Real Estate Investment - Ohio State University
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Transcript Real Estate Investment - Ohio State University
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
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)
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
Office Space in New York much higher than
Columbus
By
location
Property Type
Office vs retail vs housing vs land
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
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)
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
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
Real Estate Properties
Housing
Multifamily
Convenience, neighborhood center, community center, regional
centers
Office
Single family homes
Retail
Garden, low-rise, mid-rise, high-rise
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
Types of Investors
Passive vs Active
Debt vs Equity
Individual vs Institutional
Types of Investors – Short Term
Developer - Equity
Joint Venture Partner - 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
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
Types of Investors – Long Term
Permanent Lender - Debt
Managing Equity Investor
Concerned with long term feasibility of the project
Returns through interest collected
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)
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