©2011 Cengage Learning

Chapter 18 ©2011 Cengage Learning APPLIED REAL ESTATE ECONOMICS

Real Estate Investment Variables There are key factors that investors usually consider before making an investment decision. The key step is to study how possible changes may affect future earnings. ©2011 Cengage Learning

What to Consider? Cycles - changes that recur regularly Trends - long-term shifts in one direction ©2011 Cengage Learning

Change There are numerous markets. Investors should not be concerned with every change. Only those changes that influence a particular real estate market. ©2011 Cengage Learning

What If? The tenant went bankrupt? The seller did not meet a promise of occupancy? The largest industry in town closed its doors? The country went into a recession? The cost of gas and electricity doubled? Zoning were changed to a land use of lower value? Lenders have problems with bad loans? Depreciation deductions were eliminated? City ordered a mandatory building code inspection? There were a major natural disaster? The most liberal or conservative local political group received a smashing majority vote at the next election? ©2011 Cengage Learning

Every potential buyer makes some sort of analysis regarding: Price Returns Risk ©2011 Cengage Learning

The scientific method in Real Estate decision making is: Clearly identify and define the problem or purpose of the investigation. Collect relevant data Analyze the data collected Formulate and test the tentative decision (hypothesis) Arrive at a final decision or conclusion ©2011 Cengage Learning

Real Estate Decision Making

Steps in analyzing an Improved Parcel of Real Estate Estimate availability of financing Analyze national cycles and trends Identify regional economic changes Consider local changes Analyze the neighborhood & determine if it is growing, stagnant, or declining. ©2011 Cengage Learning

Analyzing Improved Property ©2011 Cengage Learning

Steps in analyzing an Unimproved Parcel of Real Estate Analyze the profitability of alternative uses. Determine what is legally permissible & if a zoning change is possible. Determine if construction financing is available. Estimate the physical barriers to various alternative land uses & market potential for those uses. Analyze the financial feasibility of use. ©2011 Cengage Learning

The financial analysis phase requires preparation of a development plan Construction timetable Estimated development costs Project gross income Project operating expenses Project net operating income Select best financing package Project the cash flows Obtain appraisal Final decision: Is it economically feasible? ©2011 Cengage Learning

Determine if Acquisition Financing is Available Analyze National Trends Analyze Regional Trends Analyze Local Trends Analyze Neighborhood Trends Analyze The Individual Property Final Decision Yes or No? Investment Analysis Appraisal Analysis

©2011 Cengage Learning Future net earnings are the key element in investment profits, and estimating future earnings is the focus of investment analysis.

©2011 Cengage Learning Analyst seek to understand past and present social, political, physical, and economic cycles and trends, in order to anticipate possible future changes to earnings.