why own real estate? real estate analysis –approximate valuations case studies –case 1: buying...

Aggie Investment ClubSecurities Analysis Workshop: Real Estate

2/11/2010

Tonight’s SAW• Why own real estate?• Real Estate Analysis

– Approximate valuations

• Case Studies– Case 1: Buying an apartment building*– Case 2: Selling apartment building to management company*– Case 3: Buying stock in a company that owns the apartment

building*– ROI Example*– Value Added Investment Example

* Taxes and depreciation were intentionally left out for simplicity

Pro’s to Owning Real Estate• Return consists of property rental revenue and

property appreciation

• Control over your investment (can add value through improvements, monitor costs, etc)

• Historically a strong hedge against inflation

• Tax incentives (interest, closing costs, etc are tax-deductible)

Basics of RE Valuation• “100 Rule” Approximation

– Multiply 1 month’s rent by 100– Actual value varies depending on building age,

location/appreciation rates, etc.

• Traditional valuation:– Discounted cash flow– Comparative Transaction Multiples ($/SF)

• Quick Comparisons: “Cap Rate”– Operating Income / Purchase Price, aka (EBITDA / EV)

• Which one is right? How do you choose?

CASE STUDY 120 Unit Condominium Building

Comparative Transaction Multiples

DCF Analysis

Let’s take a closer look

Case 1 Summary

CASE STUDY 2Strategic Buyer: 20 Unit Condominium Building

Comparative Transaction Multiples

NO CHANGE! Comps are comps…

DCF Analysis

Let’s take a closer look

Case 1 & 2 Summary•Usually

Comp values will fluctuate more with the market

CASE STUDY 3IPO Property Owner: 20 Unit Condominium Building

IPO Scenario

Total Valuation Summary•Strategic acquirer’s

can justify higher valuations

•Much of valuation is up to your assumptions: junk in, junk out

ROIBased on Case 2 Example

Return on Investment•All depends on

your assumptions once again

•The terms of the loan make a big difference

•Let’s play on Excel…

My Recommendation for RE1. Buy a distressed property in a good location at a fair price

for it’s condition– Buy from Trusts, Estates, personal contacts, etc

2. Remodel the building and bring it up to date– There are many fixes you can do that make a big difference

without costing a lot (i.e. refinishing floors, repainting, new trim and add crown molding, new fixtures, new appliances, knock out a wall to make it feel bigger, etc)

3. Rent the refinished units at multiples of their previous rent rate

Let’s look on Excel for this one.

Summary• High rental values and lower maintenance costs

come from good location and high quality construction

• All modeling is highly variable depending on your assumptions; the more assumptions, the higher your probability of errors

• Do your homework and know your assumptions!

All investing comes down to 2 things: 1) Hard Work (do your homework) and 2) Emotional Intelligence (don’t get caught up in the market).