REE 3043 Woodyward Spring 2018 Exam 1

Percentage of wealth in Real Estate
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Percentage of wealth in Real Estate
50% of the world's wealth is in Real Estate. Real Estate is the biggest asset a corporation has.
What are the two real estate markets?
Rental (Space Market) and Purchase Market ( Asset Market).
What are the two types of property?
Real Property and Personal Property.
What is Real Property?
Land and anything attached to it. Example, in a piece of land the real property is the land and the building.
What is Personal Property?
All other property including intangible and tangible things. Example, in a piece of land , the personal property is what is inside the building since it is not attached to the land.
What is Real Estate?
The estate that you have in the real property or the bundle of rights associated with owning real property. Estate is property and real property is the land.
Classical Land Economics View of Real Estate
Value of land is derived from its utility and scarcity. Rent is determined by the cost of labor and capital in production.
What is rent?
Periodic payment for space.
Neoclassical Traditional View of Real Estate
Value is determined by the intersection of supply and demand (cost and utility). Proposed by Alfred Marshall.
Separating Land
Dividing land into lots is called tracks, and dividing land into houses is parcel.
Property Rights and Contract LawsDefine the fundamental rights of property ownership.Purpose of Contract LawsFacilitate the transfer of property rights. Lease and Sale contracts enable prices to be established and define property ownership.Effect on Value of Property Rights and Contract LawsValue is affected by institutional arrangements imposed by the government and private groups. Land codes, building codes, and restrictions.Financial EconomicsReal Estate investment and valuation require market analysis and the application of financial techniques.Effect of Institutions on value of real estateValue affected by market and social institutions. Lending institutions, household types, government agencies, and real estate funds.Money in Florida72% of it comes from sales tax from tourismEffect of technology on ValueTechnological improvements affect value of Real Estate.Wealth of Real Estate50% of wealth in the world is real estate. Creates 9 million jobs. owners occupied(residential) is largest sector with 22 trillion 75% of wealth in USA.Largest Landowner in USATed Turner 2 million acresWho owns america?Majority of US property is owned by homeowners and mortgage lenders. Owner occupied homes is 60% and commercial real estate is 40%. Few commercial mortgages are securitized and the trend is for more institutional ownership and increased holdings of mortgage backed securities.What are the 5 perspectives of real estate?Investment, market, valuation, mortgage finance, and legal.Financial AssetsClaims to the incomes generated from the use of real assets.What is Urban Economics?Branch of economics that extends the basic ideas of the early classical and neoclassical economists to better understand and predict how humans use spaceWhat are institutions?Formal arrangements and associations that members of society make to support fundamental economic and social activities.In a perfect market the price of something is equal to its?ValueWhat is a real asset?Tangible assetsCommercial mortgages held in the portfolios of lenders are generally referred as?Unsecuritized commercial mortgagesWhat classification are stocks, bonds, and cash?Financial assetsWhat are the useful resources that are combined to form products?Land labor and capitalImportance of lease contractsFormally identify a property's rent and the intersection of supply and demand.Real Estate commonly used in the following waysbusiness or profession, investment, product or service, urban or rural space, and rights associated with owning property.Market ValuePrice a typical buyer would pay if property was placed on the marketInvestment ValueA price a particular investor is willing to pay given the investors unique situation, financing opportunities, rate of return, and expected cash flowMortgage ValuePresent worth of lenders rights to receive a series of expect mortgages payments from borrowerReal Estate ValuationExpected future cash flows from operations and sale of property. Is affected by an investors estimate of Magnitude, timing, and riskiness of expected cash flows.Net Present ValueCash flows minus cash outflows.RiskPossibility that actual outcomes will vary from what is expected.Types of risk investorsRisk averse, neutral, and seekings. Most investors are risk averse.Risk AverseRequire greater returns to bear more riskRisk NeutralNo additional compensation for additional riskRisk SeekingRequire less return as risk increases.Time Value of MoneyConcept of understanding that individuals require compensation to forego receiving and using money at an earlier date.Time LineIndicates time periods and magnitudes of cash flows and whether cash flow was an inflow or an outflow.Six Time value of money OperationsFuture value of a lump sum payment, future value of an annuity, sinking fund, present value of a single lump sum payment, present value of an annuity, and mortgage constant (amortize)Five variables in all time value of money equationsn the number of periods, I the interest rate, PV the present value at time 0, PMT periodic payment, and FV future value at end of period.Interest Rate and Number of PeriodsWhen not using years, calculate number of periods by multiplying the unit of time and the number of years. Calculate the rate by dividing the original rate with the number of times it is compounded in a year. Example, 10 percent rate compounded monthly over 5 years. Number of periods is 5*12=60. And Rate is 10/12.AmortizationPartial repayment of principalDebt ServiceLoan payments made to satisfy outstanding debt obligationsEffective CostTrue borrowing cost including the effect of financingEffective YieldYield earned by investorInterestAdjustment required to equate the value of money received at two different points in timeInterest only loansMortgage loans that do not require any amortization of principal over the loan termInternal Rate of ReturnRate of interest which equates the present value of the cash inflows to the present value of cash outflowsInvestment ValueValue of a property to an investorLoan Amortization ScheduleA table showing the breakdown of a fixed mortgage payment between interest and principalYield to maturitythe yield on an investment if held to maturityCharacteristics of a perfect competitive marketProduct homogeneity, no transaction costs, perfect knowledge, buyers cannot affect prices, and products and divided and mobile. Real Estate is not this because it has high transaction costs.Asset MarketMarket in which suppliers of capital invest their money in capital assets.Efficient MarketMarkets where investors quickly and accurately include new relevant information when pricing assetsNatural VacancyThe relationship between unoccupied space and total available space over a business cycleMarket ImperfectionsTransaction and information costs that make it difficult for real estate investors to have high returnsClassical Location TheoryVon Thunen. Rent results from accessibility of land to the markets and users. Access creates value because it lowers transportation costs and most productive users can afford highest cost locationsBid Rent CurveCurve that indicates rent received relative to the distance from market activity centers. As in, the closer you are to a hub the more you payNeoclassical Location TheoryRecognizes land as a factor of production. Rent is based on users substituting location and transportation and high rents are around central locations because producers bid up prices to avoid transportation costs.Location Decisions of HouseholdsHouseholds seek to avoid transportation costs and want to locate close to economic centers. At the equilibrium location households spend the desired amount on commuting costs while satisfying their desire for land and housingLocation Decisions of CompaniesTransportation cost, proximity cost, proximity to supplier, and proximity to workforce.Functions of the Space Market (rent market)Performs 3 functions through price mechanisms. Allocates existing space among those who demand it. Expands or contracts space to meet new conditions, and determines use for landVacant SpaceS-D where S is the supply of space, square feet, and D is the demand of space, rented space.Factors Influencing Demand and SupplyHousing, Retail, and Office (intuitive Demand and Supply Factors).Asset Market (ownership of property)Two basic forms, equity and debt markets.Unsecuritized marketsMost real estate assets are traded in these. Commercial real estate is not really traded but owner occupied (mortgages and debt) are traded.Securitized marketsFew real estate assets are traded in these but the trend is that there are more each year.Who participates in asset markets?On the equity side corporations and partnerships while on the debit side financial organizations.Asset Price and ValueProperties price depends on income level, growth, and discount rate. Prices vary according to conditions in capital marketTobin's QEquilibrium condition of Q=1 where Q is the market price divided by replacement rate when evaluating financial markets. Can be applied to see if real estate values are priced incorrectly. If Q is greater than 1 it is priced high, and if Q is less than 1 it is priced low.Noisy pricePrice that is not indicative of its actual valueEconomic FundamentalsCharacteristic of national, regional, and local markets of property locations and the capital improvements at those locations that make one property worth more than another.Reservation PriceHow much a seller is willing to acceptOffer PricePrice buyer is willing to acceptSpeculative BubblePrices are high but should not beReal Estate Markets Cyclelong construction period needed to replenish supply, high cost of changing tenants and altering space, mortgage lenders unwillingness to stop lending, and lenders failure to initiate loans when new development may be justified.Importance of capital marketsEvents in capital markets that affect interest rates affects real estate values and real estate values are linked to performance in the capital markets. Price movements in security markets lead to price movements in the directly held property market.Importance of economic fundamentalsevents in space markets are linked to changing values in the asset market, and events in the asset market affect space markets.Government Influence in space and asset marketChanges in interest rates affect both markets, changes in supply and demand, laws, and taxes.Factor SubstitutionExchanging an expensive factor of production for a cheaper onLocation monopolyPrice advantage of a spaceContract RentRent in a leaseEffective RentCash a landlord receives after paying all expensesMarket RentRent that can be obtained on the open marketIn determining where to locate a firm, a firm considers the ability of the firm to substitute building improvements forLandInvestment StrategyPlan that guides an investor that has three components. Philosophy, objectives, and policies.Investment Philosophyset of beliefs and principles that guide an investor's decision-making processInvestment Objectivespurpose a particular portfolio serves for the individual's or the investment advisory clients financial needs. Basically, what the goals of an investment are.Investment Policiesdescribes the strategies that an investor should employ to meet objectivesCharacteristics of Income Property InvestmentsProperty Type, Rental income, and purchases as investors, and geographic scopeProperty TypeProperties can be characterized by type. Apartment, hotel, offices, shopping centres, and industrial buildings.Rental IncomeIncome producing properties generating incomePurchasers as InvestorsInvestors purchase income producing property to obtain proceeds through operation and appreciation(sale)Geographic scopeThe market for large scale income producing property can be regional, national, or international.Determining a property's worth by forecasting cash flow from operationsEstimation of Net Operating Income and Capitalization Rate,Net Operating IncomeAmount of money left over after paying operating expenses bu before paying taxes and mortgage payments. Calculated by taking Potential Gross Income, -Vacancy and Collection losses+Miscellaneous Income= Estimated Gross Income- Fixed Operating Expenses-Variable Operating Expenses= Net Operating Income.Capitalization RateAmount of the original investment in a percentage that an investor will receive in the first year. Calculated by NOI/ Acquisition Price. It is the relationship between a property's net operating income and its value.Forecasting cash proceeds from saleAKA reversion. It is calculating the sale of a property. Calculated by Expected Sale Price-Selling Expense= Net Sale Proceeds (Reversion)Selling ExpensesBrokerage fees, lawyer fees, and other costs that are associated with the marketing and sale of a property.Valuation Using Discounted Cash Flow ModelsNet Present Value method and INternal Rate of return method.Net Present ValuePresent value of cash inflows(investment value) minus the present value of cash outflows (acquisition costs). As in, what you get minus what you lose. Revenue-Expense in Real Estate TermsNet Present Value Method of cash flowIf NPV is more than 0, accept because it exceeds the rate of return. If NPV is less than 0 do not accept because it does not meet rate of returnInternal Rate of ReturnDiscount rate at which the present value of cash inflows equal the present value of cash outflows. As in, NPV=0