Real Estate

Real estate refers to the industry that is most commonly tied to raw or developed land. Real estate has its own set of business dynamics. In accounting, real estate will include the structures and other improvements on the land in the total value accumulated.

Value Investing – Principle #3: Financial Analysis (Lesson 8)

Value Investing

Financial analysis is the basis to set up a predictable and reasonable market price for the respective stock. This becomes the sell price point or what is often referred to in this series of lessons as the recovery point. If all three forces (economic, industry and company level) are performing reasonably, then the stock price for the company will recover to this sell point within a short period of time. Therefore, it is important for value investors to understand the importance of having knowledge about financial analysis.

Financial analysis is an assessment of a company’s performance in the form of dollars. The goal is to establish a trend line of financial accomplishments. It is safe to assume that the historical results can predict future results with accuracy. Again, large corporations are money generating machines; it will take several adverse actions to slow down or diminish the ability to earn profits.

Financial analysis starts with gathering research data, specifically annual and the most recent quarterly financial reports. With this information, certain data is loaded into a spreadsheet so that ratios can be determined. With the spreadsheet data, trends are tracked and from there, summarized. This summary of pertinent outcomes assist the value investor with determining the most likely outcomes for the next several quarters. Take note, value investors are not as interested in extended time frames as this methodology is designed to determine an expected recovery value for the stock in the short-term. Value investors are not interested in holding to collect dividends, there are interested in the buy low, sell high tenet of business. Thus, long-term expectations are irrelevant.

Other key information is extracted from the quarterly and annual reports to confirm trends, validate business ratios and finally, determine the expected market recovery price.

Value Investment Fund Status Week 6 – 3.2X Dow Jones Industrial Average

Equity Residential

During the week ending December 5, 2020, the Value Investment Fund reports a 3.88% gain in one week. Whereas the DOW only reported a 1.2% gain. Thus, as happened multiple times this year to date for the fund and during Year One of the fund; the fund simply outperformed the DOW Jones Industrial Average. Why?

Quality stocks purchased at deep discounts tied to intrinsic value and quantified by excellent financial analysis.

At the beginning of the week, the Investment Fund’s status stood at $114,576.71 (see the end of November report) and then on Friday night after closing (December 4, 2020) the Fund’s balance was $119,024.01. This was a 3.88% gain in one week.

Occupancy Rate – How to Evaluate

Temporary housing includes hotels, motels, resorts, apartment complexes and rental homes. The number one tool to measure performance is occupancy rate. This is the number of nights the facility is occupied against total available nights. 

Financial Leverage in Real Estate

Leverage Ratios

Financial leverage refers to using a third party’s money to increase profit for the borrower. With real estate, the profit or equity in the property is the weight being lifted by the use of a lever (borrowing money) on the fulcrum (the property).

Replacement Reserves- Understanding the Fundamentals

Replacement Reserves

Long and short term housing rental businesses use a financial operations tool to maintain, repair and upgrade the physical facilities. This tool is known as replacement reserves in the real estate industry. In almost all cases it is a contractual agreement requirement between the mortgage lender and the borrower.

Don’t Flip Them, Finance The Flip!

Finance the Flip

The rage in real estate for the last 17 years has been flipping houses. Simple tenet of buy low, fix it up and sell high – House Flipping Business Dynamics. What if I told you there was more money to be made with less risk and very little work if you simply finance the deal?  You would say I’m crazy. Well, I’m going to show mathematically that I know what I’m talking about. 

Landlord – Business Dynamics and Economics

Landlord Business Dynamics

I love the game of Monopoly. My sons enjoy playing it too. But we all have the same complaint about the game; it takes forever to accumulate all the wealth and ultimately win the game. Being a landlord means the same thing. It will take a long time to accumulate wealth. For those of you considering becoming a landlord, there are certain business dynamics and economics you should understand. 

Apartment Complex Profit and Loss Statement – (Revenue Section) Best Presentation Format

Apartment Complex Profit and Loss Statement

In the apartment complex industry I have had the privilege of reviewing four different presentation formats prepared by different Certified Public Accounting Firms. Interestingly enough, they were all distinctly different. But one stood out! It made much more sense than the others. One of the other three had an interesting subsection and so I combined the best attributes of both. 

Real Estate Syndication

Real Estate Syndication

Real estate syndication is how apartment or office complexes are financed? A typical complex will have 80 to 100 units and the cost of construction will approximate $7,000,000. Where does this money come from? Your average person will think it is financed by a mortgage of some sort. 

Real Estate Investment Trusts – REITs

REITs

Real Estate Investment Trusts are corporations, trusts or associations that act as agencies in real estate and associated mortgages. This is a specialized tax segment and it requires recognition by the Internal Revenue Service to operate as a Real Estate Investment Trust (REIT). In general, the REIT pays little to no income taxes and acts very similar to a pass-through entity for tax purposes. All REITs must comply with Code Section 856 which addresses compliance for this privileged tax advantage. Typically, REITs file Form 1120-REIT for tax purposes. 

A secondary advantage for REIT status is the ability to raise capital via syndication.  Section 856(a) and (b) require a minimum of 100 shareholders or owners of interest in the business entity. This allows for a more advantageous management situation by having a more formal elected board of trustees or directors.  In addition, it allows for greater ease of transfer of ownership with the respective investors. 

To fully appreciate the Real Estate Investment Trust, you should become acquainted with the history behind REITs. From there, there are unique advantages associated with REITs and an investment in one. As with all business situations, there are some disadvantages and you should be aware of them. The following sections cover these three topics and I’ll finish off with my own conclusion.