Real Estate Income Analysis
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Part 1: Real Estate Income Analysis
An income property may look very attractive as an investment at first glance. Cash flow and property value are produced by numerous variables, and changes to any one variable can easily change the whole equation. Cash flow and property value are sensitive to change.
As a sophisticated real estate investor, you find an 80%-occupied, 20-suite office commercial building for sale, priced at $2.5 million. You are given a professional package of brochures, which presents the property attractively. You focus on the pro forma of the building, which is given over a ten-year period. You also notice in the brochures that the seller has used a discount rate and a terminal capitalization rate to value the sale price of the property.
What risks do you foresee in purchasing this property? What measures would you take to manage these risks? Will these risks affect the price that you would offer? If so, how would they affect your pricing decision? If not, what factors would contribute to your pricing decision?
Part 2: Discounted Cash Flow Analysis
In the discounted cash flow method, the discounted and terminal capitalization rates are often applied to cash flows over a period of five to ten years in income-producing real estate valuation. In addition, for sensitivity financial analysis, the income and expense items are also projected over the same period based on different scenarios, which, in turn, change the real estate valuation.
What are the pros and cons of using such an approach to justify your application for a loan from a lender to fund your real estate project? How would you improve such an approach in order to increase your possibility of securing the loan?
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The response addresses the query posted in 802 words with APA references
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The response addresses the query posted in 802 words with APA references
//The purchase of a property involves certain risks such as wrong valuation, unauthentic information and knowing the reality of the property. In this context, the various types of risks, the measures to manage them and their effect on the pricing of the property are explained below. //
The risk in relation to purchasing the property of 20-suite office commercial building is that the reality of the building could be different from the matter contained in the brochure. In this way, the real impression of the building could not be known with the help of the brochure. In reality, the property might not be as attractive as shown in the brochure. Another risk is in relation to authenticity of the information contained in the pro forma. The risk is also involved in relation to valuation of the property with the help of discount rate and terminal capitalization rate. This method of valuing the property is not very commonly used and there are chances of mistake (Bevans, 2008).
For the purpose of managing the above risks, a personal visit to the property should be made and the reality in relation to the property should be known. The information contained in the pro forma should be ...
Education
- MBA (IP), International Center for Internationa Business
- BBA, University of Rajasthan
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