Transcript Chapter 1 Introduction to Real Estate Decision Making

Chapter 11
Traditional Investment Criteria
 Rules of Thumb Criteria
– General Characteristics
– Payback Period Methods
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Gross Income Multiplier
Net Income Multiplier
BTCF Multiplier (Re)
ATCF Multiplier
Chapter 11
Traditional Investment Criteria
 Rules of Thumb Criteria
– Average Rate of Return Methods
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Average Rate on Net Operating Income
Average Rate on Before Tax Cash Flow
Average Rate on After Tax Cash Flow
Adjusting for Reversion
– Decision Rules
– Limitations of Rules of Thumb
Chapter 11
Traditional Investment Criteria
 Ratio Analysis
– Leverage and Operating Ratios
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Mortgage Debt to Property Value Ratio (LTV)
Debt Coverage Ratio (DCR)
Default Ratio (DR)
Total Asset Turnover Ratio (TAT)
Operating Expense Ratio (OER)
Chapter 11
Traditional Investment Criteria
 Ratio Analysis
– Profitability Ratios
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Profit Margin Ratio
Return to Equity on Total Investment
Return on Equity
“System of Financial Analysis”
– Limitations of Ratio Analysis
Chapter 11
Traditional Investment Criteria
 Traditional Appraisal Methods
– Key Concepts
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Anticipation - TVM
Change - Four Forces
Substitution
Contribution
Chapter 11
Traditional Investment Criteria
 Traditional Appraisal Methods
– Sales Comparison Approach
• Comparable sales data
– Selection
– How many comparables?
Chapter 11
Traditional Investment Criteria
 Traditional Appraisal Methods
– Sales Comparison Approach
• Adjustment of sales data
– Elements of comparison
» Property rights conveyed
» Conditions of sale
» Financing terms
» Market conditions
» Locational characteristics
» Physical characteristics
Chapter 11
Traditional Investment Criteria
 Traditional Appraisal Methods
– Cost Approach
• Estimating site value
• Estimating Building Cost
– Reproduction cost
– Replacement cost
• Estimating accrued depreciation
– Physical deterioration
– Functional obsolescence
– Economic obsolescence
• Entrepreneurial Incentive
Chapter 11
Traditional Investment Criteria
 Traditional Appraisal Methods
– Income Approach
• Gross income multiplier
• Net income capitalization
• Discounted cash flow