INVESTMENT IN INCOME- PRODUCING PROPERTIES
The Business of Real Estate • Majority of real estate used by business firm is leased and not owned. • Why??? – Tenants find leasing to be more cost- effective than owning. • Owning require large amount of capital to commit. • Purchase of property would “put user in the real estate business” – Even if tenant is able to acquire a building, lease is much relevant due to:- • Owning will reduce operating flexibility. • Owning lead to the burden of managing the building. • Owning make it difficult for firm to down size use
In the end… • Real estate industry includes economic function that are specialised in nature. • It is separate and distinct from the operation of the many different business activities conducted by tenant-users. • These noncore real estate business activities include the risk of:- – Selecting the “right tract” of land and developing the “right amount” of space. – Leasing the space to many different tenants. – Hiring personnel, collecting rents, and maintaining the facilty. – Finding financing for the investment or development – Doing continuous research about real estate market in order to decide when to sell, raise or lower rents, renovate etc.
The “Market” for Income-Producing Real Estate • In real estate investment, it is important to understand – How this competitive market operates – Nature of negotiation between owners and tenant-users – How owner differentiate between expenses associated with operating building and expenses related to the business operation of a tenant. • Property expenses usually allocated by owners to users. • Property owner do not pay expenses associated with the operations of tenants.
Income Potential – Real Estate Assets • Market Rent: price that must be paid by a potential tenant to use (lease) a particular type of space under current market condition. • Rent level depends on many factors such as:- – The outlook of national economy – The economic base of the area in which the property is located – The demand for the type of space provided by the property in the location being analysed. – Supply of similar competitive space.
Vacancy • All space available in a building may not be leased at a particular time. – Tenant leave after their lease expired – Breach their lease agreement before it expires. – Space never been rented, especially for newly constructed building • To project income, it is important to project how much space will be occupied. • Should always some allowance for vacant space even during where leasing activity is strong. – When tenant leave, it take time to make space ready and to re-lease space to new tenants.
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- Winter '16
- dr lizam
- Net Present Value, Effective Rent