Lecture_400X_RiskReturn

Lecture_400X_RiskReturn - Risk and Return Risk in the RE...

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Risk and Return
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Risk in the RE Market In RE investing, investor must calculate expected returns on project of interest, compare to returns on other specific projects, and then compare differences in returns to the different levels of risks faced by each project.
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Investor asks… …whether the risk premium (the difference in returns) justify an increase in risk of undertaking a particular project? Due diligence – the process of discovering info needed to assess whether the investment risk is suitable given a particular set of investment objectives.
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We can analyze risk through a sensitivity analysis. How do changes in rents, vacancy rates, operating expenses and resale prices impact the IRR and NPV of the project? Can also partition the IRR to determine which cash flows are the greatest contributors to the PV of the project.
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Given a purchase price of $700,000, we have an unleveraged IRR of 15.595%. We have cash flows: CF1 = $40,000 CF2 = $65,000 CF3 = $45,000 CF4 = $50,000 CF5 = $55,000 PV of CF1-CF5, discounted at 15.595% = $167,034 Reversion Value (sale price) = $1,100,000 PV, discounted at 15.595% = $532,966
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This note was uploaded on 06/08/2011 for the course BUAD 400x at USC.

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Lecture_400X_RiskReturn - Risk and Return Risk in the RE...

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