets for US Economy)
  • 3. Real Estate Partnerships ● Real estate limited partnerships represent the most important example of a Direct Participation Program (DPP), a class of investments that also includes oil and gas exploration programs and equipment leasing programs ● “Direct participation:” DPPs are “flow-throw vehicles” and investors can deduct program losses on personal taxes ● “Tax shelters” until the Tax Reform Act of 1986: losses used to offset “passive income.” Now, genuine businesses. ● DPPs escape the corporate profits tax ● IRS requirements, notably limitation of life
  • 4. Limited Partnership Structure ● General partner runs the business, does not have limited liability ● General partner must own at least 1% ● Limited Partners are passive investors, with limited liability, rights to vote, can replace general partner ● General partner or associate usually runs the offering to sell units to investors ● Give additional performance-oriented compensation to the general partner
  • 5. Accredited Investors ● Regulation D: Accredited investors include individuals with net worth in excess of $1 million or with income in excess of $200,000 ($300,000 joint income) in each of the last two years ● National Association of Securities Dealers (NASD) requires suitability files and suitability tests for DPPs
  • 6. Real estate investment trusts (REITS) ● Real Estate Investment Trusts (REITs) were created by US Congress in 1960 to allow small investors access to real estate investments. ● Before 1960, public companies that owned real estate would be considered businesses, for which their earnings would be subject to corporate profits tax. So, until 1960, real estate was typically owned by partnerships, not suitable for small investors. ● Today, institutions invest in REITs too.
  • 7. Restrictions on REITs ● 75% of assets must be in real estate or cash ● 75% of income must be from real estate ● 90% of their income must be from real estate, dividend, interest & capital gains ● 95% of income must be paid out ● No more than 30% of income from sale of properties held less than four years – These prevent regular businesses from being REITS
  • 8. The 3 REIT Booms ● First boom: Late 1960s: interest rates rose above deposit rate ceilings at banks, depositors fled to mortgage REITs. But, with recession of 1974, many REITs defaulted. Economic Recovery Tax Act of 1981 favored partnerships. ● Second boom: Tax Reform Act of 1986 eliminated advantages of partnerships, so investors switched to REITs. ● Third boom: Starting 1992, many private real estate companies found it advantageous to go public as REITs, specialized REITs developed.
  • 9. History of Mortgages ● In 1920s, 5-year term loans common, balloon payment due in five years, or refinance or sell house. ● In 1930s, decline in nominal home prices and rise in unemployment caused massive defaults ● Mortgage lending industry turned to long-term annuities
  • 10. Kinds of Mortgages ● Conventional, fixed rate mortgage ● Adjustable rate mortgage (ARM) ● Price level adjusted mortgage (PLAM) payment adjusted to inflation so constant in real terms ● Dual rate mortgages (DRAMs) same as PLAM but interest rate floats ● Shared appreciation mortgages (SAMs) ● First mortgages: on purchase of home ● Home equity loans
  • 11. Conventional Mortgages ● Homeowners’ fixed rate mortgage: an annuity whose present value equals the initial loan. ● Traditionally, payments are monthly and compounding is monthly. With maturity m years and mortgage rate r we have: Mortgage balance=monthly payment× [ 1 r /12 − 1 (r/12)(1+r /12)12M ]
  • 13. Fannie Mae ● Federal National Mortgage Association, created by Congress in 1938 to create a secondary market for FHA approved mortgages. Borrows money, buys & holds mortgages. ● 1944 allowed to buy VA (Veteran Admin. Loans) ● 1954 Congress makes Fannie Mae a “mixed ownership corp., with private owners ● 1968 Pres. Johnson signs bill making Fannie a fully private corporation ● 1976 Conventional loans outnumber FHA & VA ● Still does not do jumbo loans (above $275000)
  • 14. Behavior of Single Family Home Prices ● Not a random walk, substantial inertia ● Occasional booms and busts ● Shared movements over wide regions of country, but not shared over entire country ● Boom of late 1980s infected many of largest cities of world
  • 15. Characteristics of Real Estate Booms ● Case Shiller Surveys of Homeowners 1988, 2003 ● Surveyed recent homebuyers in Anaheim CA (boom), Milwaukee WI (no boom) and Boston MA (post-boom) ● Nearly 1000 responses each survey
  • 16. 1970 1975 1980 1985 1990 1995 2000 2005 0 20 40 60 80 100 120 0 1000000 2000000 3000000 4000000 5000000 6000000 7000000 8000000 9000000 Figure 5 Los Angeles Real Home Price Index and Employment Column M Column D
  • 17. 1975 1980 1985 1990 1995 2000 2005 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 200.0 0 100000 200000 300000 400000 500000 600000 700000 800000 900000 Figure 8 Milwaukee Real Home Price Index and Employment Column J Column K
  • 18. Long-Term Expectations “On average over the next ten years, how much do you expect the value of your home to change each year?” Los Angeles Milwaukee 1988 2003 1988 2003 14.3% 13.1% 7.3% 11.7%
  • 19. Fears of Being Left Out “Housing prices are booming. Unless I buy now, I won’t be able to afford a house in the future.” Los AngelesMilwaukee 1988 20031988 2003 Agree79.5% 48.8% 27.8% 36.4% Disagree 20.5% 51.2% 72.2% 63.6%
  • 20. Perceptions of Excitement “There has been a good deal of excitement surrounding recent housing price changes. I Sometimes I think I may have been influenced by it.” Los AngelesMilwaukee 1988 20031988 2003 Yes 54.3% 46.1% 21.5% 34.8% No 45.7% 53.9% 78.5% 65.2%
  • 21. Word-of-Mouth Communication “In conversations with friends and associates over the last few months, conditions in the housing market were discussed.” Los AngelesMilwaukee 1988 20031988 2003 Frequently 52.9% 32.9% 20.0% 27.6%
  • 22. “Real Estate is Best Investment” “Real estate is the best investment for long-term holders, who can just buy and hold through the ups and downs of the market.” Los Angeles Milwaukee 2003 2003 1. Strongly agree 53.7% 31.3% 2. Agree somewhat 33.1% 45.9% 3. Neutral 10.3% 11.3% 4. Disagree somewhat 2.7% 9.1% 5. Strongly disagree 0.0% 2.1%
  • 23. Effects of Real Estate Booms &Crashes ● Default rate on mortgages is function of loan to value ratio, which declines as prices rise, rises as prices fall. ● Mortgage insurance companies suffered massive losses in 1980s with decline of real estate prices in Texas. MGIC in great trouble then.
  • 24. Real Estate Market Today ● Late 1990s have shown solid price increases in many cities ● San Francisco increased 28% 1999 III to 2000 III, fell 4.5% between 2001-I and 2001-IV . ● More low downpayment loans today ● Risk of stock market decline harming real estate market, thereby the PMIs, and mortgage lenders
  • 25. Figure 5 Los Angeles Real Home Price Index and Employment 0 20 40 60 80 100 120 1970 1975 1980 1985 1990 1995 2000 2005 0 1000000 2000000 3000000 4000000 5000000 6000000 7000000 8000000 9000000 Real Price employment
  • 26. Figure 5 Los Angeles Real Home Price Index and Employment 0 20 40 60 80 100 120 1970 1975 1980 1985 1990 1995 2000 2005 0 1000000 2000000 3000000 4000000 5000000 6000000 7000000 8000000 9000000 Real Price employment
  • 27. Thankyou Michael S robinson 8880 Call center Dr Suite 1000 Sacramento www.ohana-homesolutions.com