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Investing in Real Estate
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Real Estate
land and all permanent improvements
including buildings – raw land, agricultural,
industrial, commercial, residential or in the
form of rental units
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Basic Types of Real Estate
• Residential
– Multi-Family, Single-Family
• Commercial
– Land (All Types)
– Retail
– Agricultural / Industrial
– Office
– Special Purpose
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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
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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
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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
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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.
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• 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.
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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
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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
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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
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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.
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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.
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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