Transcript Chapter 1 Introduction to Real Estate Decision Making

Chapter 1
The Real Estate Investment Decision
• Real Estate - Physical Land and Attached
Structures
• Real Property - Legal Interest in land and
structures attached to the land
• Personal property - Movable property
• Fixtures - Movable property that is attached
permanently to the land
Chapter 1
The Real Estate Investment Decision
 Characteristic Attributes of Real Estate
• Fixed location
• Uniqueness
• Interdependence of land uses
• Long life
• Long-term commitments
• Large transactions
• Long gestation period
Chapter 1
The Real Estate Investment Decision
 The Economic Impact of Real Estate
– Land and structures
• Make up approximately 2/3 of material wealth in
the U.S.
– Mortgage debt
• Totals approximately $5 trillion
– Expenditures, Investments
• 12% of gross domestic product
• 26% of personal consumption
• 49% of gross prvt domestic investment (PP&E)
Chapter 1
The Real Estate Investment Decision
 Real Estate Industry - Private Sector
– Real estate brokerage
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owner-occupied residential
renter-occupied residential
commercial
industrial
farm and open land
Chapter 1
The Real Estate Investment Decision
 Real Estate Industry - Private Sector
• Property management
• Real estate finance
• Appraisal
• Development and construction
• Asset management
• Land-use planning
Chapter 1
The Real Estate Investment Decision
 Basic Investment Concepts
• Investing Defined - choosing future over
present consumption
• Expectations and Assumptions:
• Timing of Cash inflows and Outflows
• Magnitude of Cash flows
• Riskiness of expected Cash flows
Chapter 1
The Real Estate Investment Decision
 Basic Investment Concepts
• The Risk Return Trade-off
• Investor Objectives
• Value
• Market Value
• Investment Value
Chapter 1
The Real Estate Investment Decision
 The Real Estate Investment Process
• Step 1- Identifying Investor Objectives
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Equity Investor
Mortgage Lender
Tenant
Government
Chapter 1
The Real Estate Investment Decision
 The Real Estate Investment Process
• Step 2- Environment of Decision Making
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Market Environment
Legal Environment
Financing Environment
Tax Environment
Chapter 1
The Real Estate Investment Decision
 The Real Estate Investment Process
• Step 3- Cash Flow Forecasting
• Cash Flow from Operations
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PGI
EGI
NOI
PTCF
ATCF
Chapter 1
The Real Estate Investment Decision
 The Real Estate Investment Process
• Step 3- Cash Flow Forecasting
• Cash Flow from Reversion
• Selling Price
• Net Sales Proceeds
• Before Tax Equity Reversion
• After Tax Equity Reversion
Chapter 1
The Real Estate Investment Decision
 The Real Estate Investment Process
• Step 4- Criteria for Decision Making
• Rules of Thumb Technique
• Gross Income Multipliers
• Equity Dividend Rate (Cash on Cash)
• Traditional Appraisal Methods
• Cost Approach
• Sales Comparison Approach
• Income Approach
Chapter 1
The Real Estate Investment Decision
 The Real Estate Investment Process
• Step 4- Criteria for Decision Making
• Discounted Cash Flow (DCF) Models
• Net Present Value (NPV)
• Internal Rate of Return
Chapter 1
The Real Estate Investment Decision
 The Real Estate Investment Process
• Step 5- The Investment Decision