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Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Major Topics
Investor Objectives Sources of real estate returns Introduction to Cash Flow Analysis What we mean by direct and indirect real estate investment Returns on labor versus returns on investments Sources of real estate risk Measuring real estate risk Investment alternatives within the real estate asset class Creative advantages of partnerships and investment structuring
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Tax Shelter or Postponement Deductible non-cash items include depreciation, amortization of points paid for financing and possibly tax credits for specialized government programs
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Timing of Returns
From a timing perspective, we can take the four types of returns listed above and reduce these to only two:
The before tax cash flow plus or minus tax savings or taxes due can be treated as one final source of returns during the operational stage of ownership The appreciation and equity buildup from mortgage repayment both result in before tax proceeds at the time of sale
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Operating Expenses
Net Operating Income or NOI
Debt Service
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Gross Rent Less Vacancy = Effective Gross Income Less Operating Expenses = Net Operating Income Less Debt Service = Cash Flow (before tax)
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Most investors buy stock without direct When debt is used, it is known as buying
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
of probable estimates are tested for several variables at one time, and the resulting distributions of probable results generated
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Managing Risk
Risk management is accomplished through
negotiation and contracting, or in some cases the purchase of insurance or hedge investments demand and supply, are for the most part uncontrollable lease that expires in the future might be managed through negotiation the use of more or less leverage
Risks that cannot be shifted must simply be That is, the investor must figure out how
much extra expected return they require in order to take on the additional risk, known as risk premiums
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Portfolio Perspectives
Portfolio risk is based on the estimate of
return volatility for an entire basket or investments generally will lower total portfolio risk
Combining two or more risky investments This is a result of the less then perfect
correlation of the individual asset returns, correlations over specific investment horizons then the total portfolio risk can be drastically reduced
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner
Example: one investor may want current returns and another may want future wealth By structuring an investment with various contractual interests (securities or mortgages) that direct the return priorities to different investors multiple investors can achieve their objectives G. Miller and David M. Geltner Real Estate Principles for the New Economy: Norman
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Real Estate Principles for the New Economy: Norman G. Miller and David M. Geltner