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Introduction to Real Estate Investment

Introduction to Real Estate Investment. CRP 780 Instructor: Jackie Graham. Real Estate Investment Strategy Analysis Decisions – Second Edition Pyhrr, Cooper, Wofford, Kapplin, Lapides John Wiley and Sons,1989, page 5. The Real Estate Markets.

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Introduction to Real Estate Investment

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  1. Introduction to Real Estate Investment CRP 780 Instructor: Jackie Graham

  2. Real Estate Investment Strategy Analysis Decisions – Second Edition Pyhrr, Cooper, Wofford, Kapplin, Lapides John Wiley and Sons,1989, page 5

  3. The Real Estate Markets • A Market is a mechanism for exchange of goods and services between owners • There are two markets for real estate • Space Market • Market for the usage of real property • Pay rental rates for usage • Asset Investment Market • For Ownership of the physical asset (land and built facilities)

  4. The Space Market • On the supply side Property Owners • On the demand side Tenants/users of space • The Space Market deals with Physical Assets Therefore: • Highly segmented market • By location • Office Space in New York much higher than Columbus • By Property Type • Office vs retail vs housing vs land

  5. The Asset Market • Market of Investors buying and selling properties • The Asset Market deals with Financial Capital • Much more a function of Money flows over time • Less segmented • Values are based upon risk and return equally across Locations and property types. • Values Based upon CAP Rates

  6. Capitalization Rates • Three Main Determinants of Cap Rates • Opportunity Cost of Capital • How much can your money earn in other investments like stocks and bonds. • Cap Rates move with Interest Rates • Growth Expectations • Where is the property in its Life Cycle • Is the location a growing or declining area • Investors willing to pay more for growth prospects • Risk • Higher Risk Lower price (higher CAP rate)

  7. Property Value Price of Property = Expected Annual Cash Flow CAP Rate As Cap rate goes up Price goes down. As Cap rate goes Down Price goes up

  8. Types of Real Estate Investments • The Debt Market • Public Markets • Mortgage Backed Securities • Private Market • Mortgages (loans secured by real estate asset) • The Equity Market • Public Market • REITS • Private Market • Partnerships Fund Investments • Real Estate properties

  9. Real Estate Properties • Housing • Multifamily • Garden, low-rise, mid-rise, high-rise • Single family homes • Retail • Convenience, neighborhood center, community center, regional centers • Office • Class A – Investment grade, highest rents • Class B – Good location and management • Class C – Older buildings not modernized, lesser location • Locations – CBD, Suburban, neighborhood, office parks • Industrial

  10. Types of Investors • Passive vs Active • Debt vs Equity • Individual vs Institutional

  11. Types of Investors – Short Term • Developer - Equity • May or may not be ultimate equity holder in property • Returns based upon fees and profits on sale to investors • Usually a short term interest in the property • Highest risk level • Joint Venture Partner - Equity • Provides equity to Developer during development • Bridges gap between project costs and construction debt financing • Level of risk depends on amount of capital invested and guarantees given • Construction Lender - Debt • Short term funds to cover cost of completing development • Must show commitment of permanent lender to pay out after developed

  12. Types of Investors – Long Term • Permanent Lender - Debt • Concerned with long term feasibility of the project • Returns through interest collected • Managing Equity Investor • Responsible for Asset Management during ownership • Does not fund until after project is completed • Returns through ongoing operational cash flows, Tax Savings, equity build up and property appreciation • Passive Equity Investor • Invests equity capital only • No part in building or managing the property • Returns same as managing investor • Count on managing investor to provide investment alternatives • Invest through Partnerships, corporations, REITS etc. • Many institutional investors must invest as passive investors to maintain legal status (ie pension funds and foundations)

  13. Feasibility Analysis • An analysis performed to determine whether a specific project or program can be carried out successfully. • Market, site and regulatory factors as well as Financial factors

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