Question

React = Explain HOW this is possible. Use an example for each problem for a thumbs up!

1. React: An unleased property is worth less than if the same property was fully leased.
2. React: A loan with an 80% loan to value ratio is preferable to a loan with a 50% loan to value ratio.
3. React:  When evaluating the attractiveness of an investment, you should mainly focus on your equity IRR because it tells you the return you will realize on your invested money.
4. React:  When calculating property-level cash flows, you should utilize earnings before interest payments because on-going capital expenditures are roughly equal to depreciation allowances.

Answer 1

Statement 01: An unleased property is worth less than if the same property was fully leased

Explanation -- In an unleased property the only earning you have is via capital gains in the value of the property. Whereas in a leased property you gain both by capital gains and also by the rent you receive from leasing the property. Take for example Mike who owns a flat in New york. If mike rents out the flats he starts getting an additional income of 20,000$ a year and he also enjoys the benifit in terms of capital gains when he sales the propoerty.

Statement 02: A loan with an 80% loan to value ratio is preferable to a loan with a 50% loan to value ratio.

Explanation: Loan to value ratio means that the amout of loan you are availing while investing in a propoerty. Take for example you buy a house worth 1 million $. If the LTV is 80% then you will take a loan of 0.8 Million from the bank and pay 0.2 Million from your pocket. Whereas, if the LTV is 50% your bank will give you 0.5 Million $ and you will have to shell out another 0.5 Million from your own pocket. A higher LTV is better because you have to take out lesser money in the beginning from your own pocket.

Statement 03: When evaluating the attractiveness of an investment, you should mainly focus on your equity IRR because it tells you the return you will realize on your invested money.

Explanation: Investment are generally funded by both equity and debt. The return on debt is mostly fixed and is equivalent to the interest to be paid. For an investor he should focus on IRR due to equity becuase that is the return he is earning on his investment. Take for example the investment in a power plant. The IRR of the project might be 20% however, if the project is partially funded by debt with 6% interest the iRR of equity may be 30%. The investor has to look at 30% because this is what he is making on his investment.

Statement 04: When calculating property-level cash flows, you should utilize earnings before interest payments because on-going capital expenditures are roughly equal to depreciation allowances.

Explanantion: We should consider the earnings before interest for calculating property level cash flow. This is so because these are the real cash flows that you have before making any interest payment. Also, you get a depriciation allowance on the property each year which is almost at times equivalent to CAPEX (capital expenditure) that you do on the property.