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Unformatted text preview: Asset Valuation: Alternative Investments 1: Real Estate and Other Tangible Investments a: Describe how real estate investment objectives are set. Setting investment objectives involves two steps: Consider the differences in the investment characteristics of real estate. 1. Consider the types of real estate investments: a. Equity holdings: This is the physical ownership of real estate properties. b. Debt instruments: This is the purchase of real estate mortgages and deeds of trust. 2. Real estate properties can be classified as: a. Income properties: Here the returns come mainly from rental income which includes residential properties (houses, duplexes, and apartments) and commercial properties (office buildings, shopping centers, and factories). b. Speculative properties: Here the returns come mainly from price appreciation. You should establish your investment constraints and goals . 1. To consider your financial goals and constraints, you need to determine: 1. the risk-return relationship of real estate. 2. how much of your portfolio should be in real estate (asset allocation). 3. how you should quantify the goals of these long term investments. 2. To consider your nonfinancial goals and constraints, you need to determine: 1. the technical skills needed to maintain the property. 2. the managerial talents necessary to control the property. b: Describe the factors that are important in real estate analysis. Identifying and analyzing the physical property . Determine the quality and quantity of assets to be received. Understanding the legal property rights . You must do a legal investigation, as well as, a physical one. Consider the time horizon and the volatility of real estate prices. Analysis of short term investments is different from long term ones. Consider the geographic area . Real estate is a spatial commodity, which means its value is linked to what is going on around it. c: Identify the determinants of real estate value. Demand for the property: Why do people want to buy or rent this piece of property? The demand for a piece of property is influenced by: 1. The economic base of the community in which the property is located. 2. The population characteristics of the community in which the property is located. This includes demographics (age, sex, household size, occupation) and psychographics (personality, lifestyle, etc.) 3. The availability of mortgage financing. Supply of properties: Size up the competitors offerings to the piece of property you want to rent or sell. 1. Competition comes from similar assets and substitutable assets (e.g., people judge properties as sets of substitutable benefits and costs). 2. Inventory analysis....
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This note was uploaded on 12/06/2011 for the course SMO Chartered taught by Professor Peterpellat during the Fall '08 term at University of Alberta.
- Fall '08