2. Key Questions… What? – Identify key terms and concepts that are important to real estate finance decisions Why? – Explain why those terms are important How? – Illustrate how those terms and concepts are applied in practice

3. The Basics Mortgages Traditional Finance Methods Alternative Finance Vehicles Fixed rates, variable, CPM, reverse annuity, price level, risks, yields, incremental costs, LTV, refinancing, prepayment Residential, underwriting, closing, settlement, corporate real estate, project and land development financing Course Map Notes, mortgages, default, foreclosure, bankruptcy, time value of money, compounding, yield, IRR Ventures, syndicates, secondary market, pass through securities, CMOs, MBS, CMBS You Are Here !!!

4. Schedule 4

5. Open House Today Informal – drop by my office (N-305) 2:30 – 4:30 Learn more Yummy Snacks 5

6. Real Estate Club The BEST club at MTSU Open to ALL majors Learn things that apply to the rest of your life Make some awesome friends Hang out with creative, entrepreneurial dudes Limited space, act now, while supplies last! 6

7. Homework… Bring your resume and post PDF to course discussion by next class

8. Today More Introductions So, what the heck is “real estate finance” and why do we care about it? Articles / News Chapter 2 – Intro Dynamic Terminals 8

9. Introductions Index Cards – Name and nickname – Major / Minor – When you graduate – Interests and what you do for fun – Home town – Your interest and/or background in real estate Speak up!!! 9

10. Chapter 03: Mortgage Loan Foundations: The Time Value of Money McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

11. Future Value Compound Interest – Earning Interest on Interest Basic Components – PV = Initial Deposit – i = Interest Rate – n = Number of Years – FV n = Value at a specified future period

12. Future Value General equation:

13. Future Value Example 3-1: – What is the value at the end of year 5 of $100 deposited today if the interest rate is 10% compounded annually? FV 5 = $100(1.10) 5 = $100(1.61051) = $161.05

14. Future Value Example 3-1 Using a Financial Calculator: = $100 = 5 = 10 = $161.05 PV n i CPT FV

15. Future Value Semi-Annual Compounding  In Example 3-1, what if interest were paid semi-annually instead of annually? There would be two compounding periods in each year. There would be a periodic rate to match the multiple compounding periods. The time period would be doubled. Most importantly, the future value would be higher. Additional compounding periods will effect the final result.

16. Future Value Our general equation becomes: where m = number of compounding intervals in a year

17. Future Value is also called the period rate For Example 1: = 100(1.62889) = $162.89

18. Future Value Two alternatives for multiple compounding periods and most financial calculators – You can change P/Y to the number of compounding periods Example: Change P/Y to 2 for semiannual compounding – You can enter a periodic rate Example: Enter i/2 as the interest rate for semiannual compounding

19. Future Value If you change P/Y to 2, then = $100 = 10 = $0 = $162.89 PV n i CPT FV PMT

20. Future Value Notice the difference in Future Value when multiple compounding periods are used: $162.89 vs. $161.05 This shows the effect of earning interest on interest. The more compounding periods there are per year, the higher the future value will be.

21. Spreadsheet Functions For complex analysis, Excel is much better than the financial calculator. It is far more powerful and capable.

22. Present Value Discounting: Converting Future Cash Flows to the Present General Equation

23. Present Value Example 3-2: – What is the value today of $2,000 you will receive in year 3 if the interest rate is 8% compounded annually? = 2000(.79383) = $1587.66

24. Present Value Example 3-2 Using a Financial Calculator: = $2000 = 3 = 8 = $1587.66 FV n i CPT PV

25. Present Value Example 3-2 with 8% Compounded Monthly Mathematically:

26. Present Value = 2000(.78725) = $1574.51

27. Present Value If P/Y is changed to 12 = $2000 = 36 = 8 = $0 = $1574.51 FV n i CPT PV PMT