UCLA ECON 103 - Chap011 (1) (11 pages)

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Chap011 (1)



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Chap011 (1)

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Pages:
11
School:
University of California, Los Angeles
Course:
Econ 103 - Introduction to Econometrics

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Chapter 11 Investment Analysis and Taxation of Income Properties Solutions to Questions Chapter 11 Investment Analysis and Taxation of Income Properties Question 11 1 What are the primary benefits of investing in real estate income property Net Income Dollars left over after collecting rent and paying expenses but before considering taxes and financing costs Property Sale Expecting a price increase over a specified holding period increases investor return Diversification Reduces overall risk to hold many types of investments Taxes Preferential tax benefits Taxable income is often less than before tax cash flow Question 11 2 What factors affect a property s projected NOI Expected market rents and vacancy rates Expenses associated with operating the property Nature of any leases on the property Question 11 3 What factors would result in a property increasing in value over a holding period Inflation This causes rents as well as the final sale price to be higher Demand Increased demand for space may increase value if the supply of space doesn t increase as well Question 11 4 How do you think expense stops and CPI adjustments in leases affect the riskiness of the lease from the lessor s point of view There is less risk for the lessor with expense stops and CPI adjustments in leases CPI Adjustments The risk of unexpected inflation is shifted to the lessee Expense Stops The risk of increases in expenses is shifted to the lessee while allowing the lessor to retain the benefit of any decrease in expenses Question 11 5 Why should investors be concerned about market rents if they are purchasing a property subject to leases Even if the investment is an existing building that has already been leased the income can be affected when the existing leases expire and are renewed at the market rent at the time Question 11 6 What is meant by equity The investor s initial equity in the project is equal to the purchase price less the amount borrowed The amount of equity an investor has in



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