Private Real Estate Investments
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1. There are four basic forms of *real estate investment* that can be described
in terms of a two-dimensional quadrant:: 1st dimension: Public or private markets
2nd dimension: Involvement of debt or equity
2. In the *first dimension*, the investment can be described in terms of *pub-
lic or private markets*:: In the *private market*, ownership usually involves a *direct investment* like
*purchasing property* or *lending money* to a purchaser. Direct investments can be *solely owned or indirectly
owned* through partnerships or *commingled real estate funds (CREF)*. The *public market* does *not involve direct
investment*; rather, ownership involves *securities that serve as claims on the underlying assets*. Public real estate
investment includes ownership of a real estate investment trust (*REIT*), a *real estate operating company (REOC)*,
and *mortgage-backed securities*.
3. The *second dimension* describes whether an investment involves *debt or
equity*:: • An *equity investor has an ownership interest* in real estate or securities of an entity that owns real
estate. Equity investors *control decisions* such as borrowing money, property management, and the exit strategy.
• A *debt investor* is a *lender that owns a mortgage or mortgage securities*. Usually, the *mortgage is collateralized
(secured)* by the underlying real estate. In this case, the *lender has a superior claim* over an equity investor in the
event of default. Since the lender must be repaid first, the *value of an equity investor's interest is equal to the value of
the property less the outstanding debt*.
4. *Each* of the basic forms *has its own*:: Risk, expected returns, regulations, legal issues, and
market structure.
5. *Private* real estate investments are *usually larger than public* invest-
ments because:: Real estate is *indivisible and illiquid*. *Public* real estate investments *allow the property
to remain undivided* while allowing *investors divided ownership*. As a result, *public* real estate investments are
*more liquid* and enable investors to *diversify* by participating in more properties.
6. Real estate must be *actively managed*:: *Private* real estate investment *requires property
management expertise* on the part *of the owner* or a *property management company*. In the case of a *REIT or
REOC*, the real estate is *professionally managed*; thus, *investors need no* property management *expertise*.
7. *Equity* investors usually require a *higher*:: *Rate of return* than mortgage lenders
because of *higher risk*.
8. Typically, *lenders expect* to receive returns from:: *Promised cash flows* and *do not*
participate in the *appreciation* of the underlying property.
9. *Equity investors expect* to receive:: *An income stream* as a result of renting the property *and
the appreciation* of value over time.
, Private Real Estate Investments
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10. Basic Forms of Real Estate Investment::
11. Real estate investment *differs from other asset classes*, like stocks and
bonds, and *can complicate measurement and performance assessment*:: •
*Heterogeneity*. Bonds from a particular issue are alike, as are stocks of a specific company. However, *no two
properties are exactly the same* because of location, size, age, construction materials, tenants, and lease terms.
• *High unit value*. *Because real estate is indivisible*, the *unit value is significantly higher* than stocks and bonds,
which makes it *difficult to construct a diversified portfolio*.
• *Active management*. Investors in stocks and bonds are not necessarily involved in the day-to-day management
of the companies. Private real estate investment requires active property management by the owner or a property
management company. *Property management involves maintenance, negotiating leases, and collection of rents*. In
either case, *property management costs must be considered*.
12. Real estate investment differs from other asset classes, like stocks and
bonds, and *can complicate measurement and performance assessment*
(cont'd):: • *High transaction costs*. Buying and selling real estate is *costly because it involves appraisers, lawyers,
brokers, and construction personnel*.
• *Depreciation and desirability*. Buildings *wear out* over time. Also, buildings may *become less desirable because
of location, design, or obsolescence*.
• *Cost and availability of debt capital*. Because of the high costs to acquire and develop real estate, property values
are impacted by the level of interest rates and availability of debt capital. *Real estate values are usually lower when
interest rates are high and debt capital is scarce*.
• *Lack of liquidity*. Real estate is *illiquid*. It *takes time to market and complete the sale* of property.
• *Difficulty in determining price*. Because of *heterogeneity and low transaction volume*, *appraisals are usually
necessary* to assess real estate values. *Even then, appraised values* are often *based on similar, not identical,
properties*. The combination of limited market participants and lack of knowledge of the local markets makes it *difficult
for an outsider to value property*. As a result, *the market is less efficient*.
13. The market for *REITs* has expanded to *overcome* many of the *problems
involved with direct investment*:: Shares of a REIT are *actively traded* and are *more likely to reflect
market value*. In addition, investing in a REIT can provide exposure to a *diversified real estate portfolio*. Finally,
*investors don't need property management expertise* because the REIT manages the properties.
14. Real estate is commonly *classified as*:: *Residential or non-residential*.
Study online at https://quizlet.com/_34zw7k
1. There are four basic forms of *real estate investment* that can be described
in terms of a two-dimensional quadrant:: 1st dimension: Public or private markets
2nd dimension: Involvement of debt or equity
2. In the *first dimension*, the investment can be described in terms of *pub-
lic or private markets*:: In the *private market*, ownership usually involves a *direct investment* like
*purchasing property* or *lending money* to a purchaser. Direct investments can be *solely owned or indirectly
owned* through partnerships or *commingled real estate funds (CREF)*. The *public market* does *not involve direct
investment*; rather, ownership involves *securities that serve as claims on the underlying assets*. Public real estate
investment includes ownership of a real estate investment trust (*REIT*), a *real estate operating company (REOC)*,
and *mortgage-backed securities*.
3. The *second dimension* describes whether an investment involves *debt or
equity*:: • An *equity investor has an ownership interest* in real estate or securities of an entity that owns real
estate. Equity investors *control decisions* such as borrowing money, property management, and the exit strategy.
• A *debt investor* is a *lender that owns a mortgage or mortgage securities*. Usually, the *mortgage is collateralized
(secured)* by the underlying real estate. In this case, the *lender has a superior claim* over an equity investor in the
event of default. Since the lender must be repaid first, the *value of an equity investor's interest is equal to the value of
the property less the outstanding debt*.
4. *Each* of the basic forms *has its own*:: Risk, expected returns, regulations, legal issues, and
market structure.
5. *Private* real estate investments are *usually larger than public* invest-
ments because:: Real estate is *indivisible and illiquid*. *Public* real estate investments *allow the property
to remain undivided* while allowing *investors divided ownership*. As a result, *public* real estate investments are
*more liquid* and enable investors to *diversify* by participating in more properties.
6. Real estate must be *actively managed*:: *Private* real estate investment *requires property
management expertise* on the part *of the owner* or a *property management company*. In the case of a *REIT or
REOC*, the real estate is *professionally managed*; thus, *investors need no* property management *expertise*.
7. *Equity* investors usually require a *higher*:: *Rate of return* than mortgage lenders
because of *higher risk*.
8. Typically, *lenders expect* to receive returns from:: *Promised cash flows* and *do not*
participate in the *appreciation* of the underlying property.
9. *Equity investors expect* to receive:: *An income stream* as a result of renting the property *and
the appreciation* of value over time.
, Private Real Estate Investments
Study online at https://quizlet.com/_34zw7k
10. Basic Forms of Real Estate Investment::
11. Real estate investment *differs from other asset classes*, like stocks and
bonds, and *can complicate measurement and performance assessment*:: •
*Heterogeneity*. Bonds from a particular issue are alike, as are stocks of a specific company. However, *no two
properties are exactly the same* because of location, size, age, construction materials, tenants, and lease terms.
• *High unit value*. *Because real estate is indivisible*, the *unit value is significantly higher* than stocks and bonds,
which makes it *difficult to construct a diversified portfolio*.
• *Active management*. Investors in stocks and bonds are not necessarily involved in the day-to-day management
of the companies. Private real estate investment requires active property management by the owner or a property
management company. *Property management involves maintenance, negotiating leases, and collection of rents*. In
either case, *property management costs must be considered*.
12. Real estate investment differs from other asset classes, like stocks and
bonds, and *can complicate measurement and performance assessment*
(cont'd):: • *High transaction costs*. Buying and selling real estate is *costly because it involves appraisers, lawyers,
brokers, and construction personnel*.
• *Depreciation and desirability*. Buildings *wear out* over time. Also, buildings may *become less desirable because
of location, design, or obsolescence*.
• *Cost and availability of debt capital*. Because of the high costs to acquire and develop real estate, property values
are impacted by the level of interest rates and availability of debt capital. *Real estate values are usually lower when
interest rates are high and debt capital is scarce*.
• *Lack of liquidity*. Real estate is *illiquid*. It *takes time to market and complete the sale* of property.
• *Difficulty in determining price*. Because of *heterogeneity and low transaction volume*, *appraisals are usually
necessary* to assess real estate values. *Even then, appraised values* are often *based on similar, not identical,
properties*. The combination of limited market participants and lack of knowledge of the local markets makes it *difficult
for an outsider to value property*. As a result, *the market is less efficient*.
13. The market for *REITs* has expanded to *overcome* many of the *problems
involved with direct investment*:: Shares of a REIT are *actively traded* and are *more likely to reflect
market value*. In addition, investing in a REIT can provide exposure to a *diversified real estate portfolio*. Finally,
*investors don't need property management expertise* because the REIT manages the properties.
14. Real estate is commonly *classified as*:: *Residential or non-residential*.
