Confirming Pages Introduction to Real Estate Finance and Investments This book prepares readers to understand the risks and rewards associated with investing in and financing both residential and commercial real estate. Concepts and techniques in- cluded in the chapters and problem sets are used in many careers related to real estate.
These include investing, development financing, appraising, consulting, managing real es- tate portfolios, leasing, managing property, analyzing site locations, and managing corpo- rate real estate. This material is also relevant to individuals who want to better understand real estate for their own personal investment and financing decisions.
The recent turmoil in world financial markets, which has been closely tied to events in the real estate market, suggests that investors, lenders, and others who participate in the real estate market need to better understand how to evaluate the risk and return associated with the various ways of investing and lending. This requires an understanding of the legal issues that can impact the rights of lenders and investors, the characteristics of the various vehi- cles for lending and investing in real estate, the economic benefits of the loan or invest- ment, the importance of the local economy where properties are located, and the goals of the particular lender or investor.
This book is designed to help students and other readers learn how to understand these factors, so that they can perform the right kind of analysis and make informed real estate finance and investment decisions. These topics are inter-related. Thus, the investor needs to understand both how to analyze the in- vestment and how financing the investment will impact its risk and return.
Therefore, the lender also needs to understand the risk and return of making that loan. In fact, one of the risks associated with loaning money is that the lender may end up owning the property. So the lender needs to evaluate the prop- erty in many of the same ways as the investor purchasing the property. Organization of the Book From the above discussion it should be clear that many factors have an impact on the risk and return associated with property investments and the mortgages used to finance them.
This is true whether the investment is in your personal residence or in a large income- producing investment such as an office building. Part I of the book begins with a discussion of the legal concepts that are important in the study of real estate finance and investments. Although a real estate investor or lender may rely heavily on an attorney in a real estate transaction, it is important to know enough to be able to ask the right questions. We focus on those legal issues that relate to real estate investment and financing decisions.
Part II begins with a discussion of the time value of money concepts important for an- alyzing real estate investments and mortgages. These concepts are important because real estate is a long-term investment and is financed with loans that are repaid over time. This leads to a discussion of the primary ways that mortgage loans are structured: fixed rate and adjustable rate mortgage loans. This is relevant for individuals making personal financial decisions, such as whether to own or rent a home, as well as for lenders who are evaluating a loan and a borrower.
Part IV covers many topics related to analyzing income property investments such as apartments, office buildings, shopping centers, and so on. These topics include under- standing leases, knowing how properties are appraised, and being able to analyze the po- tential returns and risks of an investment and how taxes impact the return. We also consider how to evaluate whether a property should be sold or renovated.
Finally, we look at how corporations that are not in the real estate business per se, but that use real estate as part of their business, can decide whether to own or lease the property they use.
While the first four parts focus on investing or financing existing properties, Part V dis- cusses how to analyze proposed projects, such as the development of an apartment or of- fice building or the development of land for sale to builders.
It also discusses how projects are financed during the development period, which is different from the way properties are financed once construction is complete and they are occupied. Part VI discusses various alternative real estate financing and investment vehicles.
We start with joint ventures, which allow different parties with different areas of expertise and different amounts of capital to join forces for the purpose of making a real estate invest- ment. Next, we discuss the secondary market for both residen- tial and commercial mortgages and examine how mortgage-backed securities are struc- tured. This includes a discussion of the risks these investments pose, which is important to making sound investments.
These public companies invest in real estate and allow investors to own a diversified portfolio of real estate by purchasing shares of stock in the company. Finally, we discuss how to evaluate real estate in a portfolio that also includes other investments such as stocks and bonds.
This includes understanding the diversification benefits of including real estate in a portfolio as well as ways to diversify within the real estate portfolio in- cluding international investment. Wide Audience From the above discussion, one can see that this book covers many topics.
Depending on the purpose of the particular course, not all of the topics will be covered. Some courses will emphasize housing and residential real es- tate more than others, and some will have a different emphasis on development. This book is designed to allow flexibility for instructors and students to focus on those topics that are most important to them, so that it can meet the purpose of each unique course.
Changes to the Fourteenth Edition Several new topics have been added to the fourteenth edition. Some of these were in response to the recent turmoil in the financial markets, caused in part by the problems associated with subprime mortgages.
While the previous edition of the book discussed subprime mortgages, this edition adds further emphasis to the importance of proper underwriting of mortgage loans, whether they are subprime or not and whether they are for residential or commercial properties. Many new concept boxes have been added to provide information about recent trends in mortgage-backed securities and how the government has worked to add liquidity to mortgage markets, in addition to taking over the Federal Home Loan Mortgage Corporation.
Confirming Pages The chapters that discuss the different ways mortgages can be structured have also been expanded, so that readers can understand all the ways in which a mortgage can be structured and the associated risks with each structuring.
A new section on market analysis has been added to provide readers with a better un- derstanding of how data on the supply and demand for real estate can be used to project oc- cupancy and rental growth. For more advanced readers, a new concept box describes statistical techniques that can be used in market analysis. Also new to this edition, a discussion has been added that outlines the various owner- ship structures that can be used for ownership of investment property, along with the ad- vantages and disadvantages of each.
Because investors often look for ways to defer capital gains taxes when selling invest- ment properties, a new section has been added on installment sales and tax-free ex- changes.
This includes a discussion on how to evaluate whether these tax-deferral strategies are better than a regular sale. The chapter on real estate investment trusts REITs has been expanded to reflect the current economic landscape and also to include discussion on how to value a REIT.
Since REITs are companies that invest in real estate, the value of the properties they hold is im- portant, but techniques commonly used to value corporations such as earnings multipliers and dividend discount models are also important. Finally, we have expanded the integration of financial calculators and Excel into the solutions of problems, since this is what is done in practice.
The way that solutions are pre- sented has been simplified by using new notation introduced in this edition. These problems are illustrated and solved by using a blend of financial calculators, Excel spreadsheets, and specialized software designed to analyze real estate income property.
By modi- fying these exhibits, students also may solve many end-of-chapter problems without having to design new spreadsheets. Using the trans-log hedonic model, the insured and uninsured comparable office and retail properties and their rental values were identified. Through T-Test, the difference between the insured and uninsured rental values was assessed and the extent of their differences was also estimated. The results indicated that in Tamale, Again, within the Bolgatanga CBD, Statistically, the ages and sizes of these properties were not significantly different.
The study further revealed that the rents of the insured office and retail properties were significantly higher than those of the uninsured counterparts in all the three CBDs at a variant extents.
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