Florida Real Estate Principles, Practices & Law 38th Edition Linda L. Crawford Copyright © 2015 Kaplan, Inc. All rights reserved.

Chapter 17 Real Estate Investment Analysis and Business Opportunity Brokerage

Advantages of Real Estate Investments Rate of return Tax advantages Hedge against inflation –Property values have appreciated faster than CPI Leverage Equity buildup ©2015 Kaplan, Inc.

Disadvantages of Real Estate Investment Illiquidity –Liquidity is ability to sell quickly without loss –Real estate is illiquid Market is local in nature Need for expert help Management Risk ©2015 Kaplan, Inc.

Relationship to the Economy Local economy –Supply and demand factors National economy –Employment, interest rates, construction costs ©2015 Kaplan, Inc.

Location Real property value is affected by its immediate surroundings SitusSitus indicates the influences on value created by location –Preference for a certain location owing to factors such as weather, job opportunities, transportation ©2015 Kaplan, Inc.

Destination Properties Directs an income stream to the property Service industries support the needs of a local community Examples: Shops and retail stores ©2015 Kaplan, Inc.

Origin Properties Originate a product to seek out an income stream Export activities Examples include Manufacturing plants Distribution centers ©2015 Kaplan, Inc.

Physical and Legal Factors Physical Characteristics –Site –Building Exterior considerations –Curb appeal Interior considerations –Size, number, condition of rooms or offices Building operating expenses Legal Characteristics –Rights –Limitations ©2015 Kaplan, Inc.

Assessment of Risks Risk Chance of losing all or a part of an investment Static risk Risk that can be transferred to an insurer Dynamic risk Risk that arises from the continual change in the business environment ©2015 Kaplan, Inc.

Types of Risks Business risk –Projected vs. actual income & expenses Financial risk –Ability to pay expenses Purchasing-power risk –Related to inflation Interest-rate risk Liquidity risk Safety risk –Market risk –Risk of default ©2015 Kaplan, Inc.

Leverage The use of borrowed funds to finance the purchase of an asset Positive leverage Negative leverage ©2015 Kaplan, Inc.

Example of Positive Leverage Property with purchase price of $500,000 and NOI of $50,000 1)If purchased with cash $50,000 ÷ $500,000 = 10% Investor gets 10% return on equity 2)If purchased with borrowed funds of 75% LTV loan with annual payments of $33,310 ($125,000 down payment) $50,000 - $33,310 = $16,690 Investor receives $16,690 annually $16,690 ÷ $125,000 = 13.35% Investor gets 13.35% return on equity ©2015 Kaplan, Inc.

Business Brokerage Business enterprise brokers Business opportunity brokers Tangible assets –Physical substance Intangible assets –No physical substance –Like customer loyalty ©2015 Kaplan, Inc.

Differences from Real Estate Brokerage Involves assets other than real estate –Personal property (inventory) –Goodwill – name recognition, reputation, customer loyalty Going concern value –Value of an established business –Not just physical assets Markets are wider in geographic scope Shares of stock ©2015 Kaplan, Inc.

Differences from Real Estate Brokerage Short-term liabilities –Purchaser often assumes short-term liabilities Account payable Sales taxes to be remitted to state Wider geographical market ©2015 Kaplan, Inc.

Expertise Required in Business Brokerage Corporate finance Business accounting Valuation of businesses ©2015 Kaplan, Inc.

Accounting Terminology Asset—entire resources of a business Liability—the debts of a business Capital (net worth) - amount by which assets exceed liabilities Cash flow—total amount generated from investment minus expenses ©2015 Kaplan, Inc.

Corporate Finance Corporate stocks –Preferred and common Securities analysis and valuation Management of working capital –Difference between current assets and current liabilities Budgeting ©2015 Kaplan, Inc.

Business Accounting Income statement analysis –Summary of income and expenses –Over a period of time –Profit and loss statement Balance sheet analysis –Financial position at point in time –Assets, liabilities, capital Cash flow analysis Asset depreciation Taxation ©2015 Kaplan, Inc.

Valuation of Businesses Comparable sales analysis Reproduction or replacement cost less depreciation Income analysis Liquidation analysis Used for business going out of business ©2015 Kaplan, Inc.

Steps in the Sale of a Business 1.List the business for sale 2.Identify all assets of business 3.Establish value of business 4.Subtract value of liabilities 5.If a corporation, divide net by number of outstanding shares 6.Check compliance with laws 7.Advertise 8.Find buyer and buyer signs non-disclosure agreement 9.Execute purchase agreement 10.Buyer inspects financial statements 11.Assignment of lease or transfer of title 12.Schedule closing with all parties ©2015 Kaplan, Inc.