Real Estate Unit 3

What type of property is the best safe haven investment

Timberland and farmland because everyone is going to need food and lumber

investment

The pursuit of a future return by delaying consumption and taking risk

Real estate investment

the use of debt and/or equity to purchase an income producing property (Exception: REIT)

debt

something you owe (because it’s hard to buy property upfront

equity

what you own with that money

down payment

the money that gives us equity in a property

holding period

how long you hold your investment (commercial shops have a period of around 5 years)

discount rate

required rate of return (what you have to make)

capitalization rate

this is your actual annual return, it can be called your ROI (return on investment)

why do we invest in real estate?

periodic cash flow (rent)

price appreciation (value increase over time)

Diversification (eliminates risk)

What is the biggest tax deduction

mortgage interest deduction

what is the depreciation deduction on residential property

27.5 years

what is the depreciation deduction on commercial property

39 years

inflation hedge

an investment that holds its value regardless of inflation

increasing equity through mortgage reduction means

every time you pay off a part of the debt, you’re helping your return

financial leverage

using borrowed money, like a mortgage, to purchase a property

estate building

building an estate that gets inherited after passing

Pride of ownership

putting your name on real estate, like trump towers

cash flow from operations

Ongoing rent collection and payment of operating and other expenses

cash flow reversion

cash received when investment property is sold

how do you make reversion money?

through property appreciation (make part of return when you sell it) and also paying debt

PGI (potential gross income)

the amount of rent you’re expecting to make

NLA (net leasable area)

what you CAN rent

What are the 3 types of vacancy

a space that is not being rented out/unused space

collection loss

turnover/vacancy expense

EGI (effective gross income)

anticipated income after adjusting for vacancy and collection losses

TOES (total operating expenses)

property taxes, insurance, utility, maintenance, advertising, management fees

Fixed expenses

an expense that does not change based on occupancy, whether you have one tenant or 100 you still have to pay property taxes, or insurance

variable expenses

expenses that change based on occupancy - utility and maintenance would be more with 1 tenant vs 100

Advertising counts as a variable expense because if you are at full capacity you don’t need advertising

Management fees

are more variable than fixed but in theory are both, is more variable because it could be more expensive depending on how many tenants there are

Replacement reserves

This is money you save to replace short lived items. The bank does make you put money in every month for these replacement reserves Ex. central heating and air, light fixtures, paint, water heater, roof. This is DIFFERENT from Capital expenditure - when you make the repair (spending)

Do not mix the two

NOI (net operating income)

income after adjusting for property expenses

why is debt optional

you don't necessity have to take out a loan, you can just have a lot of money

why can taxes be good?

they provide a debt shelter

what is reversion

the profit made from sale of property