978-0324787504 Chapter 27 Lecture Notes

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1 Chapter 25/27

CHAPTER 27/25: Investing in Real Estate

I. Discuss the Benefits of Real Estate Investing

A. Cash Flow

B. Tax Shelter

C. 1987-1988 Tax Rules

D. Loss Limitations

II. Give examples of Calculating Depreciation

III. Define Gain on Sale, and give examples Explain capital gain taxes and the future.

A. At-Risk Rules

B. Installment Sales

C. Construction-Period Expense

D. Investment Tax Credits

E. Rehabilitation Tax Credits

F. Low-Income Housing Credit

G. Explain the “Watch List” of new tax

developments

VI. Define Equity Build-Up

VII. Define Leverage

VIII. Explain the alternatives of Property Selection

A. Vacant Land

B. Houses and Condominiums

C. Small Apartment Buildings

D. Medium-Sized Buildings

E. Large Apartment Buildings

F. Office Buildings Tie into economic base, age distribution, and

govemmen-

IX. Explain how investment Timing affects an taI impact on real estate issues.

investment

A. Initial Land Purchase

B. The Project Completion date

C. First Decade aging

D. Second Decade aging

E. Third & Fourth Decades aging

F. Explain how Building Recycling and

Demolition affect an investment decision

X. Define and discuss GLITAMAD

XI. Explain the process of Developing a Personal Emphasize how much an investor must know to

make a

Investment Strategy property investment strategy. It’s education, not

a 3-hour

A. Risk Taking “hype” seminar, that makes good investments.

B. Debt Repayment

C. Valuing an Investment

XII. Discuss the use of Limited Partnerships in Emphasize and discuss other ownership issues

from earlier

investments chapters and compare.

A. Property Purchaser Methods

B. Property Management

C. Financial Liability

D. Investment Diversification

E. Service Fees

F. Pitfalls

G. Master Limited Partnerships

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XIII. Explain the federal and state Disclosure Laws Explain the lack of investor control.

a(ecting real estate investments

A. The Prospectus

B. Blue-Sky Laws

C. Governmental “Regulation” Stress education and risk-taking as a free

XIV. Show how effort and Courage are the final enterprise theory — no one can guarantee

success.

determinations

Chapter 27 in hard back text, Real Estate Principles, and chapter

25 in soft back text, Real Estate an Introduction to the

Profession.

Real estate investors basically take two risks: They may never

obtain a return on their investment, and they may never

recover their investment. This chapter introduces you to the

benefit and dangers of investing. Cash 4ow, tax shelters, loss

limitations, capital gain, tax law changes, equity buildup, and

leverage are just a few of the topics covered. The chapter also

deals with property selection, investment timing, development

of a personal investment strategy, valuing of an investment,

limited partnership, and disclosure laws. The chapter concludes

with a brief discussion on the effort and courage it takes to be

an investor.

3 Chapter 25/27

Page Ref.

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453 447 Opening Remarks Start this chapter with a general overview of the advantages of

investing in real estate, then survey the class to determine their

attitude toward the advantages and disadvantages of investing in

real estate versus stocks and bonds versus precious metals and

minerals versus deposits (e.g., money market accounts), etc.

453 450 Benefits of Real Stress: Be certain to stress each of the bold printed terms in this

Estate Investing chapter. They are critical to understanding an investor’s

“language.”

454 451 Tax Rules Stress: The minimum depreciation period for residential real

estate is 27 1/2 years. It is 39 years for commercial property. If pur-

chased before 1987, property is depreciated at whatever deprecia-

tion it started with.

456 452 Depreciation Stress: Distinguish straight-line depreciation and accelerated

Calculation depreciation. Also, land may not be depreciated.

457 452 Capital Gains Stress: New capital gain rates. Affect real estate investment?

458 454 Watch List Local Distinction: Address any new, pending, or speculative tax

changes.

458 454 Equity Build-Up Stress: when one sells a property for $100,000 he does not

necessarily put $100,000 into his pocket. Only the equity goes

into the owner’s pocket.

458 455 Leverage Stress: In the 1970s and early 1980s, when real estate prices

increased so rapidly, it made sense to “borrow money to make

money.” Today, however, an investor must compare carefully the

cost of borrowed money versus his return.

459 — Property Selection Stress: Briefly address the pros and cons of each of these

investments. Stress that each investor’s needs are unique.

459 — Vacant land Stress: Vacant land is not a good tax shelter, but may be a good

investment if there is sufficient demand to cause a significant

increase in value.

462 455 Investment Timing Stress: All properties go through a long-term cycle: new, stable,

declining. See Figure 27.2 (page 465).

465 — Valuing an Investment Stress: Figure 27.3 (page 466), appraiser versus investor.

466 456 Limited Partnerships Stress: The tree advantages of a limited partnership and why it

has become popular.

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471 457 Wrap-Up 1. Explain equity build-up. (Each mortgage payment reduces the

amount owed on the loan; appreciation of the property

increases what it will sell for. The new sale price minus the

amount remaining on the loan is equity build-up.)

2. What are the minimum depreciation periods for residential

and commercial property purchased today?

(Residential is 27 1/2 and commercial is 39 years.)

3. When in the life cycle of improved real estate investments is

the least risky? (When the building is finished and filled

with tenants, but that is the time with the least return. The

most risky is at the beginning and the end of the cycle.)

4. How do the appraiser and the investor’s view of value differ?

(An appraiser solves for value; the investor solves for return.)

5. What are some of the reasons for the popularity of limited

partnerships? (Allows the small investor to get in, general

partner does the work, limited financial liability.)

6. Explain the difference between negative and positive cash

flow? (Positive is the money left over, cash in the pocket

versus negative when the investor must contribute money to

keep the project going.)