Real Estate Exam 1 Study Guide Definition of Real Estate The collection of rights associated with real actions involving land o Real Estate may be An investment A product or service A business or profession The urban and rural space market The rights associated with owning real property 50 of the world s wealth is in real estate 30 of the world s real estate wealth is in the US While few commercial mortgages are securitized only about half of the outstanding residential mortgages are unsecuritized Four 4 classes of real property o Real estate held as a personal residence o Real estate held for sale to others dealer property o Real estate held for use in a trade or business trade or business o Real estate held as an investment for the production of income property investment property Three 3 types of income o Active income bonuses o Portfolio income Earned from salaries wages commissions fees and o Passive activity income Interest and dividends and capital gains from stock bonds and other financial security investments Income generated from trade and business activities in which the taxpayer does not materially participate e g rentals Cost recovery periods o Residential income property 27 5 years o Other commercial income property 39 years o Personal property 3 15 years Tax Credit Definition Allowances that are deductible directly from the taxes owed Rehabilitation tax credits are available to individuals investing inn historic rehabilitation and low income housing Like Kind Exchange Under this method owners must exchange their properties and avoid paying capital gains at the time of transaction Three 3 requirements o 1 The properties must be business or investment properties o 2 They must be like kind properties both must be real estate o 3 Any cash or personal property used to equalize the transaction is identified as boot this results in partial taxation Who owns the most land in Florida as an organization the state as an individual Ted Turner Real estate is not a competitive market Classical Location Theory vs Neoclassical Location Theory o Classical Location Theory Rent differences result from the accessibility of land to markets and users o Neoclassical Location Theory Recognizes land as a factor of production along with labor capital and entrepreneurial effort o Price decreases the further you move away from the market Rent Curve activity center CBD Distance Tobin s Q o Tobin defined the equilibrium condition as Q 1 where Q is the market divided by replacement value when evaluating financial markets The Q statistic can be applied to understand if real estate prices are too high or too low Q real estate Price or value Replacement Cost If Q 1 opportunity to develop competing properties and sell them for abnormal profit If Q 1 price of properties cheap relative to cost Loan Amortization Schedule A table showing the breakdown of a fixed mortgage payment between interest and the return of principal The investment strategy is divided into 3 components o Investment Philosophy an outline of the relationship investors would like to have with their real estate investments mainly where they will be active or passive investors o Investment Objectives general guidelines for choosing specific properties consistent with the investment philosophy o Investment Policies financial criteria and other special considerations which are used to create a profile of investments that satisfy investor objectives and are consistent with the investor s philosophy No creditor can take your personal home only bank thanks to the Homestead Act Florida doesn t have a state income tax 23 8 Capital Gaines Rate o It was originally 15 and is now headed to 28 Speculative Bubble Definition An extraordinary increase in price caused by irrational human behavior What landlords are deducting o Advertsing o Auto and travel o Cleaning and maintenance o Commissions o Insurance o Legal and other professional fees o Management fees o Mortgage interest paid to banks o Repairs o Supplies o Taxes o Utilities Natural Vacancy Definition The relationship between unoccupied space and total available space over a complete business cycle o Vacancy Rate Va S D Va amount of vacant space in the market S supply of space square footage D the amount of space currently demanded rented Space Market vs Asset Market o Space markets perform the following 3 functions each through the price mechanism Allocate existing space among those who demand space Expand or contract space to meet changing conditions Determine new uses for land o Asset Market the market in which the suppliers of capital invest their money in capital assets financial and real o Risk Averse These investors require greater expected returns for their willingness to bear more risk avoid risk o Risk Neutral Require no additional compensation for additional Risk o Risk Seeking These investors require less return as risk risk don t mind risk increases like risk o Most investors are risk averse Factors that determine where to locate firms o Transportation costs and the desire of firms and individuals to o The ability to substitute intensive capital improvements for land minimize such costs availability Noisy Price a price on a property that is higher than the surrounding poperties