Transcript Making an investment decision

Making an investment decision
Value
Investment value: The value determined in
view of investment objectives, goals and
constraints.
Market value: The price that participants
in the market place are willing to pay for
the investment, in order to make the
investment decision. Market value also
represent the anticipated future benefit.
Objectives of real estate investment
Means of building an estate
Pride of ownership
Hedge against inflation
Desired rate of return on equity invested
Diversification of investor objectives
Wealth Maximization
Risk & Return
 Risk: is the variation in the expected future
benefits.
 Return: is the amount inflow generated by an
investment each year.
– NOI
– NOI net of debt payments
– After-tax Cash Flows
 Rate of return: is measured as percentage per
year as relationships between cash flows and
amount invested
Real Estate Investment Process
Identify investor’s objectives, Goals, and
constraints
Analyze Investment Climate and Market
Conditions
Develop Financial Analysis
Apply Decision-making Criteria
Investment Decision
Identifying investor objectives
 Each participants have different objectives in real
estate investment.
 The Equity investor: amount of cash flows from
the investment and must be certain of having the
legal rights to the cash flows
 The Mortgage lender: recovery of the amount
lent, as well as in earning a rate of return on the
loan.
 The Tenant: Lease
 The Government: The relationship among
participants and restrictions on real estate market
Environment for Decision Making
Market Environment: Supply & Demand,
Real Estate Sub-market, Population,
employment, income, etc.
Legal Environment: Forms of ownership,
Land-use control, Limitations on property
rights. Community.
Financing Environment: Debt & Equity
Financing
Tax environment
Cash Flows Forecasting
Cash outflows from initial investment
Cash flows from rent collection
Cash flows from assets disposition
Cash Flows Forecasting (cont’)
 Potential Gross Income: (PGI)
 Vacancy and bad debt allowance
 Effective Gross Income (EGI)
 Operating expenses
 Net Operation Income (NOI)
 Debt Service
 Before Tax Cash Flows (BTCF)
 Tax
 After Tax Cash Flows (ATCF)
Cash Flows From sales of investment
Expected Selling Price
Selling expenses
Net sales Proceeds
Unpaid Mortgage balance
Before-tax equity reversion
Taxes due on sales
After-tax equity reversion
Criteria for Decision Making
Rules-of Thumb Techniques: Gross
Income Multiplier (GIM), Overall
Capitalization (net income multiplier),
Equity Dividend
Traditional Appraisal Method: Direct
Sales Comparison Approach, Cost
Approach, Traditional Income Approach
Discounted Cash Flow (DCF): NPV, IRR