Real Estate Management Harvard Case Solution & Analysis

REAL ESTATEASSETMANAGEMENT

CASE: FINANCIAL ANALYSIS OF REAL PROPERTY INVESTMENTS

Investing in real estate involves: the purchase, ownership, management, rental and sale of real estate for profit.

The task of analyzing a real estate investment may be divided into three components:

  • Cash flow

 Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified limited period. In this case, the amount actually received by the investor includes; rental revenue recognized, minus all cash expenses incurred during the period. By following the procedure outlined in Table A, the pretax cash flow may be determined.

KEY FACTORS:

   Following are the key factors in analysis of cash flow

Gross rent              

The analysis of cash flow should start with base rent. The investor should compare rent and revenues generated by properties with similar nature of business opportunity.

Expenses Reimbursement

Reimbursements from tenants consist of amounts due from tenants for common area such as maintenance, real estate taxes and other recoverable costs. Calculating tenant reimbursement revenue should require an in-depth analysis in this case.

Vacancy

Vacancy and Credit Loss in real estate investing is the amount of money or percentage of net operating income that is estimated as not to be realized due to non-payment of rents and vacant units. It should not increase by 5% per year.

Operating expenses

 Operating expense control can make a huge difference in gross profit margin and positive N.P.V. The buyer is subjected to the highest degree of deception who faces difficulty to find good and current information.

Interest expense

Interest payments have been excluded in the investment appraisal but these are allowed by the discount rate used in calculating the NPV.

  • Future benefits

It is the amount by which the capital position of the investor is affected by the sale or refinancing of the property or entity owning the property on an after-tax basis. In order to profit from its stabilizing effect on investment portfolios and from the attractive return potential, every investor should consider real estate when allocating resources.

Terminal Value

The terminal value at the end of 10 years is estimated to be $ 7,088,659.

Mortgage Interest Payment

The mortgage style refers to the classic style of mortgage amortization. It is also called the "constant payment method" because the borrower’s total installment payment remains the same throughout the loan period. The installment comprises of two elements: principal repayment and interest payment. The installment payment doesn’t change, however, the amounts applied to the principal and the interest change, so most of the payment goes towards interest in the beginning of the loan.

 Assumptions

This analysis makes the following assumptions:

  • Inflation forecasts of future inflation of gross rent and expenses should be prepared, so that a nominal evaluation can be undertaken. Gross rent and all expenses are assumed to be constant in real terms but in practice; prices are likely to increase and decline.
  • Cash flows occur at the end of each year.

Investment decision

The investment appraisal process is concerned with assessing the value of future cash flows compared to the cost of investment (NPV) and internal rate of return (IRR).

Net Present Value

The financial evaluation of the proposed investment ........................................

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