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59 Cards in this Set
- Front
- Back
Internal Rate of Return (IRR) |
the discount rate which causes net present value to equal zero |
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One must control to one of these 4 things to enter the reale estate market |
Land, Capital, Knowledge, or Tenants |
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Tangible vs Intangible property Real vs Personal property |
Tangible - physical asset that can be owned. intangible - non-physical (i.e. stocks, bonds, mrtgages) Real - is fixed and immovable Personal - can be moved that may or may not be attached to something fixed. |
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What are the rights gained when purchasing real estate? |
Exclusive ppossession of the property Use or enjoyment Disposition Management Right to its income |
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Gross Potential Rent (GPR) |
The maximum rental revenue obtainable when opperating at full occupancy |
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Effective Goss Income (EGI) |
Equal to GPR - Vacancy - Other expenses + Other income |
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Operating Expenses (OPEX) |
Must have a financial life of no more than one year |
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Net Operating Income (NOI) |
= EGI - OPEX |
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BTCF |
Before Tax Cash Flow. Equal to NOI - ADS. |
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Cap Rate (K) |
A Static metric that measures the relationship between NOI and Value. Equal to NOI / Value. Unleveraged return that tells you how how much return on an investment will be yeilded if paid in all cash after one year. The higher the cap rate, the lower the value. |
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Annual Debt Service (ADS) |
Monthly payment. Equal to the mortgage principal + interest, x12 |
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Market Gap |
Unsatisfied eal estate demand in a market/trade area |
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Blackhole |
No demand for a trade area |
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Life Cycle of a Real Estate Project |
1. Concept/Visioning: preliminary feasibility outlook studies 2. Pre-development: feasibility studies 3. Construction/Development 4. Operation 5. Rehab & Reuse 6. Exit |
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Market Area |
Defines the geographic area where a significant portion of the consumers will be drawn. 70% of consumers come from the primary trade area. 20% of consumers come from the secondary trade area. 10% of consumers come from the tertiary trade area. |
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Factors that influence Retail Uses |
Demand: local income and spending (employment and disposable income) Supply: competition from existing & likely uses |
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Factors that influence Industrial/Office Uses |
Demand: business and employment growth Supply: competition for current vacant space and future projects |
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Factors that influence Residential Uses |
Demand: Population growth, household income, interest rates Supply: new available units |
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Recourse Loan |
If I default on the loan the lender can foreclose on me to dispose on the property, and if the amount garnered from the sale is not enough to cover the debt then I will be on the hook for the difference (probably going to be sued). |
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Nonrecourse Loan |
If I default on the loan the lender eats the difference and I don’t get sued. |
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Loan to value ratio (LVR) |
Loan amount versus price to value. LVR permanent loan is usually 70% to 80% |
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Debt Coverage Ratio (DBR) |
DCR typically NOI is 110% to 125% of debt payment. The XX is the percentage of the NOI that the lender won’t allow you to use for debt service. That XX% of the NOI must remain in the deal. The higher the coverage the lower the loan amount |
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Ownership estates |
fee simple absolute: the highest form of property ownership (you have the whole bundle of rights) |
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Leasehold interest |
a possessory interest. You don’t own the property but you have the right to use it subject to the terms of the leasehold. |
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Non-possessory interests |
i.e. easements (the right to use the land of another for some specific purpose often at any time and without advance notice), license (permission to use the land of another that is temporary and more easily revocable) |
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Restrictive covenants |
in the Covenants, Conditions, and Restrictions (CC&R). Prevents certain uses, conditions, etc. for future buyers |
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Lien |
security for an obligation. Can be general (specific to the owner/person) or specific (specific to the parcel itself. i.e. property taxes, loans, mosquito abatement) |
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Condominium |
exclusive ownership of a unit and shared ownership of common spaces |
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Cooperatives |
you own a share of stock for every unit, giving you voting rights. |
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Deed |
the primary written contract to convey interest (full and partial interests) in real property |
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General warranty deed |
the highest form of warranty that the grantor can provide a grantee. Regardless of what may have happened during any prior ownership, the recourse for the grantee is to the grantor who gave this warranty. |
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Special warranty deed |
The seller only warrants or guarantees the title defects in clear title that arose during their period of ownership |
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Quick claim deed |
will transfer whatever interest you have in the property. Can clear up a “cloud on title” (a discrepancy or troublesome division of rights) |
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Actual vs. Constructive notice |
Actual: physically delivering the document to the grantee Constructive: publicly recording a document |
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Title |
A chain of title is the history of the ownership records for a piece of real property. The one who has the title is the property owner, but title may be shared amongst multiple entities. Title must be a collection of evidence. |
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3 Buckets of Money in Real Estate |
Time 0 Buy-in: equity in the deal at the very beginning of the deal BTCF during the entire hold period (while you have title to the property) BTCF from reversion (when you sell/exit the deal) |
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Break Even Ratio |
Equal to (Operating expenses + Annual debt service) / Effective Gross Income (1 - BER) = the percent by which the EGI can decline before the property cannot make /its debt service. Lenders don’t like BER any higher than 80% |
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Equity Dividend Rate |
= (Before tax cash flow) / (Initial equity outlay a.k.a. initial buy-in)
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Cash-on-cash Return |
Before tax basis: BTCF / Initial equity outlay
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Broker’s Rate of Return |
=(ATCF or BTCF + Equity build-up) / Initial equity Outlay
Equity build-up = principal pay-down + value growth Don’t rely on this number. It is irrelevant because you haven’t yet realised that expected value growth. |
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Location Quotient (LQ) |
helps determine economic basis of an area. Measures an area’s concentration of employment based on number of jobs compared to national employment
>1: the area is an exporter of goods/services and retaining more wealth than they are exporting. Creates a money multiplier (money is being spent more than once) <1: the area is an importer of goods/services and exporting wealth. Residents are spending money elsewhere =1: the area is a balanced trade area The higher the LQ the higher quality of of product that can be supported |
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Sales comparison approach to determine value in real estate |
Look similar examples recently sold in the trade area. Take the value of that sale / sq. ft. of site. Then multiply that ratio by my sq. ft. to estimate potential profit/sale price
Used in 1-4 unit properties + condos and townhomes |
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Income approach to determine value in real estate |
Take the property at the end of the hold period, calculate the NOI for the next year and divide that by terminal cap rate to determine the amount at which you will list the property for sale. Buyers will just take the last year’s numbers.
Used for retail, office, hotel, industrial, and 5+ unit properties |
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Cost approach to determine value in real estate |
What would be the cost to rebuild it?
Used for unique properties (i.e. hospitals, Disney Concert Hall, USC) |
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Real estate brokers |
financial intermediary that tries to find buyers to buy property and sellers to sell property
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Law of Agency |
Agents act on behalf of another Can be a: Universal agent, General agent, or *Special agent* acting for a specific purpose Has fiduciary responsibilities |
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Fiduciary responsibilities: |
An extra special standard of care to act in your client’s best interest and not your own
One must keep things confidential One must obey their client’s lawful instructions One must keep the client informed of financial transactions One must be loyal to their client One must disclose any relevant information to their client |
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Dual agency |
Agent represents both the buyer and the seller of the property. Dual agents have the seller’s interest most at heart since they pay the listing fee |
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Listing Agreements |
Highest protection for brokers:
exclusive authorization and right to sell. Protects their fee no matter who sells the property Best for the seller: open listing. Allows seller to get any broker to list the property. Brokers often don’t show that listing since their isn’t protected |
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Listing contract/agreement: |
the agreement between the listing broker and the seller Listing fee is due at mutual agreement between seller and buyer, but typically paid when deal is finalised |
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Leverage |
Other people’s money.
You always want positive leverage (if you borrow at 5% and invest in something earning 6% in returns) Negative leverage: borrowing 6% with 5% returns |
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Arbitrage |
trading in a price differential in two different markets (property market and capital market)
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Req. for a valid PSA (purchase & sale agreement) |
Competent parties Legal objective (the intended use must be legal) Offer and acceptance Consideration (any exchange of value, usually money) No defects to mutual assent. Everything must be done within allotted timeframes Must be in written form Proper description of the property (i.e. APN) |
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Contingency |
an event that must event that must occur before the next event occurs. (i.e. we won’t close until we’ve had a property inspection)
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Assignment
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entity name and/or assignee. Reserves the right to negotiate the deal and assign the deal to someone else to close.
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Remedies for non-performance (someone not closing on a deal after the signing of PSA) |
1. Sue for (provable) damages
2.Retain the good faith deposit 3. Agree to rescind the contract |
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Escrow Company |
A theoretical neutral 3rd party in a transaction that:
Holds the deed for the seller and holds the money from the buyer Once all conditions have been met the deed and money are transferred |
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US Real Estate Market cycles |
Average short term cycle: 18.3 years Average long term cycle: 64 years New real estate wealth is created at the “bottom” of cycles |
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Hedonic regression analysis: |
relates the cost of amenity vs the additional value the amenity will bring
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