Introductions Your name Where you work Your job

Transcript:Introductions Your name Where you work Your job:
Introductions Your name Where you work Your job responsibilities How long you have been in the industry What you hope to get from this class Course 8: Financial Mgmt 2 Agenda Investments Adding Value to the Investment Economic Analysis of a Property Budgets Property Valuation Course 8: Financial Mgmt 3 Chapter 1: Investments We will discuss: What are investments and whether to make them Advantages and disadvantages of investing in multifamily housing Different types of ownership and methods of financing Course 8: Financial Mgmt 4 Definition: Investment An investment is the use of funds to earn a profit. Course 8: Financial Mgmt 5 Four (4) Factors in Investment Risk – low risk = low return high risk = high return Income – may depend on risk involved Growth – means a potential to increase in value >NOI = greater value Liquidity - ability to convert to cash Course 8: Financial Mgmt 6 Owner’s Objectives Why is it important to know the owner’s investment objectives for the property you manage? Course 8: Financial Mgmt 7 Activity #1: How the Four Factors Affect Investments How do general economic and market conditions affect investments? Why is it important to know the owner’s objectives for the property you manage? Course 8: Financial Mgmt 8 Performance Measures Rate of return on investment (ROI) Cash-on-cash return Capitalization rate Internal rate of return (IRR) Course 8: Financial Mgmt 9 ROI Rate of return on investment = performance measure used to evaluate the efficiency of an investment “Return” can be cash, cost to manufacture vs. price, appreciation growth or some other benefit compared to cost Benefit/Cost = Return Course 8: Financial Mgmt 10 Capitalization Rate NOI/Purchase Price = Cap Rate NOI/Cap Rate = Value Course 8: Financial Mgmt 11 Exercise We paid $7,000,000 for a property and the NOI is $500,000. What is the cap rate? Divide NOI by 6%. Course 8: Financial Mgmt 12 Remember Lower cap rate = higher value Higher cap rate = lower value Course 8: Financial Mgmt 13 Advantages of Investments Advantages include: Periodic cash payments Potential for increase in value Reduction in income taxes due to depreciation Ability to invest using borrowed funds Course 8: Financial Mgmt 14 Disadvantages of Investments Disadvantages include: Real estate is not a liquid asset Active participation is often required Potential for risk (natural disasters, changes in market conditions) Course 8: Financial Mgmt 15 Forms of Ownership