an environmental review and approval from various

Texas SAE: Real Estate Investment Flashcards

Building codes and inspections are a major consideration contributing to both project time and costs.Active real estate investing comes in three "flavors."Fix and flipBuy and holdWholesaling Environmental and Development ControlsEnvironmental controlsAny new project will need to receive an environmental review and approval from various governmental agencies. Pressures to develop in sustainable ways mean more laws to understand and follow. Regulations also affect the sale of existing properties, from simple environmental hazard disclosures, to requirements for equipment that preserves or protects the environment.Development regulationsProperty developers must follow local regulations regarding density, infrastructure, traffic patterns, and the capacity of public services, to name a few. These are the regulations that ensure new developments are consistent with a city's general plan for zoning, and they not only influence, but determine, acceptable property use in an area.Market valueis the price the property would be expected to sell for after suitable market exposure, assuming no exceptional factors are influencing the seller's decision, the buyer's decision, or financing availability.

WholesalingRequirements include:Ability to find property at a deep

discountThick skin due to seller reaction to low ball offersAbility to act quickly, perhaps paying cashAbility to

resell quicklyRisks include: Lack of availabilityGetting stuck

with property (unable to turn property around quickly)Paying too much up front, no profit Property Type SubmarketsSegmentation by Property TypeResidential, Commercial, Industrial, Special Use, vacant land for development When supply exceeds demand(there's more than enough to go around), prices go down.

Permanence:Land doesnt simply cease to exist. While improvements on

land will deteriorate and are subject to destruction, land itself is like Superman, minus the kryptonite allergy. It cant be destroyed. This is a characteristic that makes it possible to finance real estate with long-term, relatively complex arrangements, like amortized loans.Your client is a large developer who wants to build new retail space. She's considered zoning, construction codes, and development regulations. What other governmental influence will she also need to consider?Any new construction projects must consider zoning, construction and environmental codes, and development regulations.

Government policy impacts all industries. However, real estate and finance (the engine that drives the real estate vehicle) are two of the most highly regulated industries.WholesalingSid is a wholesaler. He's not interested in buying a property, renovating it, and selling it at a profit, nor is he interested in buying and holding a property as a rental.Sid makes the low-ball bid because a wholesaling investor like himself must buy low and sell fast to make a profit.Sid already has a buyer in mind when he makes his embarrassingly low offer for a property with motivated sellers.

Slow to respond:The real estate market spreads far and wide. Because it

isnt centralized, its slow to respond to national changes in supply and demand. Property value is highly dependent on its location; changes in the national market have little (or significantly delayed) impact on local markets. Transactions also take time, and a property may be on the market for months before finding a buyer. Stocks and bonds, on the other hand, are typically traded within seconds of a decision to sell.Zoning and Construction CodesZoning:Plans for development, as well as the ways in which existing property is used, are affected by zoning restrictions. Zoning can affect value by restricting property use, perhaps even preventing its highest and best use.Properties that are located in a neighborhood in transition due to changing economic circumstances, including economic obsolescence, are often bought in anticipation of, or subject to, a successful zoning change.Construction

codes:If the investor is a large developer or an individual

who's rehabbing and flipping homes, building codes and inspections are a major consideration contributing to both project time and costs.Supply and price move in ____ directions opposite. If supply is up, the price goes down. If supply is down, the price goes up.Characteristics of the Texas Real Estate Market Real estate is an uncentralized market that's slow to respond to changes in supply or demand, and it's highly influenced by governmental policy.Progressiona lower-value property gets a bump in value thanks to the nearby higher-value property.Substitutionis the idea that a property's value is determined by what it would cost to purchase a similar substitute property.capital preservationReal estate investment is considered a hedge against inflation because property values typically rise over time.During the ownership period, equity builds and the property value increases. In contrast, a renter will never see the money paid to the landlord again. If the investor's goal is to make a profit, the capital used to purchase the

property is preserved while it earns.Segmentation by LocationA specific neighborhood, city, or regionUrban, suburban, or ruralA type of geography (some examples are ocean front, mountain, or desert) CommercialRetailOffice Space

Financial influencesTaxes: Real estate investments are likely to be taxed not

only on their profits, but also on the property itself.Federal

control of money:The actions of the Federal Reserve Board

will affect both the mortgage cost and supply.Going-concern valueis the value of the property as a functioning business.Taxes, construction codes, and development regulations are all ways that ______ can influence a real estate investment and potentially increase or decrease the investment's value.Federal and local governmentInvestors have to be particularly cognizant of government regulations when considering a particular property for investment. These regulations include environmental controls, zoning, federal control of money, taxes, and more.Uniqueness:We've all heard suburban tract housing called "little boxes," implying its all exactly the same. However, every piece of real estate is unique due to its specific location, variances in construction, and level of wear and tear.Property developers must follow local regulations regarding density, infrastructure, traffic patterns, and the capacity of public services, to name a few. These are the regulations that ensure new developments are consistent with a city's general plan for zoning, and they not only influence, but determine, acceptable property use in an area.Conformitythat value is created and maintained when a property's characteristics conform to (fit in with) its neighborhood.Some ways to value real estate aremarket value, investment value, going-concern value, insured value, salvage value, liquidation value, assessed value, and value in use.value in useThe value of a property as it's currently being used, which may or may not be its highest and best use Plans for development, as well as the ways in which existing property is used are affected by zoning restrictions. Zoning can affect value by restricting property use, perhaps even preventing its highest and best use.

Buy and Hold StrategyRequirements include:Capital for purchaseAbility to cover

debt with rental income during holding periodRisks include:

VacanciesCash flow shortagesProperty value declineTenant issues Real estate investors differ from traditional buyers and sellers. They have different motivations, different mindsets, and distinctly different goals that you'll need to recognize and work with in order to build and maintain investor clients Three Investment GoalsInvestor clients are more strategic and less emotional. And, while not everyone who invests in real estate has the same goal, most investors are typically

focused on one of the following:Earning a profitGenerating

capital preservationCreating a tax shelter When both supply and demand increaseprices tend to remain the same.The characteristics of real estate that drive how it's used as an investment are its uniqueness, immobility, permanence, longevity, its response to government policy, and its slowness to respond to market changes.Regressionsays a lower quality property located adjacent to a higher quality property can lower the value of the higher quality