Brueggeman17e_Chap07_PPT_accessible

Chapter 7 Single Family Housing: Pricing, Investment, and Tax Considerations

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Page 2: Overview: House Prices and Demand

• Growth Factors

  • Growth in population and households is a necessary condition for housing demand.

  • Strong association between house price appreciation and income/employment growth.

• Negative Influences

  • Increases in interest rates negatively influence home ownership.

  • Renting may be more cost-effective than owning, impacting investment viability.

Page 3: Impact on Demand

1. Population Growth: Positive Impact (+)

2. Household Formations: Positive Impact (+)

3. Employment: Positive Impact (+)

4. Household Income: Positive Impact (+)

5. Interest Rates: Negative Impact (−)

6. Federal Income Tax Benefits: Positive Impact (+)

7. Cost of Renting Housing: Positive Impact (+)

Page 4: Overview: Renting versus Owning (Part 1)

• Property Information

  • Purchase Price: $150,000

  • Initial Rent: $12,000 annually

  • Loan Amount (after $30,000 down payment): $120,000

• Loan Information

  • Interest Rate: 4.5%

  • Loan Term: 30 years

  • Insurance: $500

  • Maintenance: $500

  • Rental Growth Rate: 2.00%

  • Property Growth Rate: 2.00%

  • Federal Marginal Tax Rate: 24.00%

  • Selling Expenses: 7.00%

Page 5: Overview: Renting versus Owning (Part 2)

• Annual Loan Schedule

  • Payments: $7,296 annually over 30 years.

  • Breakdown of principal and interest payments for the first five years:

    • End of Year Balances: 0: $120,000, 1: $118,064, 2: $116,039, etc.

    • Interest Paid: Decreases yearly, starting at $5,360 in Year 1.

    • Amortization: Increases yearly, starting at $1,936 in Year 1.

Page 6: Cash Flow Analysis (Part 1)

• Before-tax Cash Flows for Owner

  • Year by year breakdown of outlays including property taxes, insurance, maintenance, mortgage payments, etc.

  • Year 1 Total Outlay: $10,546.

• Tax Savings

  • Tax deductions from property taxes and interest.

  • Year 1: Total deductions are $7,610 resulting in tax savings of $1,826.

• Net Cash Flows for Owning

  • Starts negative due to outlays but includes rental savings.

Page 7: Cash Flow Analysis (Part 2)

• Before-tax Cash Flow for Sales (Years 1-5)

  • Yearly Property Value Forecast and Selling Expenses.

• After-tax Cash Flow

  • Calculation of gain or loss on sales and the tax implications for these sales.

  • Yearly results showing trends in cash flow depending on selling prices.

• Investment Return (IRR)

  • Analyzes the after-tax return on equity if sold in each year.

Page 8: Other Considerations in Renting vs. Owning

• Investment Returns

  • Required returns for renting to justify opportunity cost vs. owning.

• Decisions Post Year 5

  • Considerations about selling or continuing to own property.

Page 9: Rent-Indifference Level

• Indifference Point

  • Level of rent yielding an after-tax IRR equal to the ownership investment return will determine financial choices.

Page 10: Lower Rent Cash Flow Analysis

• Adjusted Cash Flow with Lower Rent

  • Assumes after-tax IRR just sufficient to justify ownership is 3.5%.

  • Results show varying year-over-year after-tax IRR based on $6,919 rent savings.

Page 11: Analyzing Expected House Prices (Part 1)

• Expected Rates

  • Definitions of Expected Rate of Appreciation in house prices (EAHP) and on home equity (EAHE).

  • Discussion on the wealth effect of asset appreciation on consumer spending.

Page 12: Analyzing Expected House Prices (Part 2)

• Property Valuation Example

  • $100,000 Property with 80% financing; fluctuations in values and appreciation rates illustrated.

Page 13: Unrealized Rate of Appreciation Calculation

• Equity Appreciation

  • Example provides formulas to calculate the unrealized annual rate of appreciation on equity.

Page 14: Economic Influences on Property Values

• Regional Analysis

  • Importance of understanding regional economic drivers to predict growth or decline in property values.

• Comparative Advantage

  • Relation of industries with growth potential to positive impacts on house prices.

Page 15: Economic Base Analysis – Location Quotients

• Concept Clarification

  • Definition of base and supporting employment using location quotients and their implications for local economies.

Page 16: Summary of Employment Types

• Employment Types

  • Base and supporting employment definitions:

    • Base: >1.0 Location Quotient

    • Supporting: <1.0 Location Quotient.

Page 17: Housing Supply: Indicators

• Market Indicators

  • Various metrics to assess quality and value of housing submarkets.

  • Key indicators include school quality, crime rates, parks quality, housing market statistics, etc.

Page 18: Housing Supply: Capitalization Effect

• Impact of Public Services

  • Relationship between public service quality and tax payments influencing housing choices.

Page 19: Pricing Property in Submarkets/Locations

• Valuation Approaches

  • Sales Comparison Approach, Cost Approach, Income Approach, and Property Appraisal strategies.

Page 20: Investing in Distressed Properties: Financial Framework

• Types of Properties

  • Definition of distressed properties and phases in the investment process including acquisition and holding.

Page 21: Distressed Properties: Acquisition Phase

• Information Sources

  • REO lists, auctions, legal avenues, and understanding mortgage theories relevant during acquisition.

Page 22: Distressed Properties: Auction Considerations

• Auction Participation

  • Guidelines for buying at auctions and associated market research costs.

Page 23: Holding Period Phase of Distressed Properties

• Cash Flow Considerations

  • Detailed list of outlays during the holding phase and possible financing sources for renovations and associated costs.

Page 24: Copyright Notice

• Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. www.mheducation.com