The Complete Guide to Real Estate Finance for Investment Properties

This practical, real-world guide gives investors all the tools they need to make wise decisions when weighing the value and potential of investment properties. Written for old pros as well as novice investors, this friendly, straightforward guide walks readers step by step through every stage of property analysis. Whether you're buying or selling, investing in big commercial properties or single-family rentals, you'll find expert guidance and handy resources on every aspect of real estate finance, including:
* Proven, effective valuation techniques
* Finance tips for all different kinds of property
* How various financing strategies affect investments
* Structuring financial instruments, including leverage, debt, equity, and partnerships
* Measurements and ratios for investment performance, including capitalization rates and gross rent multiplier ratios
* Future and present value analysis
* How the appraisal process works
* Primary appraisal methods-replacement cost, sales comparison, and income capitalization-and how to know which one to use
* How to understand financial statements, including income, balance, and cash flow
* Case studies for single-family rentals, multifamily conversions, apartment complexes, and commercial office space
* A detailed glossary of important real estate terminology

Part 1 Real Estate Finance 1

Chapter 1 Introduction to Real Estate Finance 3

Finance as a Discipline 6

The Relevance of Finance as It Applies to Value 9

Chapter 2 Primary Investment Elements and Their Effect on Financing Strategies 13

Time Horizon 13

Volume of Investment Activity 18

Type of Property 21

Chapter 3 Secondary Investment Elements and Their Effect on Financing Strategies 27

Cost of Funds 28

Amortization Period 31

Amount of Funds Borrowed 35

Chapter 4 Additional Investment Elements and Their Effect on Financing Strategies 43

Loan Duration 43

Loan Fees 46

Prepayment Penalties 54

Chapter 5 Structuring Financial Instruments 61

Leverage 61

Debt 64

Equity 67

Partnerships 69

Blended Financing and the Weighted Average Cost of Capital 72

Options 76

Chapter 6 Real Estate Investment Performance Measurements and Ratios 81

Net Income Return on Investment 84

Cash Return on Investment 85

Total Return on Investment 86

Net Operating Income 87

Capitalization Ratio 89

Debt Service Coverage Ratio 92

Operating Efficiency Ratio 93

Gross Rent Multiplier 98

Operating Ratio 99

Break-Even Ratio 100

Chapter 7 Advanced Real Estate Investment Analysis 103

Future Value Analysis 103

Present Value Analysis 108

Net Present Value Analysis 111

Internal Rate of Return 113

Chapter 8 The Valuation of Real Property 121

Appraisal Defined 121

The Nature of Price and Value 122

Three Primary Appraisal Methods 123

Replacement Cost Method 123

Sales Comparison Method 126

Income Capitalization Method 128

Chapter 9 Financial Statements and Schedules 133

Income Statement 136

Balance Statement 143

Statement of Cash Flows 148

Part 2 Case Study Review: Practical Application of Valuation Analysis 153

Chapter 10 Case Study 1: Single-Family Rental House 155

Test 1: Comparable Sales Analysis 157

Test 2: Cash Flow Analysis 162

Chapter 11 Case Study 2: Single-Family to Multifamily Conversion 175

Exploring Alternative Possibilities 175

The Relationship between Risk and Reward 180

Chapter 12 Case Study 3: Multifamily Apartment Complex 189

Chapter 13 Case Study 4: Single-Family Conversion to Commercial Office Building 203

Part 3 Epilogue and Appendixes 229

Chapter 14 Epilogue: Destined for Greatness 231

Prior Works 231

Destined for Greatness 233

Appendix A www.thevalueplay.com 243

Appendix B www.symphony-homes.com 245

Glossary 247

Index 269

STEVE BERGES is a real estate investment professional with over twenty-five years of experience. As Principal of Symphony Homes, he is an active investor specializing in creating value through various real estate mechanisms, including single-family houses, multifamily apartment complexes, and the development and construction of single-family and condominium housing communities. He holds an MBA degree in finance and marketing from Rice University. He is also the author of The Complete Guide to Buying and Selling Apartment Buildings and The Complete Guide to Flipping Properties, both from Wiley. More and more Americans are getting out of the stock market for the relative safety and predictability of real estate. But buying real estate willy-nilly is a recipe for disaster. If you don’t do your homework, you could lose your shirt–just like you would in the stock market.

For novice investors and old hands alike, The Complete Guide to Real Estate Finance for Investment Properties focuses on the fundamentals of financial analysis and the key principles in property valuation as they apply to real estate investing. This practical guide provides all the tools and tactics investors need to accurately gauge both the present and future value of properties.

Whether they’re buying or selling, investors must base their decisions on the fundamental principles of real estate finance. Failing to do so will definitely mean failing to make a profit. This handy guide doesn’t offer long-winded theories on finance or quick schemes for making a bundle in real estate, but proven real-world knowledge every investor needs to feel secure that they’ve made a wise investment.

This is not another real estate book about how to creatively finance a purchase or get a nothing-down deal. Instead, author Steve Berges explains the basic theories of real estate finance, simplifies them for the average investor, and demonstrates how to use them in real-world situations. Using case studies and examples to illustrate these principles, Berges shows investors how to use traditional property valuation methodologies and how to understand such concepts as cash flow, rate of return, and return on investment. Investors will find everything they need to know about financial statements and schedules, investment performance measurements, the structure of financial instruments, and valuation techniques for any kind of property.

Real estate is only a smart investment if you’re a smart investor. In this book, Steve Berges walks readers step by step through all the financial analysis techniques needed to get the most out of their real estate investments.

This practical, real-world guide gives investors all the tools they need to make wise decisions when weighing the value and potential of investment properties. Written for old pros as well as novice investors, this friendly, straightforward guide walks readers step by step through every stage of property analysis. Whether you’re buying or selling, investing in big commercial properties or single-family rentals, you’ll find expert guidance and handy resources on every aspect of real estate finance, including:

• Proven, effective valuation techniques
• Finance tips for all different kinds of property
• How various financing strategies affect investments
• Structuring financial instruments, including leverage, debt, equity, and partnerships
• Measurements and ratios for investment performance, including capitalization rates and gross rent multiplier ratios
• Future and present value analysis
• How the appraisal process works
• Primary appraisal methods–replacement cost, sales comparison, and income capitalization–and how to know which one to use
• How to understand financial statements, including income, balance, and cash flow
• Case studies for single-family rentals, multifamily conversions, apartment complexes, and commercial office space
• A detailed glossary of important real estate terminology