Real Estate Investors

Estimating a business value is similar to appraising real property. You can use existing similar properties and add or subtract their differences to find a market value in a comparable sales analysis. Calculate the exact amount required to duplicate the exact business in reproduction analysis less depreciation. Replacement cost is to have the same building or business made using modern tools minus depreciation. The income approach is best at evaluating a business. So, you estimate the present value at expected future benefits, so you convert the present current value into a capitalization rate through the income stream. Income analysis is earning and appreciation. Most businesses produce value by ability to produce an income stream. A large portion of the value of business is calculation through income stream. Liquidation value of preferred stock, value of inventory on hand, and ability to pay short term obligations is liquidation value of a business, say if the sole proprietor dies or a partnership is dissolved, or the business fails. A business going out of business gets a liquidation analysis. Observe the laws in chapter 475 for business brokers learning regulations.

There is a real estate brokerage and a business brokerage. Real estate agents need to be experts in business brokerage. If you are selling, buying or leasing a business, you need a real estate license. A business broker is a business entity. A business broker is classified into a business enterprise brokerage and business opportunity brokerage. An asset is anything of value. Corporate stock exchange and purchase of corporate assets is business enterprise brokerage. The sale and lease of a business on the corporate lever is business enterprise brokerage. A sole proprietorship is a small business. Business opportunity brokerage is small scale businesses. A small business has a fixed amount of assets. Sometimes the real estate in a small business is the sole item of value. Business opp. broker. bus. can be lease. Most business leases are assignable. An existing lease can be assigned to the new owner if the lease says so. Tangible and intangible assets must be able to be valued by a business broker. Inventory and items that can be touched are tangible items. Business reputation and things that cannot be touched are intangible assets (license, trademark). Tangible is cash in the bank. Intangible if revenue can be got later down the road from it. Business brokerage activities usually: sale of real property and assigned lease. Chapter 475 says business broker license to sell property or assign lease. Business brokerage is not real estate brokerage. Business brokerage involves assets other than real property and bundle of right. Business brokerage involves personal property and goodwill. Goodwill is the intangible asset attributed to a business reputation and expected customer loyalty. Subtract the value of business from the value of tangible assets to find good will value. Intangible assets that increase value include patents, licenses, copyrights, trademarks, and franchises. Value of established real estate may differ from value of business. Total value (going concern value) may differ from real estate value. Nice place bad part of town or bad part of town with expensive assets. Going concern: value of physical assets against value of property. A market for a business enterprise is wider in geographic scope than markets for individual parcels of real estate. If you are brokering a business, you need to know corporate finance, business accounting, and valuation of businesses.

Accounting
Assets: entire resources of a business including tangibles and intangibles like accounts, notes receivable, cash, inventory, equipment, real estate, goodwill
Liabilities: all debts of business, including accounts and notes payable, incurred but not yet paid obligations, and long term debentures
Capital: net worth of business, amount that assets exceed liabilities
Cash flow: total amount of money generated after expenses paid

Efficient financial management is as important to profitability as good production know how. The classes and characteristics or corporate stock there are two basic types of stock: preferred and common. All corporations have common stock. Some firms do not issue preferred stock. Business brokers must be capable in providing advice and assistance to  in securities and valuations -- real estate brokers advise their principals. Refinancing the capital structure and raising additional funds is something new owners often feel the need to do. You must decide to select the proper type of security. Rate of earnings, stability of profits, voting control, tax impacts, debt or equity funds, and market conditions are factors involved in selecting funds. You must know how a firm's working capital is managed to engage in buying or selling a business. Inadequate inventory can cause lost sales or production time; excess inventory is expensive. It is dangerous to have outstanding bills, wages, and salaries. If foreseeable needs are in excess of funds kept on hand then efficiency is lost. The success of a business relies on the management of working capital. The difference between current assets and current liabilities is working capital. Estimated income and estimated net income can be shown on an income statement if all business is budgeted equally. Budgeting info. can be used for planning, borrowing, spending, and purchasing. Budget is estimating income and expense in fixed period.

Accounting is the language of business. A business broker in sale and purchase of business is fluent in accounting language.

Income statement: all income and expense -- shows business operation over time to provide basic data for firm profit and loss. Statement of net earning, statement of income, operating statement, and loss statement another name for income statement.

Balance sheet: shows state of business at particular time at end of closing day. Customarily print income statement and balance sheet at same time. Net income or loss for the period is shown on balance sheet.

Cash flow: is amount you have left after expenses paid. Payment of mortgage principal and interest and reserves for replacement are operating expenses. Depreciation does not involve an outlay of cash so depreciation is not in expense or cash flow. Does business produce taxable income, a bus. broker wants to know. Is cash flow sheltered from taxes?

Real property and personal property must be separate from depreciating assets. (asset depreciation)

Taxes play a critical role in business operations. Tax laws are forever changing. Client's have a need for expert tax advice.

Risk and leverage carry weight. There are many types of risk and leverage. You could lose everything. That is part of taking a risk. Whenever you invest, you are risking a bit or a lot. Static risk is taken care of. Static risk can be covered by an insurance company. Static risk is accident of fire and vandalism. Dynamic risk arises from changes in the economy. Dynamic risk is from the business environment changing. Dynamic risk is not insured. Dynamic risk falls in the hand of the investor whereas status risk falls in the hand of the insurer. No matter what there is risk in investing. Taking a business risk means you are averaging the actual income you get and the expenses you spend and the projected income and projected expenses. Business risk is sometimes called operating business risk. You could project to make a thousand and spend five hundred but you could really make seven hundred and spend three hundred. Projected is not actual, until actual happens. Financial risk is when the money to pay operating is coming from funds from equity, borrowing, and operating. Maybe your income is not paying your operating expenses. Financial risk is also called operating financial risk. Purchasing power risk is associated with inflation. During inflation the ability of property to produce good yield may be offset by loss of purchasing power because of inflation. What you once thought was a great investment may turn out to be a wet sock because all your profit was spent on expenses. So if you are renting out in a fixed rate contract and operating expenses go up because of inflation, you are losing money. Sometimes gross income may not keep pace with the inflation rate, therefore purchasing power is a risk because of inflation. Interest rate is a risk. Interest rate is a risk because an investor has to pay the debt service. So, debt servicing is not deducted from gross income to arrive at net income. To find IRV divide the rate of capitalization by the net operating income. So say you have a property and your lender increases your interest rate. Management stays the same. Owner stays the same. Property doesn't change. If interest rate goes up, the value of the property as an investment goes down. Interest rate is a risk you take when investing in real estate. Unless you have a fixed interest rate. Noi is divided by the required rate of return to get the value of the property. So usually if you want to invest in something, you put your money in an investment that offers you a high rate of return, in a safe place, that may even be liquid. An investment in real estate is illiquid. You may lose if you have to turn your real estate property into liquid cash. Selling real estate usually requires time and expense. There is no highly organized market for real estate. Safety risk is the possible loss of your invested capital. Safety risk is the loss of your expected earnings. Expected earnings are return on investment. Market risk and risk of default are safety risks. Interest rate goes up market value goes down. Market risk grows higher over time. By holding a long term investment in a low yielding mortgage a savings association can lose money. If an investment doesn't earn as expected then the promised earning will be lost and that is the risk of default. A liquid short term investment is best. Higher yields entice investors to less liquid long term investments. High risk = high return. Risk and rate of return are directly connected. If you leverage something you are borrowing funds to buy an asset. By leveraging you use other people's money to make more money. leverage can increase an investor's purchasing power. Buy a property for $1,000,000 and put 10% down = you increased your purchasing power because you bought a property costing 10 times what you put down. Investor's want a high return rate on equity and to increase their purchasing power. An investor wants a property that will produce cash flow in excess of the borrowed funds. Positive leverage happens to an investor when the benefits exceed the risks. Negative leverage happens to an investor when borrowed  funds cost more than they produce. An investor takes a risk for the potential risks of leverage. If cash flow is reduced by vacancy or over-zealous earning forecast than the investor will give out of pocket or default on the mortgage. Higher interest rate and higher loan to value ratio more cash flow from operations required to pay the interest rate and principal.

"To understand the impact of leveraging, consider a property that costs $100,000 and produces net income of $10,000 per year. If purchased for cash, the investor's annual rate of return on the equity invested is 10% ($10,000 income ÷ $100,000 equity). Assume instead that this investor leverages the purchase by borrowing $75,000 at 8% ($6,000 interest) annually and makes a down payment of $25,000. The $10,000 income earned from the investment in the previous example is reduced by the cost of financing to $4,000. The resulting return on equity invested is an attractive 16% ($4,000 income taking into account financing cost ÷ $25,000 equity = .16 or 16% rate of return on equity). This is positive leverage at work!"

Investment real estate value is affected by supply and demand. And a number of forces influence supply and demand of real estate. Each type of investment property ie agriculture, commercial, industrial, residential, and business has it's own particular set of considerations to recognize. Location, physical characteristics, and legal characteristics affect the value of a property (value creating influences affect the economy). An external force affecting a property is the economy. Local and national economies must be considered. Economy: wealth and resource of a country esp. in terms of production and consumption of goods. New development of existing properties include the existing stock of available units and local economic considerations. Supply and demand are important considerations. An investor would be ill advised to begin construction of a new apartment complex in an area already experiences an in-flux of apartments. The productivity of the property would be impaired to the extent the investor could not receive a max return on investment. The real estate market and national economy are influenced by national debt, employment levels, interest rates, availability of credit, and construction costs. Location is top priority in real estate. Location alone creates a difference in property therefore no two properties are alike. Each property is unique in a fixed location. Investor preferences for location vary. Situs is the preference by people for certain location. Situs is an economic characteristic. Location influences value, and situs is personal preference. Immediate surroundings greatly impact real estate property because a property is a fixed location. A change in land use can have a positive or negative affect on piece of real estate. A destination property is when an investor tries to investor tries to funnel money to the investment property like a service industry like a barbershop, repair shop, local real estate agencies, and financial institutions. An origin property is regarded as an export activity. An origin property is as immobile and fixed as a destination property. When a community analyzes its economic base, origin properties are regarded as export activities, because origin properties are assembly plants, distribution centers, and manufacturing facilities. An origin property must originate something (like a product) to seek out an income stream. An origin property is immobile and fixed. Origin properties though are not as situated or attractive because not on access routes. Seldom are two properties found with identical physical characteristics. An investor could make decisions based on the decision alone of location if all properties were exactly the same. A building's size shape and form are not the same, so that decision cannot be made, unless the size shape and form of building are the same. In evaluating properties to invest in, site has a lot to do with it. An investor evaluates like an appraiser evaluates. Use units of comparison to evaluate. Appraisers use square feet, front feet, and acres as units of comparison. Comparison by size is practical because they permit direct comparison for competing sites, regardless of differences in size or shape. Residential properties the square foot is used. Commercial properties front feet or square feet used. Agricultural, large tracts of undeveloped land and farm acreage is used. Topography is highly related to an investor's considerations. A site's surface, subsoil structure, orientation and view, and exposure to or protection from noxious environmental influences are elements for consideration in a thorough site analysis. A potential real estate investors will typically have one alternative to buying an existing property: to build a new building on a vacant piece of land. The cost of building a new building on a vacant land is the cost comparison for a investor investing in an existing building. If the existing building has deficiencies the cost of the deficiencies from the cost of the new building is the market value of the existing building and land. Market value is not investment value. The investment value is the value or worth of the building based on the investor's goal: Investor's have individual standards for reaching a goal, and the investment value is the worth of a building or property to that individual investor. The investment value is not only the return (appreciation) or yield, but also the cost. Three considerations affect a building's investment value:

1) Exterior considerations: the exterior is the first impression the buyers, tenants and investor make on the property.  Exterior is called curb appeal (visual image). Important are the building age and design, the landscaping, walking and parking area. Building needs repairs? Lacking anything? Building maintained? Minot repairs or major repairs (cost of repairs)? Is a repair curable (get your money back) or incurable (don't get your money back)?

2) Interior considerations: make a record as you progress through property. Inspect and remember. Write down the number and condition of each unit, (size, layout, number of rooms and baths, location and view of each room), the overall physical interior quality, condition of plumbing, hardware, carpeting, walls, appliances, electrical fixtures. Condition of halls, rooms, bathrooms, foyers, entrances, laundry room, storage room, recreation facility.

3)Building operating expenses: investor's cannot control the cost of insurance and property taxes. Investor's should examine all operating costs before investing. Have previous owners allocated amounts to a reserve for replacement of short-lived items, ie appliances, carpeting, drapes? Do the cost of repairs reflect the condition of the building. How much more do you need to spend in the future? Operating expenses may deter investors from good looking inside and outside property. Unusual expenses include building location, orientation, and design. Faulty design could lead to a high electric bill, and glass walls and inadequate insulation could lead to a high expense of cooling and heating.

An investor in real estate is investing in more than buildings, land, and equipment. An investor is investing in legal bundle of rights and protected interests. The value of an investment is influenced by the degree to which rights and ownership are present.

An investor must determine the type of legally entity to best accomplish investment objectives. Legal ownership forms are available: sole proprietorship, tenancies in common, joint tenancies, limited partnerships, corporations, business trusts, and REITs. Whether a property is supposed to show a tax loss or increase determines the type of form to use. Tenancy in common is used when the desirability of survivor ship feature is in place. Liability protection is with corporations and limited partnerships. Corporate form is most complex. Having the ability to raise capital by investing in stock is a plus of the corporate model. Each form of ownership offers advantages and disadvantages. Seek professional advice to learn the greatest net advantage. Risk is inherent in acquiring title to real property. A legal risk is associated with legal real estate investment. Warranty deeds and title insurance do not diminish risk. Potential problems part of legal risk: liability for accidents, tenant suits, noncompliance with ordinances, and these against property owner's. Does the use of the site permit the highest and best use? The legal use of land is prescribed by zoning ordinances and represents the highest use of the site. Keep the concept of highest possible land use in mind when deciding alternative types of available improvements and uses. Appraisers have developed a method to use in making such a decision.


There are advantages to investing in real estate. Real estate produces a high rate of return in comparison to other investment types. Real estate investments receive tax benefits even though the real estate reform act in 1986 affected the real estate investment type. So you get tax advantages investing in real estate. Real estate is the best protection against inflation. Real estate maintains or increases purchasing power. Sale price of real estate increases faster than market basket prices sich as transportation, food, clothing, cost of housing, medical care, and entertainment. If piece of real estate is acquired at or below market value, the price will increase more than the basket values. Real estate property increases faster than inflation. Appreciation, the increase in worth or value of the property, is faster than inflation. Price movements affected by inflation: transportation, medical care, entertainment, housing, food, clothing, entertainment, and other goods. Each of the thousands of items in a market basket is assigned a weight according to the relative importance compared to the consumers budget. The CPI measures the average change in prices over time for a fixed market basket of goods and services. The CPI which is the consumer price index, is published by the Bureau of Labor Statistics. Real estate provides a hedge against inflation. By using 70-75% of borrowed funds an investor can increase return on equity by leveraging real estate piece. Real estate is highly leveraged. An investor can borrow 70-75% of the appraised value. The goal of leveraging is to increase one's yield on investor's own capital by using borrowed funds. An investor's equity grows when a property increases in value and the mortgage value is reduced. So advantages to investing in real estate are: equity buildup, leverage, hedge against inflation, tax advantages, and rate of return.

Liquidity is an ability. A real estate investment is not liquid; it is illiquid. Market value is neither the buyer or seller are under compulsion to buy or sell and the property is exposed to the market for a reasonable amount of time. A disadvantage in investing in real estate is illiquidity. Liquidity is able to sell investment quickly without loss in capital. But selling quickly conflicts with market value. Stocks are bought and sold on the international marketplace. But real estate is local. An investor is interested in a particular geographic area. Investors are interested in a particular property type. Investing in real estate tags along attorney, property managers, and financial consultants. So you will need expert advice on investing in real estate. A property must be cared for and maintained so real estate investment is labor intensive. A piece of real estate must be managed. A real estate investor can be exposed. Risks in real estate include increased property taxes, increases cost of operations, and losing the invested capital. So real estate has disadvantages such as liquidity, management, risk, need for expert help, and the market being local in nature, not international.

Investor considerations:

Individual financial status. Income tax bracket. Motives for investing. Access to credit. Real properties meet different types of investor objectives.

Business brokerage is not real estate brokerage. Business brokerage requires special knowledge. Business brokerage includes accounting. Businesses can be appraised just like homes can be appraised.

• appreciation: property increases in monetary value
• asset: property owned by a person or company regarded as having value available to  meet debts, commitments, or legacies.
• balance sheet: statement of assets, liabilities, capital of a business at a particular point in time, detailing the balance of income and expenditure over the preceding period.
• cash flow: total amount of money being transferred into and out of a business, especially affecting liquidity
• dynamic risk: dynamic (constant change, activity, or progress)
• going-concern value: a business that is operating and making a profit
• goodwill: established reputation of a business regarded as a quantifiable asset, as represented by the excess of the price paid at takeover for a company over its fair market value.
• income statement: income (money received on a regular basis for work or through investments).
• investment: a thing that is worth buying because it may be profitable or useful in the future.
• leverage: company's debt to equity ratio -- the ratio of a company's loan capital (debt to the value of its common stock (equity)
• liquidation analysis: liquidation (convert assets into cash)
• liquidity: cash, the availability of liquid assets to a market or company
• negative leverage: negative (a number less than zero)
• positive leverage: positive (a number greater than zero)
• real estate investment trust (REIT)
• risk: possibility of a financial loss
• static risk: static (lacking in movement, action, or change)

Types of real estate investments and risks involved with investing in each type. Also the advantages and disadvantages of investing in real estate. A Florida real estate licensee is allowed to sell investment property and therefore it is important a licensee knows a investment analysis. If you want to find an expert in all types of properties, call a real estate broker. Untrained and unguided people could mess up your investment; you can be rewarded for negotiating a purchase or sale but you have to know what you are talking about. A knowledgeable professional can avoid legal action by providing sound advice. Brokers have gone to court over uninformed advice because the course of action was not properly analyzed. A real estate broker is in business to provide professional help and guidance to potential investors in real property. Who help to turn to than a real estate broker? A client has confidence and trusts a broker. Therefore, the licensee must be qualified. Expertise is the one major commodity that licensees can offer the public. You might know a lot but you also have to know when to call an accountant or an attorney on certain matters. Consulting is part of being a professional. Familiarization is the first step in developing real estate expertise in real estate investment matters.

An investment is the outlay of an investor's money in anticipation of an income or profit. Equity is an investor's own funds and investor's also use borrowed funds. If you want to determine which real estate investments will achieve an investor's objectives perform a real estate investment analysis. 
INVESTOR'S WANT SAFETY OF PRINCIPAL, PROTECTION AGAINST INFLATION, LIQUIDITY, INCREASED INCOME IN THE PRESENT AND FUTURE, AND TAX ADVANTAGES ARE WHY INVESTOR'S ARE MOTIVATED TO BUY OR TO BUY A COMBINATION OF OBJECTIVES. A limited partnership may be formed for an investor to invest in real estate. A real estate investment trust fund can be formed to invest in real estate. A REIT real estate investment trust fund offers investors the opportunity to invest in income producing real estate properties. A multifamily community, shopping center, retail mall, and office property is usually that particular type of property that REIT's invest. A mortgage secured by a real property and a professionally managed portfolio of real property are ways REIT's provide their means. A stockbroker can sell you a REIT. An REIT is similar to a mutual fund. An REIT offers advantages of skilled centralized management and continuity of operation. An REIT is attractive because it offers diversity and liquidity.

Agricultural, commercial, residential, industrial, and business are the types of real estate investors can choose from.

Residential include single family homes, condominiums, town houses, apartments, and other multi-family complexes. Investing in an apartment complex is key if the predetermined amount of time will get you your money back. (definitely recover invested capital).  Investor will if the rate of return is in existence. Apartments are not the only income producing residential real estate type.

Property tax, location, effective gross income, and operating expenses should go into assessing the desirability of an apartment complex. To make sure the existing property has been well maintained make sure to study the maintenance records and repair records. Deferred maintenance is when there is a lack of maintaining property.

Retail and office property are commercial types of real estate investments. Regional malls, shopping centers, and downtown commercial are retail properties. Operating expenses and existing leases characterize the nature of existing shopping centers. Do the leases allow for appropriate costs to be shifted from tenants? To investors participate in tenant income from sales? Do you know how much of the original term remains on the lease? The main attractions of investing in office properties is if the leases renew and sign long-term leases.

Manufacturing, assembly, and distribution are industrial types of real estate investment properties -- in urban areas. Because of the need to ship by air, rail, and road (truck), industrial sites need to be located next to rail ways, airports, and expressways aka transportation facilities. 

Investors scoop up rural properties on a track at urban growth. Who knows how long you will get a return on your investment for a long time from now urban development?

Any interest in business opportunities or business enterprises is real estate investment. Stock of a corporation is real estate and so is the sale or lease of a business or the goodwill of a business.  

There are many advantages to real estate investments.

Real estate produces a high rate of return for investors. Real estate investments highly reduce tax rates. Investors receive tax benefits; they stuck through the tax reform act of 1986.