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

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
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





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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
