What is an "Appropriate" Investment Return?

Question 1

When do we calculate returns?

Answer 1

1. ex post return
2. ex ante return
3. periodic return

Question 2

ex post

Answer 2

Examination of historical returns useful for estimating future performance, judging past performance of management, and to understand the real estate environment.

Question 3

ex ante

Answer 3

Estimation of future expected returns, helps in making decisions in the present.

Question 4

periodic returns

Answer 4

measurement of investment growth over one single period of time assumring all cash flows occur at the beginning and the end of the period.

Question 5

What are the five stages of the real estate cycle?

Answer 5

1. concept to commitment
2. commitment to closing
3. Development
4. Operation
5. Harvest

Question 6

In the real estate cycle when do inflows and outflows occur?

Answer 6

1. Concept to commitment —- minimal cashflows
2. Commitment to closing —- signifcant outflows
3. Development —- signifcant outflows
4. Operation —- moderate inflows
5. Harvest — signifcant inflows

Question 7

Finance

Answer 7

The study of cash flows

Question 8

Investment

Answer 8

the study of returns

Question 9

income return

Answer 9

aka Current Yield relevant to investor income objective

y_t = cash flow_t/value_t-1

income return = cash flow of period/value

Question 10

Total Return

Answer 10

r_t = y_t + g_t

total return = income return + appreciation return

Question 11

appreciation return

Answer 11

g_t=Value_t - Value _(t-1)/Value_t-1

the change in asset market value during the period t expressed as a percentage of asset value at the beginning of the period. Relevant to investor growth objective

Question 12

What competencies are revealed in the periodic return?

Answer 12

income return = compentency in management

appreciation return = comptency in big picture

Question 13

Expected Return

Answer 13

E_r=r_f + E_(RP)

Expected Return = Risk Free Rate + Expected Risk Premium

Question 14

What is the Geometric Average a good tool for?

Answer 14

Calucalting the multiperiod appreciation returns, because appreciaiton returns are compounding.

Question 15

What is a geometric average not a good tool?

Answer 15

Calcuating the Total Multiperiod Returns, and the Income Returns because cash flows are non-compoudning.

Question 16

What is a shortcoming of periodic return anaylsis?

Answer 16

Logistcally difficulty- Requires intermeidate valuations

Doesn’t caputre the story of investmetn over the entire holding period.

Question 17

What is the arithmetic average good for?

Answer 17

Best forecast of the return for anyone future period.

Question 18

What is an IRR?

Answer 18

Money weighted average which has the discount rate such that the NPV is zero.

Equivalent annualized rate of return you’re earning on your money which is invested in the entire project.

Question 19

return

Answer 19

A measurement of investment performance.

Simply what you get minus what you put in.

Question 20

What are the 9 types of risk in real estate?

Answer 20

1. business risk
2. financial risk (leverage)
3. liquidity risk
4. inflation risk
5. management risk
6. interest rate risk
7. legislative risk
8. environmental risk
9. due dilligence/projections risk