Video 4: Property Valuation
Take this quiz to recap everything that was discussed in video four. (Formula sections do not appear on the quiz)
The value of a property is always determined by what?
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Depending on the situation, different approaches to valuing property are used. For example: it would cost a lot more to purchase a building previously occupied by Benjamin Franklin rather than a building with similar dimensions in the same location. However, in most cases, discounted cash flow is the approach that is used.
YOU'RE WRONG!
Depending on the situation, different approaches to valuing property are used. For example: it would cost a lot more to purchase a building previously occupied by Benjamin Franklin rather than a building with similar dimensions in the same location. However, in most cases, discounted cash flow is the approach that is used.
Why do you discount money in the future to modern day value?
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When evaluating discounted cash flow, one of the things that you should keep in mind is how much you would earn if you made a safe investment like investing in government securities. When you discount the money in the future you are simply saying, "this is how much more I need to make in order to beat what I could have made with a safer investment."
YOU'RE WRONG!
When evaluating discounted cash flow, one of the things that you should keep in mind is how much you would earn if you made a safe investment like investing in government securities. When you discount the money in the future you are simply saying, "this is how much more I need to make in order to beat what I could have made with a safer investment."
What is the difference between cash flow and net operating income?
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Cash flow is affected by all expenses whether they are regular or uncommon. Tenant improvements would be deducted from cash flow, it would not be deducted from NOI.
YOU'RE WRONG!
Cash flow is affected by all expenses whether they are regular or uncommon. Tenant improvements would be deducted from cash flow, it would not be deducted from NOI.
Why is it important to be wary of the amount you increase your rent by?
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If you raise your rent too high then there is a possibility that competition takes advantage of this, builds a new building, and draws tenants out of your building by offering cheaper rent.
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If you raise your rent too high then there is a possibility that competition takes advantage of this, builds a new building, and draws tenants out of your building by offering cheaper rent.
The liquidity aspect of the discount rate should be adjusted to make up for…
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The liquidity premium should be adjusted to make up for the fact that you won't be able to have your money instantly, as opposed to other investments.
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The liquidity premium should be adjusted to make up for the fact that you won't be able to have your money instantly, as opposed to other investments.
Why might the discount rate change over the course of an investment?
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It is not a likely event, but there are instances in which a given tenant is significantly riskier than another tenant or vice-versa and when the contract on one expires and a new tenant leases, the operating risk must be adjusted, directly impacting the discount rate.
YOU'RE WRONG!
It is not a likely event, but there are instances in which a given tenant is significantly riskier than another tenant or vice-versa and when the contract on one expires and a new tenant leases, the operating risk must be adjusted, directly impacting the discount rate.
What is a perpetuity stream?
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Perpetuity stream is simply an infinite series of numbers, generally displayed on a spreadsheet, representing the revenue for each year going forward. Assuming the property is stabilized you can use the Gordon model to estimate what revenue will be in any year moving forward.
YOU'RE WRONG!
Perpetuity stream is simply an infinite series of numbers, generally displayed on a spreadsheet, representing the revenue for each year going forward. Assuming the property is stabilized you can use the Gordon model to estimate what revenue will be in any year moving forward.
Cap rate is equal to ...
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Because value is equal to cash flow over discount rate (r) minus ongoing growth rate (g), it can be derived so cash flow divided by value is equal to discount rate minus ongoing growth rate, with the definition of cap rate being cash flow divided by value.
YOU'RE WRONG!
Because value is equal to cash flow over discount rate (r) minus ongoing growth rate (g), it can be derived so cash flow divided by value is equal to discount rate minus ongoing growth rate, with the definition of cap rate being cash flow divided by value.
Cap rate variation on paper is primarily due to fluctuation of what?
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Because cap rate is equal to the discount rate minus the ongoing growth of cash flow anything that affects discount rate (operating risk and liquidity) will also affect cap rate. Inflation does have a slight influence, but it is not enough to take notice.
YOU'RE WRONG!
Because cap rate is equal to the discount rate minus the ongoing growth of cash flow anything that affects discount rate (operating risk and liquidity) will also affect cap rate. Inflation does have a slight influence, but it is not enough to take notice.
Big increases in cap rate affect which type of investments the most?
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Cap rate represents the annual income over the value of the property, so in a high equity deal, if the cap rate increases due to a decrease in property value, then the money lost gets taken out of the equity portion.
YOU'RE WRONG!
Cap rate represents the annual income over the value of the property, so in a high equity deal, if the cap rate increases due to a decrease in property value, then the money lost gets taken out of the equity portion.
What is the primary cause of cap rate changes?
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If you get big flows of capital coming in, cap rates decrease. However, when there is a limited flow of mortgage funds, cap rates increase.
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If you get big flows of capital coming in, cap rates decrease. However, when there is a limited flow of mortgage funds, cap rates increase.
Why do you want to over-discount for an up period?
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Over-discounting is a tool to counter using a low discount rate for down periods. Over-discounting during an up period will prevent you from getting overly confident, and will aid in the success of your property.
YOU'RE WRONG!
Over-discounting is a tool to counter using a low discount rate for down periods. Over-discounting during an up period will prevent you from getting overly confident, and will aid in the success of your property.
What is the problem with getting too attached to numbers?
YOU'RE CORRECT!
The numbers can't take into account completely random events. Numbers are a good thing to look at when evaluating a real estate deal but they can't guarantee success, and it is worth noting that one should not get too attached to them.
YOU'RE WRONG!
The numbers can't take into account completely random events. Numbers are a good thing to look at when evaluating a real estate deal but they can't guarantee success, and it is worth noting that one should not get too attached to them.