1. South-Western Publishing©2002 By Charles J. Jacobus Real Estate Principles Ninth Edition Real Estate: An Introduction to the Profession Ninth Edition South-Western Publishing©2002

2. Chapter 27 Investing in Real Estate _______________________________________

3. South-Western Publishing©2002 Investing Appreciation – increase in property value over time. Mortgage reduction – the decline of the mortgage balance as payments are made. Cash flow – money left each year after paying property operating expenses and debt service. Tax shelter – tax deductible expenses generated by an investment property.

4. South-Western Publishing©2002 Rent receipts for the year$30,500 Less operating expenses $10,000 Less mortgage loan payments $20,000 Equals cash flow$ 500 Cash Flow Projection

5. South-Western Publishing©2002 Rent receipts for the year$30,000 Less operating expenses $10,000 Less interest on loan $19,500 Less Depreciation $ 8,000 Equals taxable income($ 7,000)* *In accounting language, parentheses indicate a negative or minus amount. Taxable Loss

6. South-Western Publishing©2002 Equity at Time of PurchaseEquity 5 Years Later Purchase price$200,000Market value $220,000 Mortgage loan -140,000Less loan balance -120,000 Down payment $ 60,000 Equals current equity $100,000 Equity Build-Up current equity $100,000 less beginning equity -60,000 equals equity build-up $ 40,000 (equity) Calculating Equity Build-up

7. South-Western Publishing©2002 Leverage The ability to use borrowed funds to purchase investment property. Purchase Price$100,000 Cash Down $20,000 Loan $80,000 Leverage 80% Investor only needs $20,000 to control $100,000 property or 20¢ cash for each $1 of cost.

8. South-Western Publishing©2002 Ground (the raw land stage) Increasing the risk Loan (long-term loan commitment) increasing return Interim (short-term loan, construction) Least risk, least Tenancy (building filled with tenants)return Absorption (second through tenth year) Maturity (eleventh through thirtieth year) Aging (more than 30 years) Demise (demolition, reuse of the land)Increasing risk, increasing return As the risk that an investor will suffer a loss increases, the expected returns must increase. Source: Maury Selding and Richard H. Swesnik, Real Estate Investment Strategy, copyright 1970, John Wiley and Sons, Inc., New York. Used by permission. GLITAMADGLITAMAD ================ GLITAMAD

9. South-Western Publishing©2002 Lifetime Income and Consumption Patterns

10. South-Western Publishing©2002 APPRAISER’S VIEWPOINTINVESTOR’S VIEWPOINT The appraiser solves for value. The investor solves for return. Value = Net Income Return Return = Net Income Price Comparative Appraisal and Investment Objectives

11. South-Western Publishing©2002 Key Terms Cash Flow Cash-on-cash Downside risk Equity build-up Investment strategy Leverage Negative cash flow Prospectus Straight-line depreciation Tax shelter