1 / 27

Equity Investment & The Investment Decision

Equity Investment & The Investment Decision. 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.

Samuel
Download Presentation

Equity Investment & The Investment Decision

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation 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%

  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 • Raiseyour 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 outStages 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) vsSale: 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

More Related