Condensed Chapter 16 Slides

Condensed Chapter 16 Slides - Chapter 16 Risk Analysis,...

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“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Chapter 16 Risk Analysis, Leverage and Due Diligence
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“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Major Topics Causes of Risk Versus Statistical Measures Understanding the sources of returns as a way to understand the causes of risk Partitioning the IRR Changing the required rate of return or discount rate Cycles and Risk Sensitivity Analysis Simulation Analysis Causes of Risk and Risk Management Market Due Diligence Property Due Diligence People Due Diligence Contractual Due Diligence Financial Leverage and Equity Return Risk Positive and Negative Leverage Risks of Below Market Financing. Creative Uses of Financing
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“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Introduction In the context of real estate investment, risk is anything that creates volatility in the expected returns Astute investors are differentiated not by their ability to analyze returns and run cash flow projections, but rather by their ability to understand, avoid or manage and price risk Risks that can not be avoided must be priced – a higher return is required
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“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Introduction (Contd.) Investment A and B start and end at the same place but the volatility of the return pattern is much greater for A than for B thus A has more risk.
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“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Managing Risk To “manage risks” means to first do a thorough job investigating what might influence the cash flow projections Then an astute investor will try and avoid potential problems when possible by shifting them to others as discussed in Chapter 10 Last, the required rate of return is adjusted to match the expected overall risk on a property
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“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Causes of Risk Versus Statistical Measures Listing below ranked by the degree of control that an owner has over these risks from least controllable to most controllable 1. Economic Risks 2. Liquidity Risks 3. Political-Legal and Environmental Risks 4. Business or Management Risks 5. Financing Risks
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“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Understanding the sources of returns as a way to understand the causes of risk Sources of Return: 1. Cash flow generated from the collected income (rents) less operating expenses and debt service
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This note was uploaded on 02/07/2012 for the course FIN 4380 taught by Professor Staff during the Spring '08 term at Texas State.

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Condensed Chapter 16 Slides - Chapter 16 Risk Analysis,...

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