1. Chapter 17 Investing in Income-Producing Real Estate Advantages of Real Estate Investment –Attractions of real estate as an investment Cash flow from operations Appreciation Portfolio diversification Financial leverage

2. Chapter 17 Investing in Income-Producing Real Estate Disadvantages of Real Estate as an Investment –Large amount of capital required –Risk, particularly liquidity risk –Changing market conditions (overbuilding)

3. Chapter 17 Investing in Income-Producing Real Estate Financial Decision Making –Goal is wealth maximization –Using the NPV rule –Using the IRR rule

4. Chapter 17 Investing in Income-Producing Real Estate The Discounted Cash Flow Model –Initial equity investment –Forecasting after-tax cash flow (ATCF) Calculating net operating income –Potential gross income (PGI) –Vacancy and credit losses (VCL) –Effective gross income (EGI) –Operating expenses (OE) –Net operating income (NOI)

5. Chapter 17 Investing in Income-Producing Real Estate The Discounted Cash Flow Model –Before-tax cash flow (BTCF) NOI less Debt Service –Taxes from Operation NOI Interest Expense Depreciation (DEP) –27.5 years for residential, and 39 years for nonresidential Taxable Income Marginal Tax Rate –After-tax cash flow (ATCF)

6. Chapter 17 Investing in Income-Producing Real Estate After Tax Equity Reversion (ATER) –Gross sale price –Less Selling expenses –= Net sale proceeds –Mortgage Balance outstanding –Before-tax equity reversion (BTER)

7. Chapter 17 Investing in Income-Producing Real Estate After Tax Equity Reversion (ATER) –Before-tax equity reversion (BTER) –Book value –Taxable gain –Taxes due on sale (TDS) –After-tax cash on sale

8. Chapter 17 Investing in Income-Producing Real Estate Other Performance Measures –Cash-on-cash return –Operating expense ratio –Debt coverage ratio

9. Chapter 17 Investing in Income-Producing Real Estate REITs –As an alternative to direct investment in real estate