R.E. Ecs 156 Foldvary

Constitution of Orbiz, by MacCallum.

Chapter 15 - Government reports

Environmental review: decide if a project will significantly impact the environment.

If not, issues a "negative declaration." Project is OK.

Chapter 16 - Real Estate Investment.

Economic investment: capital goods and human capital. Increase in investment.

Financial investment: ownership of an asset for its yield.

Speculation: ownership of an asset expecting a change in supply and demand.

P. 379: saving: income minus consumption.

Investment is also income minus consumption.

The interest rate equilibrates.

Elements of financial investment and speculation:

Factor returns, explicit and implicit.

Forms of returns:

normal profits and returns, time shifting (interest), risk premia, speculative gains,

economic profits.

Risk: known probability of loss.

Uncertainty: probability unknown, unknowable.

R.E. uncertainties: market (prices, rentals), default (non-payment, damage, lawsuits), governmental (zoning, extra taxes).

Investment gains are after taxes.

Liquidity: the speed and ease of converting an asset into cash.

Real estate illiquid.

Cash flow analysis

1. Gross Scheduled (full occupancy) Rentals.

Use either current or market rentals.

Monthly rental X 12 X units.

$800*20*12 = $192,000

2. Other income: parking, storage, laundry, vending, fines, interest

$3600 / year.

3. Total gross income: $195,600

4. Subtract vacancy loss: e.g. $9780.

5% of total gross income.

5. Gross operating income: $185,820.

6. Subtract operating expenses:

maintenance, repairs (including reserve), property tax, insurance, management, utilities, supplies


7. Net Operating Income. $142,720.

8. Subtract debt service: interest and principal: $126,370.

9. Economic cash flow (before tax reduction): $16,350.

Possible to have a negative cash flow, yet overall profitable.

Tax benefit analysis

10. Net operating income (7): $142,720

11. Less interest: $119,700. 12. other interest: zero.

13. Depreciation: straight line, 27.5 years for residential property, building only. 38,760

P. 386: Depreciation is a tax write-off and not a cash expense.

14-15: net income or loss: (15,740)

16. Tax rate (.38).

17. Taxes saved: 5981. Note: passive income and loss rules apply.

Net income

18. Economic cash flow (9): 16,350

19. Tax savings: 5981

20. After-tax cash flow: $22,331

Profit from sale is called the "reversion" by property appraisers.

Offering price:

Gross rent multiplier. Price/gross income. Compare to similar properties.

Ignores vacancies.

Capitalization rate: Net operating income / asking price = capitalization rate.

Compare price per square foot.

Or for an expected rate of return, calculate how much you would pay.