REAL ESTATE INVESTMENT

REAL ESTATE INVESTMENT??????
Real estate investing involves the purchase , ownership , management, rental or sale of real estate for profit.

Real estate is an asset form with limited liquidity relative to other investments, it also capital intensive and highly cash flow dependent.

Examples of real estate investment

• Agricultura l Land Examples • Residential of real Property estate investment • Farmhous es • Urban Land

What does investment does???
Investors seek current or future income or sometimes both

Future income might be used for personal consumption at a later date or for future generations

Aggressiveness of investor depends on risk preferences

Steps in investment decision process
Estimate the stream of expected benefit

Adjust for timing Differences among expected streams of benefits flow in from investment alternatives

Adjust for difference in perceived risk associated with the alternatives

Rank alternatives to the relative desirability of perceived risk return combination they embody

Real Estate -Advantages
Emotional Satisfaction Huge Capital Appreciation
Savings of Rents
Easy availability of Home Loans Tax Incentive

Real Estate –Disadvantages and Risk
Lack of Liquidity Management requirements

Depreciation of Value
Government Controls Legislation Legal Complexity

Goals of financing in real estate

Long term goal

Short term goal

Nonfinancial goal

HOW DO WE MEASURE RETURNS
Net operating income=All positive cash flow- recurring expenses
Tax shelter offsets : depreciation tax credits, carryover losses reduce tax liability charged against income from other sources

The ratio of NOI X100 = Capitalization rate (%) purchase price (used as a measure of the performance of an investment property)

Equity build-up increased equity/debt ratio.

Capital appreciation the increase in market value of the asset over time, realized as a cash flow when the property is sold.
“Real Estate investments"

4/12/2012

Sources of finance

Equity Debt

• Commercial Banks (Domestic and Foreign) • Insurance Companies • Savings and Loan Associations • Non-Bank Financial Institutions • Securitized Lenders • Mortgage Real Estate Investment Trusts • Pension Funds • Government Sponsored Entities • Opportunity Funds • Mezzanine Investors

Sources of debt financing

Mortgage Real Estate Investment
Mortgage Real Estate Investment

Asset Backed Securities

Mortgage Backed Securities

Commercial Mortgage Backed Securities

CMBS – What are they?
Cash Flow Structure

• Commercial MortgageBacked Securities (CMBS) are securitizations of mortgage loans backed by commercial real estate .

Risk

• The credit risk comes
from the fact that the commercial mortgages underlying the bonds are not guaranteed and can, of course, default

investment funds to purchase certificate

5 4

Investor below grade Investor Rating agencies
8
Pooling & servicing agreement Loan sold to CMBS trust
Primary servicing contract

Principal & interest payment 10
Controlling class mass right to replace special servicer

CMBS Trust (REMIC)
6

Master servicer
Principal & interest payment

3

7

Loan proceeds

ORGINATING LENDER/PRIMA RY SERVICER (MORTGAGE BANK)
2 1 9

SPECIALSERVI CER

Loan proceeds

OBLIGOR

11 Workout or foreclosure

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