Value Investment The Investment Decision

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Slide 1

Value Investment & The Investment Decision

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Real Estate Investment Advantages Pride in Ownership Personal control Self-utilize & Occupancy Estate Building Security of Capital Operating Cash Flows Leverage Tax Shelter components Capital Appreciation & Inflation Protection

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Real Estate Disadvantages Illiquidity Required value capital Management load Depreciation of significant worth Government controls Real domain cycles Legal many-sided quality Lack of data & instruction

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Trade-Offs: Risk/Return

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Risks Legal : Zoning, general assessment, public administrations, and so forth. Advertise dangers : Marketability study Will it lease? Will it offer? Showcase ponder: S&D, Competition Absorption rates: How quick is space being used

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Risks Cost dangers: Interest rates Estimates poor Labor Weather Possible Solutions: Guaranteed cost contracts Watch out for pad General temporary workers: Reputable & reinforced Completion security (Lenders may require) Guarantees Cost in addition to contracts: Developer pays costs + charge

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Return Measures Cash Flow ( Net Spendable ) Pro Forma: Cash on Cash= Net Spendable/Down installment =1100/10000=11%

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Return Measures Rate of profit for aggregate capital: = NOI/Total Capital = 14/120 = 11.7% Return on Equity (ROE) = CF Before Tax/Equity = 1.1/20 = 5.5% Favorable influence: If ROE > ROR If unfavorable influence: Don't purchase Reduce Price Try to lower APR or increment term Raise NOI or lower costs Restructure (ie., more value)

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Return Measures Equity top rate: = CF before Tax/Equity (ie., required ROE) For instance: Your fancied top rate is 14% CF before expense is $1,100 Equity esteem = 1.1/.14 = $7,857 Plus credit of $100K Therefore property estimation = $107,857 Risk measures: BEP & Debt Coverage Ratio

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Discounted CF Analysis Income Cap Rate: NOI/Market Value Compare to different open doors Do Cash Flow Spread sheet: Ratio Analysis Sensitivity Analysis: What on the off chance that we change the estimation of a variable? Situation Analysis: Worst versus Best? Monte Carlo Analysis: Randomly relegate values & check main concern

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Investment Analysis Process Strategy: Determine First!! Return/Risk Objectives Ownership Form Market Analysis Screening Criteria Location/Property Analysis Generate Alternatives: Those that pass screen Use Basic Financial Feasibility Model Develop Finance Screens (APRs, CapRates, NOI) Examine Finance Alternatives (Loans, Equity, and so on)

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Investment Analysis Process Negotiate Basic Terms with Seller Price Financing Covenants Escape Clause Do Detailed Feasibility Research Market: Supply & Demand, Competition, Absorption, Vacancy Marketability: Property Condition Legal, Political, Environmental Management & Operations

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Investment Analysis Process Structure Tax Benefits Cost Recovery Useful Life Passive Loss Limitations Discounted CF Analysis After-Tax CF, DCF, Adjust for Risk Final Negotiations & Closing Management of Property Termination Sell, merger, IPO

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Control Purchase Price & Terms Form of Ownership Financing sums, rates, terms Tax structure & Planning Property administration Property area Tenants & Lease rates & terms

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Negotiation Maximize learning position First! Set your underlying requests a long way from conclusive target Probe for main concern Raise your desire level/collapse your rival's Buyer: Start with lower cost than merchant needs Lukewarm state of mind Point out imperfections Mention focused offers Seller: Mention different offers you have rejected Price is presumably going up Negotiate most basic things first and

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Negotiation (Cont) Concentrate on things that impact benefits Down installment, value, contract period Employ preservationist concession approach Don't give in or respond/No sportsmanship/Never surrender first Never acknowledge a radical counteroffer without investigation Use middle people when further bolstering your good fortune With operator, more opportunity to break down Advisor: Openly talk about concerns Try for better arrangement for both sides: Place verification trouble & fulfillment on them Prove to you that it is an appealing open door

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Negotiation (Tactics) Standard Practice: Terms are "standard practice" Bogey: "I just can bear the cost of $7,500 in cash" Good person/Bad guy: One makes solid requests ... Rival is more vulnerable to great person's weaker requests Deadline: Always utilize them! Nibbling: Get extra minor concessions after significant assention The tie-up: Get the property off the market while you're settling on choice

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Property Types Land Most Risky Low wage Interest, charges, protection Interest deduct pay just No devaluation 20-30% ROR for hazard Consider Access/Slope Zoning Public administrations & Utilities Return=capital thankfulness

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Property Types Residential Rental (Houses,Apts,MHs) Management Intensive Good financing Tax shield High gratefulness Know area & physical condition Check neighborhood & vicinity to administrations Good initial step for land Some salary - generally capital gratefulness

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Property Types Office Buildings More wage/less thankfulness Appreciation can be enhanced w/upkeep Needs more information for renting & Property administration Types: Downtown versus Suburban Medium versus HiRise versus Garden (Low) Locations: Highways/Shopping Centers Better development Low occupant turnover proportions Prestigious customers

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Property Types : Shopping Centers Most refined Investment & Management Expertise Much more wage than gratefulness/Few Foreclosed! Claimed by well off financial specialists (TIAA/CREF=Mall of Amer) Types: Neighborhood focus: ( Strip): Food, drugs, and so forth, Built around general store/drugstore: 50K Gross leaseable range Community focus: + Clothing, furniture, bank, prof: 150K GLA Regional focus : Full-line Dept store (Anchor): Reit & Insur=Ownership; 400K GLA Super Regional Centers : Major metro zone: 2 grapples, 100-200 stores, Usually % of benefits

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Property Types : Industrial & Special Industrial Warehouses, processing plants, indust stops Almost all wage Not effortlessly changed over … expands hazard Low hazard by and large on the off chance that you have a customer Near expressways Special Use Need skill: RE + the application Risky: Be prepared to substitute Loans are difficult to get … banks ?? Requires time duty

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Development Overview Combine arrive, work, capital & Entrepreneurial capacity Good designers can "picture " great employments of space Creation of space for play, living & working LT Motive =Income, Mgt, Community/ST Motive =Cap Gain Redevelopment: Restoration of more seasoned structure

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Development Types: Land Prep: Lots of various types Sell land to different engineers Erect upgrades ashore Who Develops? Low maintenance Proprietorship Corporation, and so forth. Joint endeavors (ie., 2 engineers)

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Development Process: Be prepared to rescue Stages might be done at the same time Idea: Can create over existence of venture Preliminary Feasibility: Rough cut examination Are PC programs: Go if benefit looks great GainControl: Ground lease(ties you up), choice, vender blade Feasibility Analysis & Design : Detailed investigation, Check site, showcase, legitimate, budgetary Finance: Need money ASAP, ought to have as of now talked Construction: Problems: cost overwhelms & temporary worker comes up short Marketing: Lease (don't rent too soon rates change) versus Sale: When … recollect exchange offs

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Redevelopment & patterns Redevelopment: Costs are high, structures - out of date ITCs, stipends Popular pattern Trends: Mixed utilize improvement: One structure Planned unit advancement (PUD) New towns/Village idea: Integrated approach: work, shop, play, live

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Professional Help Real Estate Brokers: Get a pro! Has entry to data Appraisers & specialists: Can do DCF Property directors: Has rental & opportunity rates, operation. costs, and so on Morgage investors: Arrange bargains & financing choices Tax counsels and lawyers Others: Comm banks, Engineers, Architects, Contractors

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