Lesson 7: The Investment Decision: Criteria Flashcards

1
Q

what is the purpose of investment decision criteria in real estate?

A

to quantify certain measures to compare them to a predetermined benchmark

to rank properties according to the decision criteria of choice

will facilitate the decision-making process

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2
Q

what are The Rules of Thumb Techniques based on?

A

real estate income statement

similar to the traditional income statement that companies use in their annual financial statements

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3
Q

Payback Period (PB)

A

The number of years or period to recover your investment costs

ex: If the investment cost (cash outflow) is $60,000 and the cash inflow is $20,000 per year for 5 years, the PB is 3 years

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4
Q

Return on Asset (ROA)

A

This is the rate of return on asset, often denominated on a per annum basis

ex: If the return or profit is $20,000 for the year and the investment costs $100,000 (total costs of the investment, i.e. loan plus the down payment), the ROA is 20%

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5
Q

Return on Investment (ROI) or Return on Equity (ROE)

A

This is the rate of return on the down payment (the equity) on the asset, often denominated on a per annum basis

ex: If the return or profit is $10,000 for the year and the down payment or equity is $40,000 (i.e. cost of investment is $100,000) less loan ($60,000), the ROI or ROE is 25% (i.e. 10,000 divided by 40,000)

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6
Q

Gross Income Multiplier (GIM)

A

This is a multiplier or number of times. The GIM is calculated as follows

GIM = (Value of property) / (effective gross income)

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7
Q

Value of property

A

the Asking Price (if the property has not been sold) or Selling Price if property has been sold

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8
Q

effective gross income

A

Potential Gross Income (100% occupancy) less vacancy and Credit Losses

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9
Q

what do the sellers and buyers of property want regarding GIM?

A

Seller wants a high price (high GIM)

Buyer wants a low price (low GIM)

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10
Q

Net Operating Income Multiplier (NIM)

A

NIM = (Value of property) / (Net Operating Income)

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11
Q

Net Operating Income

A

Effective Gross Income less Operating Expenses (without depreciation also called capital cost allowance)

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12
Q

what do the sellers and buyers of property want regarding NIM?

A

Seller wants a high price (high NIM)

Buyer wants a low price (low NIM)

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13
Q

Overall Capitalization Rate (OCR)

A

This is a rate of return and not a multiplier

OCR = (Net Operating Income) / (Value of property )

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14
Q

what do the sellers and buyers of property want regarding OCR?

A

Seller wants a high price (low OCR)

Buyer wants a low price (high OCR)

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