Investment Analysis

Summaries

Raw Lands:

1. determined by supply and demand. (urban land supply is NOT constant)
2. earn through land value appreciation
3. Alligator – feb with income from other sources and no feedback until the land is sold. Can be sold at distressed price if other income source is reduced
4. Illiquid
5. Low leverage
6. No tax depreciation

Residential Rentals:

1. liquid
2. income from periodic income and appreciation
3. Highly leveraged
4. provide tax depreciation and protect against inflation
5. for investor can afford large initial capital outlay and desire tax shelter

Office Buildings

1. Most of the risks are under control
2. Need very active management
3. Tenant Mix is important to value

Warehouses

1. value is a function of transportation convenience and change of material handling process
2. Income more from periodic income (instead of appreciation)
3. Minimum management involvement and good for retiree needs high cash flow
4. Can be obsolete if cannot change the handling process

Shopping centers

1. Car park is important to value
2. Risk: has to have good tenant mix
3. Need very active management

Hotels and Motels

1. Can handle conventions?
2. Good for Real Estate Investment Trust (REIT)

NOI = income – expenses (not including personal tax and financial cost)

Tax payable = (NOI – depreciation – interest) * personal tax rate

CFAT (cash flows after tax) = NOI – debt service (principal and interest) – tax payable

ERAT (Equity Reversion After Tax) = selling price – selling cost – mortgage left – tax

Recapture depreciation: selling at higher than BV has to repay tax

*** use tax rate on capital gain to calculate the tax for the portion purchasing price

*** use depreciation recapture tax rate to find tax for the portion < purchasing price but > than BV (purchasing – depreciation) (This part is the recaptured depreciation)

NPV = sum(CFAT_t / (1+r)^t) + ERAT/(1+r)^T – Equity investment (excluding borrowings)

Negative cash flow can result in multiple IRR (so use NPV)

For mutually exclusive projects, if both IRR are acceptable, due to different in cash flow patterns, it is better to determine using NPV