The Complete Guide to Real Estate Finance for Investment Properties

The Complete Guide to Real Estate Finance for Investment Properties

How to Analyze Any Single-Family, Multifamily, or Commercial Property

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
The Author

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.

TABLE OF CONTENTS

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
The 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