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Lesson 8.docx

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Department
Finance
Course
FINA 210
Professor
All Professors
Semester
Fall

Description
Lesson 8 The Investment Decision TechniquesChapter 3 Finding And Evaluating the Right PropertyAfter completing this lesson you will be able toCalculate a real estate investment using the Cost ApproachCalculate a real estate investment using the Net Income ApproachCalculate a real estate investment using the Sales Comparable ApproachDefinitionTraditional Valuation Techniques are used to calculate the value of a propertyThey consist of three approachesCost ApproachNet Income Approach NOISales Comparable ApproachThe Cost ApproachListen to your professors introduction to this topic video length 000530When to Use the Cost ApproachThe Cost Approach is usedTo value unique real estate investmentsTo value real estate projects with little or no depreciationWhen real estate investments do not produce income ie when the Net Income Approach cannot be appliedWhen real estate investments do not have any comparables ie when the Sales or Market Comparable Approach cannot be appliedBy municipalities or local governments to calculate property taxesSlide 5 Advantages and Disadvantages of the Cost ApproachAdvantageDisadvantagesEasy to apply the procedures if the information is Difficult to evaluate depreciationavailableDepreciation calculations are very subjectiveDifferent variables used to calculate value of new building iegenerates different answersSlide 6 How to Apply the Cost ApproachProfessors Comments audio1StepsCalculateFormulaValue of the building Calculate this value as if the building were new using any one of the following methodsAAPer square foot basisQuantitative survey basisPutinplace basisDepreciationPhysical depreciationBBFunctional depreciationLocation depreciationABCCNet cost of building or book valueDValue the land as if it is vacant DCDEEValue of the real estate investmentSlide 7 Cost ApproachExampleExample 1You are given the assignment of appraising a property This property has 28000 square feet sqft of usable space Analysis of construction costs indicate a per squarefoot cost of 27 for the first 18000 square feet of space and 5 more per square foot for the remaining space The property is twenty years old with an estimated economic life of eighty years Changing neighbourhood location depreciation characteristics have had a negative influence on the property of approximately 14 of building construction costs An examination of similar lots indicates a land value of 1750 per square foot and this property is on 55000 square feet of land Step 1Step 2Step 3Question Try on your ownCompare your results with the right answerWhat is the estimated market value ofthis property based on the Cost ApproachStepsCalculateResultValue of the building18000 sqft27sqft First 18000486000A10000 sqft32sqft Remaining 10000320000806000806000BDepreciation314340Physical and 2080806000 201500functional 2
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