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Chapter 1 The Real Estate Investment Decision

Chapter 1 The Real Estate Investment Decision. Real Estate - Physical Land and Attached Structures Real Property - Legal Interest in land and structures attached to the land Personal property - Movable property Fixtures - Movable property that is attached permanently to the land.

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Chapter 1 The Real Estate Investment Decision

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  1. Chapter 1The Real Estate Investment Decision • Real Estate - Physical Land and Attached Structures • Real Property - Legal Interest in land and structures attached to the land • Personal property - Movable property • Fixtures - Movable property that is attached permanently to the land

  2. Chapter 1 The Real Estate Investment Decision • Characteristic Attributes of Real Estate • Fixed location • Uniqueness • Interdependence of land uses • Long life • Long-term commitments • Large transactions • Long gestation period

  3. Chapter 1 The Real Estate Investment Decision • The Economic Impact of Real Estate • Land and structures • Make up approximately 2/3 of material wealth in the U.S. • Mortgage debt • Totals approximately $5 trillion • Expenditures, Investments • 12% of gross domestic product • 26% of personal consumption • 49% of gross prvt domestic investment (PP&E)

  4. Chapter 1 The Real Estate Investment Decision • Real Estate Industry - Private Sector • Real estate brokerage • owner-occupied residential • renter-occupied residential • commercial • industrial • farm and open land

  5. Chapter 1 The Real Estate Investment Decision • Real Estate Industry - Private Sector • Property management • Real estate finance • Appraisal • Development and construction • Asset management • Land-use planning

  6. Chapter 1 The Real Estate Investment Decision • Basic Investment Concepts • Investing Defined - choosing future over present consumption • Expectations and Assumptions: • Timing of Cash inflows and Outflows • Magnitude of Cash flows • Riskiness of expected Cash flows

  7. Chapter 1 The Real Estate Investment Decision • Basic Investment Concepts • The Risk Return Trade-off • Investor Objectives • Value • Market Value • Investment Value

  8. Chapter 1 The Real Estate Investment Decision • The Real Estate Investment Process • Step 1- Identifying Investor Objectives • Equity Investor • Mortgage Lender • Tenant • Government

  9. Chapter 1 The Real Estate Investment Decision • The Real Estate Investment Process • Step 2- Environment of Decision Making • Market Environment • Legal Environment • Financing Environment • Tax Environment

  10. Chapter 1 The Real Estate Investment Decision • The Real Estate Investment Process • Step 3- Cash Flow Forecasting • Cash Flow from Operations • PGI • EGI • NOI • PTCF • ATCF

  11. Chapter 1 The Real Estate Investment Decision • The Real Estate Investment Process • Step 3- Cash Flow Forecasting • Cash Flow from Reversion • Selling Price • Net Sales Proceeds • Before Tax Equity Reversion • After Tax Equity Reversion

  12. Chapter 1 The Real Estate Investment Decision • The Real Estate Investment Process • Step 4- Criteria for Decision Making • Rules of Thumb Technique • Gross Income Multipliers • Equity Dividend Rate (Cash on Cash) • Traditional Appraisal Methods • Cost Approach • Sales Comparison Approach • Income Approach

  13. Chapter 1 The Real Estate Investment Decision • The Real Estate Investment Process • Step 4- Criteria for Decision Making • Discounted Cash Flow (DCF) Models • Net Present Value (NPV) • Internal Rate of Return

  14. Chapter 1 The Real Estate Investment Decision • The Real Estate Investment Process • Step 5- The Investment Decision

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