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115 CFA
File:
115.090.01.04 Alternative Investments - Reading 50 - 4. Real estate

4. Real estate

d. describe hedge funds, private equity, real estate, commodities, infrastructure, and other alternative investments, including, as applicable, strategies, sub-categories, potential benefits and risks, fee structures, and due diligence;

e. describe, calculate, and interpret management and incentive fees and net-of-fees returns to hedge funds;

f. describe issues in valuing and calculating returns on hedge funds, private equity, real estate, commodities, and infrastructure;

What is the Direct ownership (fee simple) form of real estate ownership?
Direct ownership refers to full ownership rights for an indefinite period of time, giving the owner the right, for example, to lease the property to tenants and resell the property at will.

What is Leveraged ownership form of real estate investing?
Leverage ownership refers to the same ownership rights as Direct ownership, but subject to debt (such as a promissory note) and/or a pledge (mortgage) to hand over real estate ownership rights if the loan terms are not met.

What is a mortgage?
A Mortgage is a type of debt investment as a mortgage provides the investor a stream of bondlike payments. This is a form of real estate investment as the creditor may end up with owning the property being mortgaged.

How do mortgage providers diversify their risks against non-payment?
To diversify risks a typical mortgage investor often invests in securities issued against a pool of mortgages.

What is a real estate aggregation vehicle?
An aggregation vehicle aggregates investors and serves the purpose of giving investors collective access to real estate investments.

What are the two most common types of real estate aggregation vehicles?
- Real Estate Partnerships (RELP) - a professionally managed real estate syndicate that invests in various types of real estate.
- Real Estate Investment Trust (REIT) - a type of closed-end investment company that sells shares to investors and invests the proceeds in various types of real estate and real estate mortgages.

What is a residential property?
When an individual or a family purchases a home.

What is commercial real estate?
Commercial real estate is a direct equity and/or debt investment is made into a property which is then managed to generate economic benefit to the parties.

What is the difference between mortgage REITs and equity REITs?
- Mortgage REITs invest in mortgages
- Equity REITs invest in commercial and residential properties

What are mortgage-backed securities?
Securitization of mortgages

What are the three most commonly used approaches to value real estate?
1. Comparison sales approach
2. Income approach
3. Cost approach

What is the comparison sales approach to valuing real estate?
The comparison sales approach uses as the basic input the sales prices of properties (benchmark value) that are similar to the subject property.

What is the income approach to valuing real estate?
The income approach calculates a property's value as the present value of all its future income. It assumes that the annual net operating income (NOI) of a property can be maintained at a constant level forever (that is, NOI is a perpetuity).

What is the formula for Direct Capitalization, which is the most popular Income valuation approach to valuing real estate?
$$Market\ value = \frac{Annual\ net\ operating\ income}{Market\ capitalization\ rate}$$
- Net operating income (NOI) = amount left after subtracting vacancy and collection losses and property operating expenses from an income property's gross potential rental income.
- Market capitalization rate = looking at recent market sales figures to determine the rate of return required by investors.

What is the cost approach of valuing real estate? When is it most commonly used?
The cost approach is based on the idea that an investor should not pay more for a property than it would cost to rebuild it at today's prices. It generally works well for new or relatively new buildings. Most experts use it as a check against a price estimate.


Source:
  • CFA