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Chapter 17 Investing in Income-Producing Real Estate

Chapter 17 Investing in Income-Producing Real Estate. Advantages of Real Estate Investment Attractions of real estate as an investment Cash flow from operations Appreciation Portfolio diversification Financial leverage. Chapter 17 Investing in Income-Producing Real Estate.

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Chapter 17 Investing in Income-Producing Real Estate

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  1. Chapter 17Investing in Income-Producing Real Estate • Advantages of Real Estate Investment • Attractions of real estate as an investment • Cash flow from operations • Appreciation • Portfolio diversification • Financial leverage

  2. Chapter 17Investing in Income-Producing Real Estate • Disadvantages of Real Estate as an Investment • Large amount of capital required • Risk, particularly liquidity risk • Changing market conditions (overbuilding)

  3. Chapter 17Investing in Income-Producing Real Estate • Financial Decision Making • Goal is wealth maximization • Using the NPV rule • Using the IRR rule

  4. Chapter 17Investing in Income-Producing Real Estate • The Discounted Cash Flow Model • Initial equity investment • Forecasting after-tax cash flow (ATCF) • Calculating net operating income • Potential gross income (PGI) • Vacancy and credit losses (VCL) • Effective gross income (EGI) • Operating expenses (OE) • Net operating income (NOI)

  5. Chapter 17Investing in Income-Producing Real Estate • The Discounted Cash Flow Model • Before-tax cash flow (BTCF) • NOI less Debt Service • Taxes from Operation • NOI • Interest Expense • Depreciation (DEP) • 27.5 years for residential, and 39 years for nonresidential • Taxable Income • Marginal Tax Rate • After-tax cash flow (ATCF)

  6. Chapter 17Investing in Income-Producing Real Estate • After Tax Equity Reversion (ATER) • Gross sale price • Less Selling expenses • = Net sale proceeds • Mortgage Balance outstanding • Before-tax equity reversion (BTER)

  7. Chapter 17Investing in Income-Producing Real Estate • After Tax Equity Reversion (ATER) • Before-tax equity reversion (BTER) • Book value • Taxable gain • Taxes due on sale (TDS) • After-tax cash on sale

  8. Chapter 17Investing in Income-Producing Real Estate • Other Performance Measures • Cash-on-cash return • Operating expense ratio • Debt coverage ratio

  9. Chapter 17Investing in Income-Producing Real Estate • REITs • As an alternative to direct investment in real estate

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