What Are Capital Markets and How do They Work?
Real Estate competes with other investments on a risk/return basis.
Debt ranges from 0-100%, and normally 50-80%; equity ranges from 20-50%.
Debt is repaid from project proceeds before equity.
Four Types of Real Estate Investments
Financial Productivity (NOI)
Gross Leasable Area (GLA) = Gross Floor Area for tenant occupancy and exclusive use
Potential Gross Income = GLA x annual Rent
Effective Gross Income (EGI) = Potential Gross Income x Occupancy Rate (or minus Vacancy Allowance)
Typical Operating Expenses:
Utilities, Janitorial, Maintenance, Security, Professional fees, Taxes, Insurance, Management, Leasing, Cost of new tenants.
Net Operating Income (NOI) = EGI – Operating Expenses
Cap Rate = NOI / Price
Cap rates are set by the market
Rate of Return on Total Capital = (Annual NOI / Property Cost) X 100
Return on Equity or Cash on Cash Return = (Before Tax Cash Flow / Equity) X 100
*BTCF = NOI – Debt Service
How to Improve the Value or Investment Returns of a Property Investment?
1. Reduce cost to develop
2. Get lower interest rate
3. Increase NOI
4. Lower risk to future income, thus discount rate