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

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Presentation on theme: "Florida Real Estate Principles, Practices & Law 38th Edition Linda L. Crawford Copyright © 2015 Kaplan, Inc. All rights reserved."— Presentation transcript:

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

2 Chapter 17 Real Estate Investment Analysis and Business Opportunity Brokerage

3 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.

4 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.

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

6 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.

7 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.

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

9 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.

10 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.

11 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.

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

13 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.

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

15 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.

16 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.

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

18 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.

19 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.

20 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.

21 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.

22 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.

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