Docsity
Docsity

Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity


Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan


Guidelines and tips
Guidelines and tips

Real Estate Investment: Understanding Cash Flows, Lease Jargon, and Building Measurements, Exercises of Real Estate Management

An introduction to real estate investment, focusing on generating cash flows, common lease jargon, building measurement terms, and calculating net operating income (noi) and property value using cap rates. Students will learn about various lease types, expense allocations, and other common lease terms.

Typology: Exercises

2012/2013

Uploaded on 10/01/2013

dinesh
dinesh 🇮🇳

4.3

(17)

131 documents

1 / 12

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
Introduction to Investment
1) Cash is King!
a) The ultimate goal of any real estate investment is to generate cash flows.
b) Three types of cash flows to consider:
c) Income taxes and real estate:
In this class, we will ignore income taxes and focus only on before-tax
cash flows.
As a general rule, however, income taxes generally don’t alter real estate
investment decisions.
Two exceptions:
Low income housing tax credits
Historic preservation tax credits
docsity.com
pf3
pf4
pf5
pf8
pf9
pfa

Partial preview of the text

Download Real Estate Investment: Understanding Cash Flows, Lease Jargon, and Building Measurements and more Exercises Real Estate Management in PDF only on Docsity!

Introduction to Investment

  1. Cash is King!

a) The ultimate goal of any real estate investment is to generate cash flows.

b) Three types of cash flows to consider:

c) Income taxes and real estate:  In this class, we will ignore income taxes and focus only on before-tax cash flows.

 As a general rule, however, income taxes generally don’t alter real estate investment decisions.

 Two exceptions:

 Low income housing tax credits

 Historic preservation tax credits

  1. Common Lease Jargon (see handout in Downloads section of the website)

a) Rent  Base rent

 Asking rent

 Contract rent

 Market rent

b) Rent adjustments  Indexed leases

 Step leases

 Percentage leases and overage rent

c) Expense Allocations  Gross (full-service) lease

 Net (hybrid) lease

 Double-net lease

 Triple-net (absolutely-net) lease

 Expense stops

 Common area maintenance (CAM) charges

  1. Pro Forma Operating Statement

a) The pro forma is the key tool used in calculating cash flows from operations. The primary goal of this statement is to calculate Net Operating Income (NOI) and Before-tax Cash Flow (BTCF).

 Net Operating Income

b) Layout of the pro-forma

Potential Gross Income (PGI)

  • Vacancy & Collection Allowance (V&C)

Effective gross income (EGI)

  • Operating Expenses (OE)

Net Operating Income (NOI)

  • Annual Debt Service (ADS)

Before-tax cash flow (BTCF)

c) Example: Calculate the NOI for an office building with the following characteristics:  The building has a total of 15,840 square feet GLA.  Of this, 10,800 square feet rent for $12 psf, while the remaining 5, square feet rent for $10 psf.  All leases are gross leases.  The vacancy and collection loss allowance is 10% of PGI.  Operating expenses include:  Property taxes $15,  Insurance 12,  Utilities 13,  Cleaning & maintenance 23,  Management expenses 8,  Reserves for replacement 8,  The purchase price of the building is $885,000.  Financing is available for 75 percent of the purchase price at 9 percent interest amortized over 30-years with monthly payments.  Monthly debt service = $5,341  Annual debt service = $64,

b) Using Cap Rates

 Cap rates are typically used to compare different investment alternatives to see if their price is in line with current earnings.

 If other similar properties in the market are selling at a 10 percent cap rate, does this appear to be a good investment?

 Cap rates can also be used to estimate the value of a property.

 If other similar properties in the market are selling at a 10 percent cap rate, how much is this building worth?

c) Cap Rate Limitations

 The primary value of cap rates is their simplicity.

 Cap rates do not account for a property’s

 Risk

 Income growth over time

Example: Consider two properties, each with $100,000 in NOI expected next year. The NOI for property A is expected to grow by 3 percent per year, while property B’s NOI is expected to grow by 5 percent per year.

 Which property will sell for a higher price?

 Which will have a higher cap rate?

b) Operating expense ratio

 Measures how expensive it is to operate the property.

c) Breakeven ratio

 Frequently called the default ratio.

d) Debt coverage ratio

e) Limitations of ratio analysis

 Ratios are good for measuring against benchmarks, but should not be used as hard and fast rules.

 The main problem is that they ignore changes in the sizes of and in the timing of cash flows.

 Better method: Discounted cash flow analysis (taught in RE618).

  1. Thoughts about Small Property Investment

b) Two key investment rules to remember:

 You make all your money the day your purchase a property.

 The best real estate deals you ever do are the ones you don’t.

c) Do your research:

 Pick and neighborhood and learn it really well

 Build a database of properties in the neighborhood

 Owner or renter occupied

 Sale price

 Physical characteristics

 Size, bedrooms, bathrooms, condition, etc.

 Rent charged & how long vacant