Presentation Transcript

1. Chapter 2:

   Value and Real Estate Decisions
2. Value and Investment Decisions An investment decision is one that entails significant costs now in return for benefits in the future Significant time into the future Significant, irreversible costs now
3. Elements of an Investment Decision Future Benefits Financial Time Initial Cost Non-Financial
4. Normal Business Decisions vs. Real Estate Decisions Normal business decisions Recruit Personnel Choose ways to generate business Choose marketing strategies or channels Select an organizational structure Select equipment Real estate decisions Choose the location Rent or buy Expand or not Renovate or not Hold or sell How to finance or refinance
5. Initial Cost Cash Flow at Sale Cash Flow From Operations The Cash Flows of a Real Estate Investment Future Net Cash Flows Time
6. Nonfinancial Factors in Real Estate Decisions Example: choice of a personal residence Important to “internalize” information on the nonfinancial factors Decision is intuitive, but no less of a valuation decision Proof: Houses do have prices
7. The Spectrum of Risk in Investments
8. Four Combinations of Investment Risk
9. Significance of Cost Risk vs Cash Flow Risk Cost risk is immediate, and therefore can have greater impact on value. Each risk requires special expertise. Cost risk is evaluated by engineers and building contractors. Cash flow risk is evaluated by brokers, market researchers or appraisers.
10. The Spectrum of Cost Uncertainty
11. The Spectrum of Cash Flow Uncertainty
12. Risk, Investment, and Yield Two investment choices: Vacant residential lot which can sell in one year for $50,000 Treasury bonds that will mature in one year, paying $50,000 Which would you pay the most for? Why?
13. Risk, Investment, and Yield (continued) If you purchase the lot for $40,000, and sell in a year for $50,000, how much has your money grown? If you purchase the Treasury securities for $48,000, how much does your money grow? What do we call these growth rates?
14. Ways of Managing Real Estate Risk Avoid risky ventures Study real estate as an ongoing interest Do not accept advice on an uninformed basis Get experience in a type of investment: Work for experienced persons Make only small-scale investments Assure a long holding period Price risk Cash flow (or benefit stream) risk
15. Two Concepts of Real Estate Value Investment value: Value to a particular individual Appraised value: Value to a “typical” investor, or probable selling price
16. A Condo Conversion Story: Rent or Buy Price: $157,000 Financing 90 percent of price 30 years, 5.75 percent $824.59 Closing costs: $9,420 Property taxes: App. $2,400 Monthly Association fee: $160.00 Current apartment rent: $1,010 month
17. A Condo Conversion Story: Rent or Buy
18. A Condo Conversion Story: Rent or Buy
19. A Condo Conversion Story: Rent or Buy
20. A Condo Conversion Story: Rent or Buy Do Jennifer’s assumed appreciation rates of 2.5 percent to 7.5 percent seem reasonable? Why does she believe she needs to “compound” the initial cost figure when considering sale in the future? Does she appear to be forgetting anything important in her analysis of the rent or purchase decision?
21. End of Chapter 2