Exam 2- M7- R.E.4540

Investment styles used by Real estate investors

1. Investing in Core properties 2. Investing in core "plus" properties 3. property sector investing 4. Contrarian Investing 5. Market Timing 6. Growth Investing 7. Value investing 8. Strategy as to Size of Property 9. Strategy as to Tenants 10. Arbitrage Investing 11. Turnaround/Special Situation 12. Opportunistic Investing 13. Investing in "Trophy" or "Blue Chip" Properties 14. Development- "Value add"

Market Analysis: Current market Conditions

1. Office 2. Retail 3. Warehouse 4. Residential

What 4 things motivate investors to make an equity investment in income properties?

1. Rate of Return 2. Price Appreciation 3. Diversification 4. Tax Benefits

The real Estate Cycle

A hypothetical cycle for all property types relative to a "normal" level of occupancy range for each property type indicate a condition of high occupancy and rising rents. This is a condition when further development is likely. All areas below the normal range indicate a condition of low occupancy and the potential for declining rates, a condition not suitable for development.

What motivates invdestors

Equity: Funds invested by an "owner," or a person acquiring the property

M7 is

Investment Analysis and taxation of income properties

Market Analysis

Investors and appraisers perform a market analysis to evaluate the supply and demand for the type of property that they are evaluating as an investment. the demand for space comes from potential tenants who desire to use the space for their business. The supply of space comes from investors who have purchased or developed buildings and are willing to make that space available for rent. This is often referred to as the space market.

Rate of Return:

Investors anticipate that market demand for space in the property will be sufficient to produce net income after collecting rents and paying operating expenses. This income constitutes part of an investor's return (before considering taxes and financing costs)

Market Timing:

Is based on the belief that with an understanding of the stage of each property type in the real estate cycle and future economic conditions, some investors have the ability to predict when to buy or sell properties. Many market timers believe that they should sell when a specific property type reaches a cyclical peak and buy a different property type in a different phase of the cycle. This is also referred to as a property sector rotation strategy.

Tax Benefits

Preferential tax benefits may result. Historically investors have paid little or no taxes on returns from real estate investments for many years. Although many of these favorable tax benefits have been eliminated over the years, an understanding of real estate tax law is still important. As tax laws change, investor decisions regarding purchase prices, how much financing should be used, and when to sell the property are also affected

Supply of space and market rents

Rental rates and growth in rents are highly correlated with occupancy rates.

Diversification:

The investor achieves diversification. Most investors want to hold a variety of different types of investments such as stocks, bonds, money market funds, and real estate.

Price Appreciation:

The investor anticipates selling properties after holding them for some period of time. Investors often expect prices to rise over the holding period, particularly in an inflationary environment. Thus, any price increase also contributes to an investor's return.

Absorption:

The term absorption refers to the amount of space that was leased by tenants for the year, that is, "absorbed" by the market.

Value Investing:

The value investing strategy is based more on a "tried and true" performance approach where research is directed toward finding those properties that have been "overlooked" by investors and appear to be undervalued.

Contrarian Investing:

This Strategy is based on the premise that some major economic, technological, or other event will make the investment outlook for a given property type poor and "out of favor" among investors. Contrarians believe that investors tend to overreact to negative news and tend to oversell out-of-favor properties. The contrarian waits until these properties become available at very low prices and then purchase them with the expectation that after other investors realize this property sector has been oversold, a price recovery will occur.

Turnaround/Special Situation:

This Strategy is generally based on the belief that successful investments can be made by investors who see opportunities by changing or modifying the use of existing properties. For example: 1. Investors may acquire under-performing or under-managed properties. After a period of more intensive leasing, renovation, and property management, these properties can be sold one at a time, such that the total amount received when all properties are sold exceeds the initial total cost. 2. Acquire "Real estate rich" firms that own an extensive amount of real estate in their business. These firms may not realize that the market value of their real estate is not fully reflected in the value of the business and the value of the real estate are separable. consequently, a gain may be earned by acquiring the firm and then selling its real estate. The necessary space to run the business could then be leased. If successful, the value of the real estate and business after separation would be greater than the previously combined entity.

Investing in Core Properties:

This Style is based on a goal of acquiring existing, seasoned, relatively low-risk properties that are at least 80 percent leased to tenants with good credit. The goal is to realize a relatively stable cash flow with returns that are competitive with comparable properties.

Investing in Core "Plus" Properties:

This strategy combines core investment with a strategy to make minor changes in the management of the property with a releasing program or by making some limited and specific capital improvements. These latter changes tend to be very specific and are targeted toward increasing rents and outperforming competing properties in the same sub-market.

Opportunistic Investing:

This strategy involves acquiring properties from investors in financial difficulty or properties needing renovation, upgrading, or repositioning. The success of this investment plan usually depends on 1. The ability to purchase properties at a discount. 2. Management understanding of the opportunity and how to upgrade, modify, or perhaps reposition the property (e.g. From office use to retail use). the success of such an investment may also be dependent on an exit strategy such as 2a market acceptance of the repositioned assets 2b the ability to buyers to obtain financing to purchase such assets.

Growth Investing:

This strategy is based on "Discovering" through research, those properties in markets that are likely to experience significant or above-average appreciation in value. Investors in these properties believe that economic conditions favor demand for specific property types in specific growth markets. Investors using this strategy should expect to bear more risk than average as these markets are apt to be more volatile.

Investing in "Trophy" or "Blue Chip" Properties

This strategy is based on a "Blue Chip" approach to investing; that is, only very visible, well-located properties (trophy properties) should be the targets for acquisition. These investors believe that properties with some unique historical, architectural, or locational attributes will prove to be excellent long term investments.

Strategy as to size of Property

This strategy is based on a preference for properties leased to multiple tenants or leased to a single or very few tenants. These properties may be less risky because of low tenant turnover and the creditworthiness of tenants. These properties may be preferred even though they may not offer the opportunity for frequent adjustments in rents.

Arbitrage Investing:

This strategy is based on the ability of investors to recognize differences in prices that buyers are willing to pay for the same real estate investments in different markets. For example, this strategy has been used by investors who buy properties directly in private market transactions and then earn a profit by creating a publicly traded entity, such as an REIT, and issuing stock to the public.

Property Sector Investing:

This style is based on the belief that over the long term, based on economic and demographic research, one property type will outperform the other property sectors. For example, if research shows that prospects for the office sector are excellent and that this sector will outperform the retail, apartment, and warehouse property sectors over the long term, then an investor would specialize in office properties as a preferred sector investment.

Development-"Value Add"

this strategy usually involves the acquisition of land, design of the building, and a leasing program to reach stable occupancy. By embarking on this riskier strategy, investors believe that more value creation may occur through development, design, leasing, and so forth, thereby leading to superior investment returns than would be the case with investing in existing properties.