Real Property Investment

7/29/2019 Real Property Investment

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Investing in Real Estate



1

Real Estate

land and all permanent improvements

including buildings – raw land, agricultural,

industrial, commercial, residential or in the

form of rental units



2

Basic Types of Real Estate

• Residential

– Multi-Family, Single-Family

• Commercial

– Land (All Types)

– Retail

– Agricultural / Industrial

– Office

– Special Purpose



3

Advantages of Real Estate Investment

•It is a hedge against inflation

•It is one of the few finite investments

•It is one of the basic necessities of

man•It is a tangible asset and can be

directly controlled by the owner

•It can be used in financing

•It can provide periodic income whenleased out



4

Disadvantages of Real Estate Investment

•It requires a number of years to realizeprofit on the investment

•It is immovable

•Mortgaging real property requires certain

procedures•Upon death of the investor, real property

automatically forms part of his estate

which is subject to inheritance tax

•It is impractical to dispose in case theinvestor needs of small amount of

additional capital

•Its price is adversely affected in times of

crisis



5

Factors Considered in Real Estate Acquisition

• Location

• Frontage and shape of the land

• Drainage and sewerage system

• Width of streets• Elevation

• Possible expropriation

• Clean title

• Encumbrances• Improvements

• Financing

• Prospects



Accounting for Real Property Expenses

• Repairs are an expense, improvements

have to be depreciated

• Maintenance is an expense, replacements

must be capitalized.• Interest expense is only deductible in the

year it was incurred. Prepaid interest must

be amortized.



• Residential property can be depreciated

straight-line over 27.5 years

• Commercial property is depreciated over

39 years• Don’t forget the mid-month convention –

property is assumed to be purchased in the

middle of the month of acquisition

regardless of when it was actually

obtained.



Depreciation

• The original cost basis includes all costs

associated with acquiring the property and

transferring the title

• Land value cannot be depreciated• The depreciable basis is the total value that

can be depreciated over the recovery

period

• Depreciable Basis= Cost Basis- Land

Amount



Market Value

• most probable price at which a property wouldsell for in a competitive market as of a specificdate, had it been exposed to the market for a

reasonable time prior to that date.

--The Appraisal Institute

--Informed Buyers/Sellers

--No Duress Situation



Most Probable Selling Price

• most likely price at which a property

will sell, given the market conditions

then prevailing and the financing

arrangements available

• used in determining Transaction Range



Transaction Range

• price range within which a transaction can occur and leave both the buyer and the seller better off

than before (win-win situation)

Lower End: Present owner’s investment value

Higher End: Prospective Buyer



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Investment Value

• worth to a present or specific prospective owner;

unique to the individual and need not be closely

related to most probable selling price

• reflects an investor’s assumptions about the

asset’s future ability to produce revenue, about

the likely holding period, selling price, tax

consequences, available financing, etc.



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Real Property with Building or House

Fixer-upper a property that requires repairs

whether cosmetic or structural for it to gain

its full potential market value

In case there are

improvements

included in the

acquisition of

real estate, the

buyer shouldconsider the

possible use

thereof and the

estimated cost

of immediate

repairs or evendemolition.



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Gross Margin per Annum

(Selling Price – Total Cost)Holding Period



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When the properties available for

investment vary in physical condition

because of varying degrees of

maintenance, the investor should consider the cost of repairs and

cosmetic improvements and their

expected effects on market values.



16

In case the investor has to choose

between two or more lots with house

on each, it would be advisable to buy

with the worst improvementsassuming it would cost the least and

demolition cost would be minimal.



17

Market Conditions for Real Property

• Buyers’ Market – demand is low that

buyers are able to avail of discounts

and deferred payment plans for

extended period

• Sellers’ Market – demand exceeds

supply that sellers can charge high

prices often on cash basis or for shorter terms



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Conformity

• refers to whether the

property conform to what

is normal or standard in a

specific locality

Underground Economy

- the unregistered businessoperations going on in a country

Zoning

refers to

designation of

certain areas for

specific purposes

or limitations

“Non-confo rmity to

standards can adversely affect

the market value of

a property”



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Occupancy Rate

• the portion of real estate that brings in

revenue based on the total capacity

• opposite of vacancy rate

Real Property Investment

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