Category: sub20-fin591

Module 7: Current Market Conditions

Review:

  • Monetary Policy
  • Deregulation

Presentation:

Video: Discussion Commentary – as promised in the discussion thread below, here are some thoughts to go along with my replies to various comments, questions and concerns.

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Final Project Instructions

Since Bb is down this weeks, it seems like a good time to provide details on the final project. Feel free to submit a comment (use the form at the bottom of this post) so I can respond to questions for all to see.

I’ve broken the project into 2 pieces. The first piece is essentially a rough draft and counts toward your regular assignment for Module 7. The second piece is the final product and the presentation.

Assignment 7: Investment Proposal Presentation Outline (80 points)

  1. Identify a commercial investment property
    1. No Single Family homes
    2. Multifamily Residential (Apartment Building) is preferable
    3. Office or Retail or other commercial is okay with permission
    4. Minimum 10 units
  2. Prepare a PowerPoint presentation you will use to pitch to investors 
    1. Include a valuation estimate 
    2. Include a complete ROI analysis
    3. Include estimate of up-front capital required

Assignment 8: Final Project Presentation (200 points)

  1. Preferred: Present your investment proposal live (10-15 min) during a Zoom conference (date/time TBD), or
  2. Optional (if #1 isn’t possible): Record a video presentation.
    1. Video quality isn’t terribly important. Your phone camera/recorder is sufficient. The video doesn’t need annotation or professional touch ups.
    2. Audio quality IS important – I must be able to understand you
  3. Files to submit
    1. PowerPoint File
    2. ROI Analysis spreadsheet
    3. Video (if applicable)

So, Step 1 is to identify your commercial property. It should be listed for sale. These properties are more difficult to find. You won’t find them on Zillow. Some are listed on the MLS but some aren’t. Instead, you’ll have to use a website like LoopNet. There may be other good websites. Let me know if you find a good one!

Step 2 is valuation. The reason multifamily residential is preferred is because it’s fairly straight forward to estimate value. If you choose a different type of commercial real estate the valuation step may be trickier.

Valuation metrics for multifamily residential:

  • Video Explanation
  • Price per unit
    • Simply divide asking price by number of units
    • For example, if a 20-unit building is listed for $1,000,000
    • Price per unit = $1,000,000/20 = $50,000 per unit
  • Gross rent multiplier
    • Estimate annual rent (monthly rent per unit x units x 12 months)
    • Divide list price by annual rent
    • For example, if a 20-unit building generates $725 per unit
    • Monthly rental income is $725 x 20 = $14,500
    • Annual rental income is $14,500 x 12 months = $174,000
    • Gross rent multiplier is $1,000,000/$174,000 = 5.7 (rounded)
  • Cap rate (capitalization rate)
    • This is the most commonly used metric, at least among commercial real estate agents and brokers
    • It’s similar to Gross Rent multiplier but based on net income
    • You calculate net income by estimating annual rent and annual expenses, but typically without cost of mortgage financing.
    • Let’s say the 20-unit building costs $8,000 per month to run and maintain. So, annual operational expenses = $96,000
    • Net income is then $174,000 – $96,000 = $78,000
    • Cap rate = $78,000/$1,000,000 = 7.8%
  • Your Final Project submission and presentation should include each of these three valuation metrics.

Step 3 is ROI analysis. It’s basically the same deal as the single family ROI analysis you already completed. But some of the numbers may be more challenging to estimate. Don’t worry. I’ll help.

I’ll provide more details here as we go along.

Questions? Submit below.

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Module 6: 2008 Mortgage and Housing Crisis

Review:

  • REITs

Presentation:

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Module 5: Real Estate Investment Trusts (REITs)

Review:

Presentation:

Assignment:

  • Some clarification on the REIT assignment.
    • Choose 2 publicly traded REITs.
    • You can choose any sector but if that makes the menu feel too big then just focus on Multifamily Residential
    • For each of the REITS you choose, I want a 1-page summary
    • Don’t over-think this. There’s no *wrong* way to do it.
    • Just tell me what you think is important about the 2 REITs you chose.
    • You can write a few paragraphs or highlight some of the metrics like recent performance, dividend yield, market cap, etc.
    • Why would you want to own this stock?
  • Due date: Aug 8th
    • Since you’ve been patient with me I’ll be flexible here too.
    • You can have all this coming week to submit your REIT summaries.
    • Fair enough?
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Module 4: ROI Analysis

Review:

  • Comparable Sales Analysis

Presentation:

  • Video Lecture
  • Pro Forma ROI Analysis
    • ROI worksheet
    • Begin with Valuation – what’s the property worth?
    • Estimate rental income – fair market rent?
    • Estimate expenses
      • Property taxes
      • Insurance
      • Maintenance
      • Repairs
      • Management
      • Utilities
    • Use an amortization schedule
      • Calculate interest payments
      • Calculate principal payments
    • Estimate tax benefits
      • Depreciation
      • Tax shelter
      • Tax savings
    • Appreciation?
    • Estimate ROI
      • Total
      • Annualized
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Module 3: Comparable Sales Analysis

Review:

  • Mortgage Financing

Presentation:

  • Video Lecture
  • Comparable Sales Analysis or Comparable Market Analysis
    • A realtor might say, “let me run the comps” on this property
    • Find similar properties recently sold (typically 3+)
      • location, size, construction style/materials, etc
    • Calculate price per square foot
    • Apply price per square foot to your property
    • Adjust for key valuation drivers
      • Identify key value differences (e.g., 2-car garage, solar panels, swimming pool, etc), if any
      • Estimate valuation difference and +/- value
    • Investopedia Video
  • Estimate value of a property listed for sale

Assignment:

  • Comparable sales analysis exercise
    • Identify a target property
    • Identify 3+ comparable properties, recently sold
    • Calculate Price per SqFt for each comparable property
    • Identify differences between each comparable and the target property (e.g., additional bathroom, finished basement, 3-car garage, etc)
    • Make price adjustments (e.g., +$10k, -$5k) to compensate for differences
    • Calculate an estimated fair market value sales price for target property

Optional Videos:

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Module 2: Mortgage Financing

Review:

  • Why Study Real Estate
  • How to Buy Real Estate

Presentation:

“You’ll always run out of money before you run out of good deals.” – A. Gilad

  • Historical Mortgage Rates
  • Mortgage 101 – video series at realtor.com
    • Basics
    • Rates
    • Credit Rating
    • Down Payment
    • Home Loans
    • Mortgage Process
  • Mortgage Types
    • Fixed vs ARM
    • 10, 15, 20, 30 – which amortization?
    • 1, 3, 5, 7, 10 – which initial time period (before ARM rate adjusts)?

Reading

  • Here’s an article from the New York Times I’d like you to read for discussion this week:
Rising-Seas-Threaten-30-Year-Mortgage-NYTimesDownload
  • It’s also posted in Bb for your convenience.
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Module 1: Introduction to Real Estate Investing

Presentation:

Discussion Question:

  • What, if any, experience do you have buying or selling real estate?
    • No experience is required for the class but it helps me to understand who has already done some buying and/or selling and to what extent they’ve been involved in the process.

Assignment:

  1. Complete this Real Estate Survey.
  2. Submit your survey responses on Bb.
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