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© 2010 Rockwell Publishing Construction Building a home The three phases of building a home are: land acquisition development construction
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© 2010 Rockwell Publishing
Lesson 15: Real Estate Construction, Ownership, and Investment
Principles of California Real Estate
© 2010 Rockwell Publishing
ConstructionArchitectural styles
Agents should be familiar with various architectural styles including modern, ranch, Spanish, and so on.
One story ranch is easiest to maintain. But two-story construction costs less per square foot and makes more economical use of land.
© 2010 Rockwell Publishing
ConstructionBuilding a home
The three phases of building a home are:land acquisitiondevelopmentconstruction
© 2010 Rockwell Publishing
ConstructionBuilding codes
Building codes specify standards for construction methods and materials.
These standards promote building safety and provide certain degree of uniformity for community.
© 2010 Rockwell Publishing
ConstructionPlans and specifications
Plans: Drawings that show vertical and horizontal cross-sections of a building.
Show placement of foundations, floors, walls, windows, wiring, and fixtures.
Specifications: Text that accompanies plans, specifying construction materials and methods to be used.
© 2010 Rockwell Publishing
Foundation plan: Shows details of foundation construction, such as footing and piers.
Plot plan (or site map): Shows contours of land and location of improvements.
Elevation: Shows side view of each side of house.
ConstructionPlans and specifications
© 2010 Rockwell Publishing
ConstructionBasic elements
Most common type of construction is wood frame building (relatively inexpensive and easy to construct).
Basic construction elements include:foundationframingroofingplumbingelectrical systemHVAC
© 2010 Rockwell Publishing
Elements of ConstructionFoundation
Foundations are almost always made of reinforced concrete.
Footing: Wide bottom base of the foundation wall.
Sill plate: Board attached to top of concrete foundation, on which framing of the house sits.
© 2010 Rockwell Publishing
Elements of ConstructionFraming
House frame is typically constructed of dimensional lumber.
Elements include:Joists: Horizontal members that hold up
floor and ceiling.Studs: Vertical members attached to the
sole plate, a horizontal board that rests on the subfloor.
© 2010 Rockwell Publishing
Walls provide structural support and separate the interior space.
Interior walls are either load-bearing or non-load-bearing.
Load-bearing walls:are sturdier and support upper structureare not easily moved in remodeling
Elements of ConstructionWalls
© 2010 Rockwell Publishing
Ridge board: Peak of the roof. Rafters: Diagonal roof members.Roofing felt: Tar-impregnated paper that
covers sheathing attached to the rafters.Pitch: Steepness of the roof.Hip roof: A roof that rises from all sides to a
short ridge.Flashing: Metal sheeting installed on roof to
prevent water seepage.
Elements of ConstructionRoofing
© 2010 Rockwell Publishing
Elements of ConstructionPlumbing
Plumbing systems include:fixturessupply pipes (galvanized steel, copper,
or plastic)drain pipes (cast iron, concrete, or
plastic)Soil pipe: Heavy clay drain pipe for
sewage outflow.
© 2010 Rockwell Publishing
Elements of ConstructionElectrical
Most modern electrical wiring consists of cable: insulated cord containing strands of copper or aluminum wire.
Cable is enclosed in conduit: metal or plastic piping that provides added protection.
© 2010 Rockwell Publishing
Elements of ConstructionHVAC
HVAC: Heating, ventilation, and air conditioning system in house or other building, which provides warm, cool, or fresh air to rooms through series of galvanized sheet metal tubes called ducts.
© 2010 Rockwell Publishing
Elements of ConstructionHVAC
HVAC systems have energy-efficiency ratio (EER).
The higher the EER, the more efficient the appliance.
© 2010 Rockwell Publishing
Elements of ConstructionHVAC
Insulation: Material resistant to transfer of heat; important for keeping heating and air conditioning costs down.
R-value: Effectiveness rating for insulation that measures resistance to heat transfer; higher R-value is better.
© 2010 Rockwell Publishing
Construction Pest problems
Wood frame construction is vulnerable to wood-eating insects, especially termites.
Always a good idea to have pest control inspection when property is listed:
good investment for buyeroften required by buyer’s lender or (in
some parts of California) FHA or VA
© 2010 Rockwell Publishing
Inspection report must be:given to property owner within 10 days, and
to buyer as soon as possible before closingfiled with state Structural Pest Control
Board, which will retain it for two years
Construction Pest problems
© 2010 Rockwell Publishing
Unless parties agree otherwise, seller usually pays for fixing existing pest problems, and buyer pays for preventive work.
Construction Pest problems
© 2010 Rockwell Publishing
Construction Soil problems
Soil may be expansive, adobe, or alkaline. Backfill is soil used to fill excavated areas. It may be advisable for buyer to request a:
percolation test, which measures soil’s ability to drain water
soil engineer’s test for possible leakage from nearby underground storage tanks
© 2010 Rockwell Publishing
SummaryConstruction
• Plans and specifications• Elements of construction• Pest problems• Soil problems
© 2010 Rockwell Publishing
To Rent or to Buy?Advantages of renting
Advantages of renting:less financial commitment and riskgives person greater mobilitycarries fewer responsibilitiesaccess to amenities
© 2010 Rockwell Publishing
To Rent or to Buy?Advantages of buying
Advantages of buying:security and stabilityprivacy and freedom from restrictionslower monthly payments (eventually) investment appreciationtax advantages (mortgage interest
deduction)
© 2010 Rockwell Publishing
Choosing a homeNeighborhood considerations
Neighborhood considerations include:percentage of home ownershipconformity among propertiespresence of changing land usescondition of streets and sidewalksavailability of utilities and public servicespresence of quality schoolsavailability of social servicesneighborhood condition: stable or
changing?
© 2010 Rockwell Publishing
Choosing a homeHome features
Buyer should consider:site and viewexterior appearanceplumbing and electrical systems, HVACattic and/or basementgarage or carportenergy-efficient featuresinterior floor plan, design deficiencies
© 2010 Rockwell Publishing
Home FeaturesDesign deficiencies
Examples of design deficiencies: front door opens directly into living roomno front hall closetback door difficult to reachdifficult access to dining room, stairways
or basementno eating area in kitchen
© 2010 Rockwell Publishing
SummaryChoosing a Home
• Advantages of buying• Advantages of renting• Neighborhood considerations• Evaluating the house• Design deficiencies
© 2010 Rockwell Publishing
Investing in Real Estate
Real estate agent shouldn’t claim to be investment counselor, but should have some familiarity with investment options in real estate for interested clients.
© 2010 Rockwell Publishing
Investing in Real EstateReturn on investment
Investment: Asset that is expected to generate return (profit).
Return on investment may take various forms, including:
interestdividendsappreciation
© 2010 Rockwell Publishing
Investing in Real EstateReturn on investment
Interest: Money paid to investor for use of borrowed money.
Dividends: Share of earnings paid to an investor by a business.
Appreciation: Increase in the value of an asset.
© 2010 Rockwell Publishing
Investing in Real EstateTypes of investments
Investment is either ownership investment or debt investment.Ownership investment: Investor takes ownership interest in asset. Also known as equity investment.
Examples: real estate, stocks.Debt investment: Investor lends money to another person or entity.
Examples: government bonds or mortgage loan.
© 2010 Rockwell Publishing
Investing in Real EstatePortfolio
Because ownership investments appreciate, instead of just paying interest like debt investments, they are considered better hedge against inflation.
Investors usually try to diversify their investments, with mix of ownership and debt investments.
This mix of investments, plus cash reserves, is known as portfolio.
© 2010 Rockwell Publishing
Investing in Real EstateInvestment characteristics
Investments are usually evaluated on basis of three characteristics:
liquidity (ability to be converted into cash quickly)
safetyreturn on investment (yield)
© 2010 Rockwell Publishing
Highly liquid investments are usually quite safe but offer low yields.
Generally, the more liquid an investment the lower the risk and the lower the rate of return
Example: savings accounts.
Real estate is not liquid investment, since it can take months to sell property.
Investing in Real EstateInvestment characteristics
© 2010 Rockwell Publishing
Investing in Real EstateAdvantages
Potential advantages of investing in real estate include:
appreciationleveragecash flowtax benefits
© 2010 Rockwell Publishing
Advantages of Investing in Real EstateAppreciation
As property appreciates, owner’s equity increases.
Equity: Difference between property’s market value and liens against it.
Increase in equity:increases owner’s net worthcan be used as collateral for loan (cash)
© 2010 Rockwell Publishing
Advantages of Investing in Real EstateAppreciation
Initial downpayment on property creates equity right away.
Equity financing: Buyer makes home purchase using her own funds (not borrowed funds). Disadvantage to having money tied up in
equity is that money can’t be invested elsewhere for (potentially) greater returns.
© 2010 Rockwell Publishing
Advantages of Investing in Real EstateLeverage
Leverage: Using borrowed money to invest in asset.
If asset appreciates, investor earns money on borrowed money as well as on money directly invested.
© 2010 Rockwell Publishing
Advantages of Investing in Real EstateCash flow
Cash flow: Spendable income generated by investment, after all expenses have been paid (operating costs, mortgage payments, taxes, etc.).
So income property can increase investor’s:net worth (through appreciation)income (through cash flow)
© 2010 Rockwell Publishing
Advantages of Investing in Real EstateCash flow
Cash flow may be increased with sale-leaseback:Building owner sells and then leases property
from new owner.Rent paid by seller is deductible business
expense.
Sale-leaseback may include buyback agreement:Building owner agrees to buy property back
from investor after specified period.
© 2010 Rockwell Publishing
Advantages of Investing in Real EstateCash flow
Having long-term lease is stable source of cash flow, much like annuity.
Investors often evaluate investment by looking at “cash on cash,” which refers to property’s first year cash flow divided by initial investment.
This formula pinpoints ratio between cash invested (equity) and cash received.
© 2010 Rockwell Publishing
Investing in Real EstateDisadvantages
Disadvantages of investing in real estate include:
need for expert adviceexpense of property managementlow liquidityhigh risk
© 2010 Rockwell Publishing
Investing in Real EstateProperty management
Large properties usually require property manager to oversee day-to-day operations.
Property manager duties often include:maintaining propertyhandling tenant complaintscollecting rentslocating new tenantsacting as tenant/owner liaison
© 2010 Rockwell Publishing
State law requires apartments with more than 15 units to have resident manager living on premises.
Investing in Real EstateProperty management
© 2010 Rockwell Publishing
Property manager may be paid flat fee or commission.
Commission could be percentage of gross receipts, new leases, or expected rents.
Manager’s authority to engage in acts on owner’s behalf comes from property management agreement (contract between owner and manager).
Investing in Real EstateProperty management
© 2010 Rockwell Publishing
Investing in Real EstateCommercial properties
Investors considering commercial properties must look at various economic factors.
Main consideration when investing in shopping centers is purchasing power of surrounding area.
Investor will also evaluate center’s largest tenants (anchor tenants).Kiosk is small, low-overhead booth
within a shopping center.
© 2010 Rockwell Publishing
Investing in Real EstateCommercial properties
Commercial tenants tend to avoid the northeast corner of intersections because this corner receives the greatest amount of sun during business hours.In strip development, stores may be located in a line along major arterial.A turnkey project is a completed project that is ready for immediate occupancy.
© 2010 Rockwell Publishing
Subdivision planners will rely on initial market analysis in making planning decisions.
Subdivision developers tend to use longer blocks, which are more economical since less land is devoted to streets.
Investing in Real EstateResidential properties
© 2010 Rockwell Publishing
A real estate investor will need to pay insurance premiums to protect property against loss.
Policy can be canceled only if insurer gives written notice within reasonable period of time.
Refund of premiums (short-rating) will be determined according to schedule approved by Insurance Commissioner (rather than prorated).
Investing in Real EstateInsurance
© 2010 Rockwell Publishing
SummaryInvesting in Real Estate
• Ownership investments• Debt investments• Liquidity, safety, and yield• Leverage • Equity• Cash flow• Property management• Commercial properties• Residential properties• Insurance