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Making an investment decision

Making an investment decision. Value. Investment value: The value determined in view of investment objectives, goals and constraints.

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Making an investment decision

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  1. Making an investment decision

  2. Value • Investment value: The value determined in view of investment objectives, goals and constraints. • Market value: The price that participants in the market place are willing to pay for the investment, in order to make the investment decision. Market value also represent the anticipated future benefit.

  3. Objectives of real estate investment • Means of building an estate • Pride of ownership • Hedge against inflation • Desired rate of return on equity invested • Diversification of investor objectives • Wealth Maximization

  4. Risk & Return • Risk: is the variation in the expected future benefits. • Return: is the amount inflow generated by an investment each year. • NOI • NOI net of debt payments • After-tax Cash Flows • Rate of return: is measured as percentage per year as relationships between cash flows and amount invested

  5. Real Estate Investment Process • Identify investor’s objectives, Goals, and constraints • Analyze Investment Climate and Market Conditions • Develop Financial Analysis • Apply Decision-making Criteria • Investment Decision

  6. Identifying investor objectives • Each participants have different objectives in real estate investment. • The Equity investor: amount of cash flows from the investment and must be certain of having the legal rights to the cash flows • The Mortgage lender: recovery of the amount lent, as well as in earning a rate of return on the loan. • The Tenant: Lease • The Government: The relationship among participants and restrictions on real estate market

  7. Environment for Decision Making • Market Environment: Supply & Demand, Real Estate Sub-market, Population, employment, income, etc. • Legal Environment: Forms of ownership, Land-use control, Limitations on property rights. Community. • Financing Environment: Debt & Equity Financing • Tax environment

  8. Cash Flows Forecasting • Cash outflows from initial investment • Cash flows from rent collection • Cash flows from assets disposition

  9. Cash Flows Forecasting (cont’) • Potential Gross Income: (PGI) • Vacancy and bad debt allowance • Effective Gross Income (EGI) • Operating expenses • Net Operation Income (NOI) • Debt Service • Before Tax Cash Flows (BTCF) • Tax • After Tax Cash Flows (ATCF)

  10. Cash Flows From sales of investment • Expected Selling Price • Selling expenses • Net sales Proceeds • Unpaid Mortgage balance • Before-tax equity reversion • Taxes due on sales • After-tax equity reversion

  11. Criteria for Decision Making • Rules-of Thumb Techniques: Gross Income Multiplier (GIM), Overall Capitalization (net income multiplier), Equity Dividend • Traditional Appraisal Method: Direct Sales Comparison Approach, Cost Approach, Traditional Income Approach • Discounted Cash Flow (DCF): NPV, IRR

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