Texas SAE: Real Estate Investment
When it comes to real estate investments, "commercial" is _______.
"Commercial" has the distinction of being both a property type- that includes the retail and office space submarket, and an investment strategy which includes the market value, value and growth, and property mix submarkets.
When supply exceeds demand
(there's more than enough to go around), prices go down.
Segmentation by Location
A specific neighborhood, city, or region Urban, suburban, or rural A type of geography (some examples are ocean front, mountain, or desert)
Salvage Value (Residual Value)
A structure that's at the end of its useful life may be demolished, but some value can be realized if the improvements are sold.
Your client is a large developer who wants to build new retail space. She's considered zoning, construction codes, and development regulations. What other governmental influence will she also need to consider?
Any new construction projects must consider zoning, construction and environmental codes, and development regulations.
Land is immobile
Because location is a huge factor in determining value, the geographic area surrounding a parcel of land is a key value driver.
Immobility (sometimes aka fixity):
Earthquakes and other natural disasters notwithstanding, you canʼt move land. Because location is a huge factor in determining value, the geographic area surrounding a parcel of land is a key value driver. In addition, whatever is happening there—social, political, physical, and economic activity— will influence the propertyʼs desirability and value. Remember that the area where a property is located will impact its value, and any changes that occur in the area can influence that value up or down.
Environmental and Development Controls
Environmental controls Any new project will need to receive an environmental review and approval from various governmental agencies. Pressures to develop in sustainable ways mean more laws to understand and follow. Regulations also affect the sale of existing properties, from simple environmental hazard disclosures, to requirements for equipment that preserves or protects the environment. Development regulations Property developers must follow local regulations regarding density, infrastructure, traffic patterns, and the capacity of public services, to name a few. These are the regulations that ensure new developments are consistent with a city's general plan for zoning, and they not only influence, but determine, acceptable property use in an area.
Taxes, construction codes, and development regulations are all ways that ______ can influence a real estate investment and potentially increase or decrease the investment's value.
Federal and local government Investors have to be particularly cognizant of government regulations when considering a particular property for investment. These regulations include environmental controls, zoning, federal control of money, taxes, and more.
Segmentation by Investment Strategy
Fix and flip Buy and hold Wholesale Commercial Development Owner-user
Active real estate investing comes in three "flavors."
Fix and flip Buy and hold Wholesaling
Highly influenced by government policy:
Government policy impacts all industries. However, real estate and finance (the engine that drives the real estate vehicle) are two of the most highly regulated industries. Monetary policy determines funding availability, which results in either a purring real estate market or one in need of a tune up.
Special Use
Hotels and motels Entertainment (theater, theme park, etc.) Golf courses Mini warehouse/public storage Medical facilities
Government policy impacts all industries.
However, real estate and finance (the engine that drives the real estate vehicle) are two of the most highly regulated industries.
Demand and price move in the same direction
If demand is up, the price goes up. If demand is down, the price goes down.
Resale value:
In general, real estate will increase in value over time. When the investor sells the property, it's likely to be for a higher price than the price at which it was originally purchased, resulting in more profit from the investment.
Industrial
Industrial parks Manufacturing Warehouses
Rental income:
It provides one form of profit, assuming the income is sufficient to cover all the operating expenses.
Permanence:
Land doesnʼt simply cease to exist. While improvements on land will deteriorate and are subject to destruction, land itself is like Superman, minus the kryptonite allergy. It canʼt be destroyed. This is a characteristic that makes it possible to finance real estate with long-term, relatively complex arrangements, like amortized loans.
REITs
Passive Investing companies that invest in professionally managed commercial properties such as office buildings, apartments, warehouses, or health care facilities. To invest in an REIT, you purchase publicly traded shares of the company.
Limited Partnership
Passive Investing private real estate investments in commercial property. The general partner is an experienced property manager or real estate development firm. The investors are the limited partners who provide financing for the real estate project in exchange for a share of ownership.
Longevity:
Permanence and longevity are related. While land is permanent, the structures we put on the land arenʼt. They do tend, however, to be around for a long time. This makes it possible for an investor to estimate, with a fair degree of reliability, a propertyʼs potential income over time.
Passive Investing
Real Estate Investment Trusts (REITs) Real estate Limited Partnerships. Mutual funds that sell mortgage-backed securities, and you can invest with online real estate platforms.
capital preservation
Real estate investment is considered a hedge against inflation because property values typically rise over time. During the ownership period, equity builds and the property value increases. In contrast, a renter will never see the money paid to the landlord again. If the investor's goal is to make a profit, the capital used to purchase the property is preserved while it earns.
Characteristics of the Texas Real Estate Market
Real estate is an uncentralized market that's slow to respond to changes in supply or demand, and it's highly influenced by governmental policy.
Structures built on land last a long time, in general
Real property longevity makes it possible to estimate, fairly reliably, a propertyʼs potential income over time.
one thing that makes real estate investment different from other investments—like securities or bonds—is that there's the potential for earning income two different ways from the same investment.
Rental income Resale value
Wholesaling
Requirements include: Ability to find property at a deep discount Thick skin due to seller reaction to low ball offers Ability to act quickly, perhaps paying cash Ability to resell quickly Risks include: Lack of availability Getting stuck with property (unable to turn property around quickly) Paying too much up front, no profit
Buy and Hold Strategy
Requirements include: Capital for purchase Ability to cover debt with rental income during holding period Risks include: Vacancies Cash flow shortages Property value decline Tenant issues
Fix and flip
Requirements include: Working capital for the purchase and repairs Priced low enough to cover costs of repairs, holding period, marketing, closing costs, and profit Remodeling skills Eye for needed updates Risks include: Running out of money to finish repairs Inability to sell due to poor market timing
Property Type Submarkets Segmentation by Property Type
Residential, Commercial, Industrial, Special Use, vacant land for development
Commercial
Retail Office Space
Wholesaling Sid is a wholesaler. He's not interested in buying a property, renovating it, and selling it at a profit, nor is he interested in buying and holding a property as a rental. Sid makes the low-ball bid because a wholesaling investor like himself must buy low and sell fast to make a profit.
Sid already has a buyer in mind when he makes his embarrassingly low offer for a property with motivated sellers.
Residential
Single-family homes Small multi-family Apartments
Other Government Influences
Some cities, concerned about the effect of unregulated growth in an area, have enacted growth restrictions. This often causes existing properties to increase in value. Alternatively, sometimes the government steps in to encourage development. Tax incentives to develop can be very effective in the short term, but in the long run the intervention may result in an oversupply of certain kinds of property in an area, causing local property values to drop.
Financial influences
Taxes: Real estate investments are likely to be taxed not only on their profits, but also on the property itself. Federal control of money: The actions of the Federal Reserve Board will affect both the mortgage cost and supply.
Tax Shelter
The cost of purchasing, maintaining, and operating an income property can be deducted from that income, effectively reducing the amount of taxable income. The long-term investment that real estate usually represents also helps decrease the capital gains tax owed.
Slow to respond:
The real estate market spreads far and wide. Because it isnʼt centralized, itʼs slow to respond to national changes in supply and demand. Property value is highly dependent on its location; changes in the national market have little (or significantly delayed) impact on local markets. Transactions also take time, and a property may be on the market for months before finding a buyer. Stocks and bonds, on the other hand, are typically traded within seconds of a decision to sell.
Real Estate Cycles and Value in Texas
The value assigned to a property may be different depending on the reason for the valuation.
value in use
The value of a property as it's currently being used, which may or may not be its highest and best use
The value principle of change incorporates the phases of the change cycle, which are
The value principle of change incorporates the phases of the change cycle, which are
Land can't be destroyed; it's permanent
This is a characteristic that makes it possible to finance real estate with long-term, relatively complex arrangements, like amortized loans.
Real estate investors differ from traditional buyers and sellers. They have different motivations, different mindsets, and distinctly different goals that you'll need to recognize and work with in order to build and maintain investor clients
Three Investment Goals Investor clients are more strategic and less emotional. And, while not everyone who invests in real estate has the same goal, most investors are typically focused on one of the following: Earning a profit Generating capital preservation Creating a tax shelter
Uniqueness:
We've all heard suburban tract housing called "little boxes," implying itʼs all exactly the same. However, every piece of real estate is unique due to its specific location, variances in construction, and level of wear and tear.
Properties sold this way can affect the value of other homes in the neighborhood.
When a property is subject to foreclosure or a rapid sale, liquidation value comes into play.
Zoning and Construction Codes
Zoning: Plans for development, as well as the ways in which existing property is used, are affected by zoning restrictions. Zoning can affect value by restricting property use, perhaps even preventing its highest and best use. Properties that are located in a neighborhood in transition due to changing economic circumstances, including economic obsolescence, are often bought in anticipation of, or subject to, a successful zoning change. Construction codes: If the investor is a large developer or an individual who's rehabbing and flipping homes, building codes and inspections are a major consideration contributing to both project time and costs.
Low buyer demand results in
a cool or even cold market (aka buyer's market), higher inventory (supply), and lower prices.
Progression
a lower-value property gets a bump in value thanks to the nearby higher-value property.
Anticipation says that
a property's value is the total sum anticipated future benefits in today's dollars.
any real estate investment should include
an analysis of the governmental regulations that will affect it.
Plans for development, as well as the ways in which existing property is used
are affected by zoning restrictions. Zoning can affect value by restricting property use, perhaps even preventing its highest and best use.
Real estate market characteristics
are primarily the characteristics of real estate itself: 1.uniqueness, 2.immobility, 3.permanence, 4.Longevity, 5.government Policy, and 6.Response
Building codes and inspections are a major consideration contributing to
both project time and costs.
The actions of the Federal Reserve Board affects
both the mortgage cost and supply.
Real Estate Investment and the Government
certain areas in which government policies make an impact, such as: Taxes Federal control of money Zoning Environmental controls Construction codes Development regulations
A hot market (aka seller's market) has the opposite effect
due to high demand, low inventory, and rising prices.
Environmental regulations affect the sale of existing properties
from simple environmental hazard disclosures, to requirements for equipment that preserves or protects the environment.
Investment value
gives a buyer information to determine if a property's rate of return will be as expected.
The principles of value include
highest and best use, anticipation, competition, conformity, regression, progression, contribution, substitution, and change.
Contribution has to do with
how alterations to a property impact its value as a whole.
The demand refers to
how many of a particular item consumers are willing and able to buy at a given time for a given price.
Insured value
is the amount it would cost to replace or rebuild a house that's damaged or destroyed.
Substitution
is the idea that a property's value is determined by what it would cost to purchase a similar substitute property.
Market value
is the price the property would be expected to sell for after suitable market exposure, assuming no exceptional factors are influencing the seller's decision, the buyer's decision, or financing availability.
Going-concern value
is the value of the property as a functioning business.
The market in which real estate is bought, sold, leased, and exchanged is unlike other investment markets
it isnʼt centralized, so buyers and sellers donʼt all congregate in one convenient spot.
Every piece of real estate is unique due to
its specific location, variances in construction, and level of wear and tear. This describes the characteristic of uniqueness.
The characteristics of real estate that drive how it's used as an investment are
its uniqueness, immobility, permanence, longevity, its response to government policy, and its slowness to respond to market changes.
Some ways to value real estate are
market value, investment value, going-concern value, insured value, salvage value, liquidation value, assessed value, and value in use.
Pressures to develop in sustainable ways mean
more laws to understand and follow. New projects are reviewed and approved from an environmental standpoint.
Highest and best use describes a property's
most profitable use that's both legal (conforms to zoning) and economically feasible.
The principle of change refers
not only to a specific property, but to the general location. As an area goes through this change cycle, property values fluctuate as well.
Supply and price move in ____ directions
opposite. If supply is up, the price goes down. If supply is down, the price goes up.
When demand exceeds supply
prices go up. When there are fewer houses on the market, sellers can ask more for their properties. (there's less of it to go around),
When both supply and demand increase
prices tend to remain the same.
The real estate market can be categorized according to
property type, location, and investment strategy.
Property developers must follow local regulations
regarding density, infrastructure, traffic patterns, and the capacity of public services, to name a few. These are the regulations that ensure new developments are consistent with a city's general plan for zoning, and they not only influence, but determine, acceptable property use in an area.
Competition is
related to supply and demand. Multiple similar properties on the market creates competition, causing a value decrease because the supply exceeds demand. Less competition increases demand and drives pricing upward.
Regression
says a lower quality property located adjacent to a higher quality property can lower the value of the higher quality property. A foreclosure can negatively impact the value of neighboring properties.
Conformity
that value is created and maintained when a property's characteristics conform to (fit in with) its neighborhood.
The supply of an item is
the amount of that item available at a given time for a given price.
Sales Price
what a buyer actually pays for a property. It may be higher or lower than the market value as determined by an appraiser.
A property's assessed value is
what the local taxing authority thinks a property is worth.
The principle of substitution
when two similar homes are available, price will be the determining factor.
An investment strategy has bearing on
which valuation type is more relevant to an investor.
