MGMT E2037 Real Estate Finance and Investment Fundamentals

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MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 Lecture #1: Welcome “Hey, now, you're an Entrepreneur get your game on, go play Hey, now, you're a Real Estate Investor get the show on get paid And all that glitters is gold Only shooting stars break the mold. ” -Smash Mouth on Studying Real Estate Investment August 31, 2015 Teo Nicolais mgmte 2037@dce. harvard. edu © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 Introduction: 1. 2. 3. 4. 5. 6. Welcome! What is Real Estate? Course Objectives Tips for Making the Most of This Course Getting to Know Canvas Review of Principles of Real Estate • What can you do with land? • What is the Real Estate System? • The Space Market • The Asset Market • Creating Value in Real Estate 7. Essential Investment Analysis Tools: What is the Time Value of Money? 8. How Does Debt Financing Work? © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 A few words about who I am: #Harvard. Real. Estate © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 What is Real Estate? Structures Physical Land …and so much more! © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 Objectives of This Couse By the end of this course, my goal is to help you… Build on MGMT E-2035: Principles of Real Estate Think like a real estate investor. Have a clear, intuitive understanding of the key financial and managerial concepts at play in the real estate world. Develop practical, marketable, skills in developing financial projections for all of the major real estate asset types (apartments, retail, office, and for-sale development) • Including tax implications and investor equity analysis Practice making investment decisions using tools of financial analysis. Understand the global real estate market and alternative financing options …. for this to be the BEST COURSE YOU’VE EVER TAKEN. Seriously. © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 Tips for Making the most of this Course Ask questions. • “Who cares about this? ” • “Is that how it works in real life? ” Reflect on how the lessons we cover apply to your market and career. Get to know your classmates…. © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 Connect with Your Classmates on Facebook (Optional)… Facebook Group for MGMT E-2035 & MGMT E-2037: https: //www. facebook. com/groups/908121689231849/ © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 Connect with Your Classmates on Facebook (Optional)… Facebook Group for a Student Group You Definitely Need to Check Out: https: //www. facebook. com/heerea? fref=ts © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 Follow and Share Real Estate News with the World on Twitter (Optional)… #Harvard. Real. Estate © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 The Course Textbooks: Optional, but Strongly Recommended. Earlier Editions are Totally Ok. © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 In This Class, You’ll Learn to Create Value in Real Estate Investments Through… “Investing in Real Estate” by Gary W. Eldred Recommended Reading (Not Assigned in Class) © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 In This Class, You’ll Learn to Create Value in Real Estate Investments Through… 1. Real appreciation • When demand for a specific type of property location, or both grows faster than the supply of competing properties. • Note: Areas Differ in their rates of appreciation! See “Investing in Real Estate” by Gary W. Eldred © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 In This Class, You’ll Learn to Create Value in Real Estate Investments Through… 1. Real appreciation 2. Inflation of real estate values • The general increase in price levels. • Important caveat: “Price increases” printed in the newspaper generally reflect overall sales trends. This means those figures do not reflect • Gains from investment properties. • Returns adjusted for leverage. • Value created in investment properties which have not sold. • Takeaway: Eye these figures wearily. See “Investing in Real Estate” by Gary W. Eldred © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 In This Class, You’ll Learn to Create Value in Real Estate Investments Through… 1. 2. 3. 4. 5. 6. 7. Real appreciation Inflation of real estate values Cash Flows from Operations Equity gains amplified by leverage. Cash flows returns amplified by leverage. Mortgage payoff Increases in Net Operating Income due to inflation • This is a really, really big deal. • Preview: Revenue increases disproportionally with inflation when compared to. . . • Expenses • Debt Service See “Investing in Real Estate” by Gary W. Eldred © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 In This Class, You’ll Learn to Create Value in Real Estate Investments Through… 1. 2. 3. 4. 5. 6. 7. 8. Real appreciation Inflation of real estate values Cash Flows from Operations Equity gains amplified by leverage. Cash flows returns amplified by leverage. Mortgage payoff Increases in Net Operating Income due to inflation Increases in cash flows through refinancing • Your interest rate can decrease significantly as a result of… • Overall market conditions (Not so much now…keep this in mind) • Increases in your credit score • Loan-to-value • Bonus: re-amortizing your loan See “Investing in Real Estate” by Gary W. Eldred © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 In This Class, You’ll Learn to Create Value in Real Estate Investments Through… 1. 2. 3. 4. 5. 6. 7. 8. 9. Real appreciation Inflation of real estate values Cash Flows from Operations Equity gains amplified by leverage. Cash flows returns amplified by leverage. Mortgage payoff Increases in Net Operating Income due to inflation Increases in cash flows through refinancing Refinancing to extract equity • Accessing newly formed equity • Reclaiming capital improvement expenditures • Using second mortgage to match cashflow with asset usage • Putting the extracted equity back to work in new projects See “Investing in Real Estate” by Gary W. Eldred © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 In This Class, You’ll Learn to Create Value in Real Estate Investments Through… 1. Real appreciation 2. Inflation of real estate values 3. Cash Flows from Operations 4. Equity gains amplified by leverage. 5. Cash flows returns amplified by leverage. 6. Mortgage payoff 7. Increases in Net Operating Income due to inflation 8. Increases in cash flows through refinancing 9. Refinancing to extract equity 10. Buying at below current market prices 11. Selling at above current market prices 12. Creating value through smarter management 13. Creating value through renovation See “Investing in Real Estate” by Gary W. Eldred © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 In This Class, You’ll Also Learn to Maximize Your Returns… At the Property Level Through… 1. Property Selection (picking “good” properties) 2. Acquisition transaction execution (skillful negotiation and due diligence) 3. Operational management during holding period 4. Disposition transaction execution On the Portfolio Level Through…. 1. Capital allocation 2. Specific investment strategies See “Investing in Real Estate” by Gary W. Eldred © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 Our Grading Philosophy: 1. Letter Grades are assigned according to a fixed scale. 2. Your two lowest problem sets are dropped. 3. Two weighting systems are used to calculate your semester score (see the syllabus) and you are given the higher of the two scores. 4. We grade your work with an eye toward helping your develop practical, marketable skills. • Complete your work as though you were raising capital from a lender or an investor – our goal is that you will someday! © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 Is MGMT E-2035: Principles of Real Estate Required for this course? No, but it is strongly, strongly encouraged. You will accrue significantly higher returns on your investment of time and capital by taking MGMT E-2035. Many of the skills taught in MGMT E-2035 are expanded here. If you have not taken MGMT E-2035, e-mail Annie (annie. the. ta@gmail. com) and she will provide you with useful information for succeeding in this course. © 2015 Teo Nicolais

MGMT E-2037: Real Estate Finance and Investment Fundamentals Lecture 1: Welcome and Principles of Real Estate Review Instructor: Teo Nicolais August 31, 2015 Review from Principles of Real Estate © 2015 Teo Nicolais