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Real estate is always a type of investment, but when the phrase real estate investment is used it
is how much a property grows (or declines) in value in the market year to year.
the ORIGINAL COST basis of a property
the amount of spendable income after the expenses from operating and interest are deducted from the
is the method of determining a property's value by considering the NET ANNUAL INCOME and the
is an income tax term for the TAXABLE PROFIT made from the sale of the property or any capital
is how fast the property can be sold. Real estate is less liquid than stocks or bonds
is chance of loss for an investor
meaning an investment which will shield or reduce other money from income tax
Net Operating Income
the amount of money left after the vacancy rate and operating expenses are deducted
RE investments are properties such as houses, apartment buildings, townhomes, condos, and
RE investments consist mostly of office buildings and retail establishments.
RE investments consist of storage units, warehouses, car washes, dry cleaners, and other
Agricultural properties investment
strictly involve land which is sublet to allow for farming or ranching
Business Opportunities investment
Business Opportunity Brokerage consists of purchasing an established
Good rate of return
Historically, real estate through its appreciation and improvement in the market place has
There are several tax advantages such as tax shelters, depreciation, installment sale, capital gains
Hedge against inflation
because real estate usually increases in value with the market, it is considered that real
Equity build up
As the loan is paid, the amount of money the investor has invested in the home increases, thus
property is not always easy to sell in a quick fashion so if the market isn't right for sale or the
Market is local in nature
in the global economy of the 2000's, real estate remains a local property with local
Need for expert help
An investor may need to hire some help with this property: this need ranges from a broker to
it takes time and energy to keep track of real estate investments and it takes energy to
Investors may wish to invest in real estate with others. These are called investment
Real Estate Investment Trust
these can be purchased through stock brokers just as mutual funds.
Income Capitalization Approach:
This is used for INCOME GENERATION properties such as apartments, retail centers,
A property valued at $150,000 earns $750 per month. What is the annual percent of return?
750 x 12 = $9,000
3 x $450 = 1350
Find the value of the same property if a 10% cap rate is used.
NET INCOME ________________________________
Assessment of Risk
investor will consider many items:
What is the business risk associated with this investment? Does it fit with my other investments?
What is my financial risk?
Risks that will affect return
A) Ligudity risk
how soon can I sell this property
Selling a business is different yet similar to selling property.
is the value that an existing business would have compared to a start-up business of the
Steps in the Sale of a Business
1. The broker lists the business for sale.
The first step is setting up a business is a business plan. This includes budgeting for the
which is the simplest.
shows future income as it is invoiced and future costs as bills are received.
The income statement is also known as the profit and loss statement.
where the income statement shows changes (to income and expenses) over a certain period of time, the
Cash Flow Statement
The cash flow statement is a statement (report) of flows (both in and out of the business)
is anything of value.
is risk that arises from the continual change in the business environment. It cannot be transferred
Going concern Value
is the value of an established business property compared with the value of just the
is an intangible asset asset attributed to a business's reputation and the expectation of continued
is a concise summary of all income and expenses of a business for a stated period of time.
is the outlay of an investor's money in anticpation of income or profit.
is risk that can be transferred to an insurer, such as the risk of vandalism, fire, and so forth.
income from a real estate investment
real estate held for rental income
refinancing property to buy more
a transaction in which real property is transfer for like kind of property
initial cost of real estate
direct deduction from income tax due
sale in which seller receives purchase price over period of years
marginal tax rate
rate at which investors top dollar is taxed
real estate investment syndicate
group pooling resources to buy real estate
real estate investment trusts (REITs)
fund making real estate investments and selling shares, a group of at least
uniform commercial code (UCC)
law regulating transfer of business personal property
bulk transfer act
law regulating sale and financing of business personal property
a joining together of two or more people to carry out business projects
bill of sale
document transferring ownership of personal property
property held for depreciation and income.
amount of rent
negative cash flow
if cash flow from rent is not enough to cover cost
tax payers can use losses to offset other income.
exchanges 1031 like kind exchange
new property must be identified with 45 days and purchase must be complete
deductons and federal tax laws
first 25k of loss can be used to offset income. if income over 100k maximum is
two or more people for a single project. limited time and not permenant
one party responsible for limited partnership. generalmpartner responsible for all losses.
business opportunity sales
if sale includes real estate a licensed salesperson or broker is required.
uniform commercial code
regulates the transfer of personal property.
Need for real estate investment analysis
The public regards a real estate broker or sales associate as an
Equity in investment
The money of an investor that is used.
Real estate investment analysis
The process of determining the extent to which real estate investments will achieve
Real estate as an investment
Experience indicates that investors are motivated by one or a combination of
Retail properties such as shopping centers and regional malls. An investor should study all leases
Any interest in business enterprises that include the sale or lease of a business and
Advantages of real estate as investment good rate of return
Historically, real estate has produced a high rate
Although the Tax Reform Act of 1986 eliminated or seriously reduced some of the tax advantages, real
As a property appreciates in value and the mortgage debt is reduced, the investor's equity grows.
Market is local nature
The real estate market is very local in nature. An investor usually is interested in a
Real estate is a labor intensive investment. Properties must be cared for, rents collected, and so
Analyzing investment properties
A number of factors affect supply and demand, and thus value, of investment real
Relationship to the economy
One of the external forces affecting a property is the economies. Both the local and
Economy considerations includes the existing stock of available units and new development competing
National debt, employment levels, interest rates, availability of credit, and construction
Because real property is fixed in its area it is affected greatly by its immediate surroundings. A
Because land is immobile, investors must find ways to direct an income stream to the
Immobile and fixed as destination properties, but often they are not as attractive or as
If one site and it's building size, shape, and form were the same as all the others,
One of the more common ways of neutralizing variables is through the use of units of comparison. For
Potential real estate investors have at-least one alternative to buying an existing property. They
Three considerations that influence a building's investment value
Exterior considerations, Interior
The first impression a building makes on both tenants and customers is its exterior and it's
Investors need to make a deliberate and thorough inspection of the premises and make a
While the cost of property taxes and insurance are beyond the control of investors, these
Investors in real estate are investing in more than land, buildings, and equipment. They are
Before investing, investors must determine what type of legal entity will be best to accomplish their
May authorities believe that a type of risk is associated with real estate investments. Risk is
Risk associated with general business conditions
Business risk, Financial risk, purchasing power risk,
Purchasing power risk
This category of risk is related to inflation. In an inflationary period, the ability of a
Interest rate risk
To find the value of a property using the IRV formula, the net operating income is divided
Risk that affect return
Historically, business and individuals have put money in investments that offer the highest
The possible loss of invested capital or return of investment. Composed of market risk such as
The type of risk associated with a decrease in the market value of an investment as a result of
Risk of default
The risk that promised earnings will be lost by the investor because of the failure of the
Leverage in business
The use of borrowed funds to finance the purchase of an asset. The use of other people's
If the benefits from borrowing exceed the costs of borrowing.
Brokers normally deal in corporate transactions involving the sale and purchase of
Brokers typically deal in the sale and purchase of smaller businesses, such as sole
Asset than can be touched and has actual substance such as inventory.
Asset that cannot be touched and that do not have actual substance such as a business
Similarities to real estate brokerage
A real estate relationship is established every time the sale of real
Differences from real estate brokerage
Personal property, goodwill, going concern value, shares of stock, short
Knowledge of business brokers
Corporate finance, business accounting, valuation of business, applicable laws that
The entire resources of a business, including tangibles and intangibles such as accounts and notes
All of the debts of a business, including accounts and notes payable, incurred but not yet paid
The net worth of a business, the amount by which the assets exceed the liabilities.
Business brokers know that efficient financial management is as important to profitability
The classes and characteristics of corporate stock
There are two basic types of stock, preferred stock and
Securities analysis and valuation
Selecting the proper type of security, or securities, must be decided. Among
The management of working capital
The difference between total current assets and total current liabilities.
An estimate of anticipated income and expenditures over a definite future period. Organized
Cash flow analysis
Shows the total amount of money generated from an investment after expenses have been paid.
Business brokers must be able to separate the depreciable assets of a business into real
Valuation of Businesses
In addition to being knowledgeable in the areas of business. Some of the frequently
Methods of appraising businesses
Methods used to estimate a business's value are similar to those used in
Comparable sales analysis
Where records reveal previous sale prices for businesses with a higher degree of
Reproduction or replacement cost less depreciation analysis
This method is appropriate for estimating the value
Estimates accurately the present value of expected future benefits by converting the
Key applicable laws
In addition to all the activities mentioned, a business broker is required to observe the
Steps in the sale of a business 1, 2, and 3
1. List the business for sale. 2. Identify all assets belonging to
Steps in the sale of a business 4 and 5
4. Subtract the value of all short and long term liabilities including the
Steps in the sale of a business 6,7, and 8
6. Check and recheck to ensure compliance with all pertinent laws.
Steps in the sale of a business 9 and 10
9. Enter into a contract with both parties. 10. Establish a due
Steps in the sale of a business 11 and 12
11. If the real estate is not sold with business, as assignment of