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Transcript
Florida Real Estate Principles, Practices & Law 38th Edition Linda L. Crawford Copyright © 2015 Kaplan, Inc. All rights reserved. Chapter 17 Real Estate Investment Analysis and Business Opportunity Brokerage Advantages of Real Estate Investments • Rate of return • Tax advantages • Hedge against inflation – Property values have appreciated faster than CPI • Leverage • Equity buildup ©2015 Kaplan, Inc. Disadvantages of Real Estate Investment • Illiquidity – Liquidity is ability to sell quickly without loss – Real estate is illiquid • • • • Market is local in nature Need for expert help Management Risk ©2015 Kaplan, Inc. Relationship to the Economy • Local economy – Supply and demand factors • National economy – Employment, interest rates, construction costs ©2015 Kaplan, Inc. Location • Real property value is affected by its immediate surroundings • Situs indicates the influences on value created by location – Preference for a certain location owing to factors such as weather, job opportunities, transportation ©2015 Kaplan, Inc. Destination Properties • Directs an income stream to the property • Service industries support the needs of a local community • Examples: Shops and retail stores ©2015 Kaplan, Inc. Origin Properties • Originate a product to seek out an income stream • Export activities • Examples include Manufacturing plants Distribution centers ©2015 Kaplan, Inc. Physical and Legal Factors • Physical Characteristics – Site – Building • Exterior considerations – Curb appeal • Interior considerations – Size, number, condition of rooms or offices • Building operating expenses • Legal Characteristics – Rights – Limitations ©2015 Kaplan, Inc. Assessment of Risks • Risk Chance of losing all or a part of an investment • Static risk Risk that can be transferred to an insurer • Dynamic risk Risk that arises from the continual change in the business environment ©2015 Kaplan, Inc. Types of Risks • Business risk – Projected vs. actual income & expenses • Financial risk – Ability to pay expenses • Purchasing-power risk – Related to inflation • Interest-rate risk • Liquidity risk • Safety risk – Market risk – Risk of default ©2015 Kaplan, Inc. Leverage • The use of borrowed funds to finance the purchase of an asset • Positive leverage • Negative leverage ©2015 Kaplan, Inc. Example of Positive Leverage Property with purchase price of $500,000 and NOI of $50,000 1) If purchased with cash $50,000 ÷ $500,000 = 10% Investor gets 10% return on equity 2) If purchased with borrowed funds of 75% LTV loan with annual payments of $33,310 ($125,000 down payment) $50,000 - $33,310 = $16,690 Investor receives $16,690 annually $16,690 ÷ $125,000 = 13.35% Investor gets 13.35% return on equity ©2015 Kaplan, Inc. Business Brokerage • Business enterprise brokers • Business opportunity brokers • Tangible assets – Physical substance • Intangible assets – No physical substance – Like customer loyalty ©2015 Kaplan, Inc. Differences from Real Estate Brokerage • Involves assets other than real estate – Personal property (inventory) – Goodwill – name recognition, reputation, customer loyalty • Going concern value – Value of an established business – Not just physical assets • Markets are wider in geographic scope • Shares of stock ©2015 Kaplan, Inc. Differences from Real Estate Brokerage • Short-term liabilities – Purchaser often assumes short-term liabilities • Account payable • Sales taxes to be remitted to state • Wider geographical market ©2015 Kaplan, Inc. Expertise Required in Business Brokerage • Corporate finance • Business accounting • Valuation of businesses ©2015 Kaplan, Inc. Accounting Terminology • Asset—entire resources of a business • Liability—the debts of a business • Capital (net worth) - amount by which assets exceed liabilities • Cash flow—total amount generated from investment minus expenses ©2015 Kaplan, Inc. Corporate Finance • Corporate stocks – Preferred and common • Securities analysis and valuation • Management of working capital – Difference between current assets and current liabilities • Budgeting ©2015 Kaplan, Inc. Business Accounting • Income statement analysis – Summary of income and expenses – Over a period of time – Profit and loss statement • Balance sheet analysis – Financial position at point in time – Assets, liabilities, capital • Cash flow analysis • Asset depreciation • Taxation ©2015 Kaplan, Inc. Valuation of Businesses Comparable sales analysis Reproduction or replacement cost less depreciation Income analysis Liquidation analysis Used for business going out of business ©2015 Kaplan, Inc. Steps in the Sale of a Business 1. List the business for sale 2. Identify all assets of business 3. Establish value of business 4. Subtract value of liabilities 5. If a corporation, divide net by number of outstanding shares 6. Check compliance with laws 7. Advertise 8. Find buyer and buyer signs non-disclosure agreement 9. Execute purchase agreement 10. Buyer inspects financial statements 11. Assignment of lease or transfer of title 12. Schedule closing with all parties ©2015 Kaplan, Inc.