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Introduction to Real Estate Investment CRP 780 Instructor: Jackie Graham Real Estate Investment Strategy Analysis Decisions – Second Edition Pyhrr, Cooper, Wofford, Kapplin, Lapides John Wiley and Sons,1989, page 5 The Real Estate Markets A Market is a mechanism for exchange of goods and services between owners There are two markets for real estate Space Market Market for the usage of real property Pay rental rates for usage Asset Investment Market For Ownership of the physical asset (land and built facilities) The Space Market On the supply side Property Owners On the demand side Tenants/users of space The Space Market deals with Physical Assets Therefore: Highly segmented market By Office Space in New York much higher than Columbus By location Property Type Office vs retail vs housing vs land The Asset Market Market of Investors buying and selling properties The Asset Market deals with Financial Capital Much more a function of Money flows over time Less segmented Values are based upon risk and return equally across Locations and property types. Values Based upon CAP Rates Capitalization Rates Three Main Determinants of Cap Rates Opportunity Cost of Capital How much can your money earn in other investments like stocks and bonds. Cap Rates move with Interest Rates Growth Expectations Where is the property in its Life Cycle Is the location a growing or declining area Investors willing to pay more for growth prospects Risk Higher Risk Lower price (higher CAP rate) Property Value Price of Property = Expected Annual Cash Flow CAP Rate As Cap rate goes up Price goes down. As Cap rate goes Down Price goes up Types of Real Estate Investments The Debt Market Public Markets Mortgage Backed Securities Private Market Mortgages (loans secured by real estate asset) The Equity Market Public Market REITS Private Market Partnerships Fund Investments Real Estate properties Real Estate Properties Housing Multifamily Convenience, neighborhood center, community center, regional centers Office Single family homes Retail Garden, low-rise, mid-rise, high-rise Class A – Investment grade, highest rents Class B – Good location and management Class C – Older buildings not modernized, lesser location Locations – CBD, Suburban, neighborhood, office parks Industrial Types of Investors Passive vs Active Debt vs Equity Individual vs Institutional Types of Investors – Short Term Developer - Equity Joint Venture Partner - Equity May or may not be ultimate equity holder in property Returns based upon fees and profits on sale to investors Usually a short term interest in the property Highest risk level Provides equity to Developer during development Bridges gap between project costs and construction debt financing Level of risk depends on amount of capital invested and guarantees given Construction Lender - Debt Short term funds to cover cost of completing development Must show commitment of permanent lender to pay out after developed Types of Investors – Long Term Permanent Lender - Debt Managing Equity Investor Concerned with long term feasibility of the project Returns through interest collected Responsible for Asset Management during ownership Does not fund until after project is completed Returns through ongoing operational cash flows, Tax Savings, equity build up and property appreciation Passive Equity Investor Invests equity capital only No part in building or managing the property Returns same as managing investor Count on managing investor to provide investment alternatives Invest through Partnerships, corporations, REITS etc. Many institutional investors must invest as passive investors to maintain legal status (ie pension funds and foundations) Feasibility Analysis An analysis performed to determine whether a specific project or program can be carried out successfully. Market, site and regulatory factors as well as Financial factors