Real Estate Investment and Financial Strategy

The Real Estate Investment and Financial Strategy book author is by Peter Chinloy.  Peter Chinloy is a Professor at American University based in Washington, District of Columbia. Graduated from McGill University Having a master’s Degree from Harvard University, a master’s degree in real estate programs from American Business School, and a Ph.D. degree from Harvard University. Recognized locally and internationally for his Paper publications as he published 24 scholarly papers. He is the author of several books in his field of specialty like Labor productivity, and the cost of doing business. He has several Board Memberships & Affiliations Like Academic member of the National Council of Real Estate Investment Fiduciaries Board of Governors Member of the Federal Reserve System. Most of his work is on the academic and research side of real estate work.  

From the book title, one could conclude that the author’s target audience and readers are interested in the real estate business, investors and developers of urban development, and whoever is working to build a financial strategy whether for small investors or developers. But going through the book and reading it carefully I see it could serve several audiences. The book could serve several audiences. Developers benefit from the book to grasp the plan for their real estate mortgage or loans, to understand the critical matters of failures when funding a project by a loan, and to mitigate risk when periodical payments are at default. Real estate brokers and their companies take advantage of how to use the US financial system advantages for brokers to facilitate their work in the real estate field. People who want to invest regardless of their academic knowledge could benefit from the various techniques and funding system and USA law to benefit and reduce money loss. Accountants and planners need who want deeper knowledge of the US financial system, real estate laws, and regulations, financial institutions working with real estate, how they operate with the funding system, and how to build a financial plan and financial statements and worksheets for the real estate mortgage. Consultancy firms working in the real estate field such as architecture firms need a deeper understanding of the financial and funding procedures of the US system and how to manage future default by the provided methods by the author. Managers who run businesses also must take a look at the complexity and the high responsibility they undertake when working with real estate investors. Readers and people who are likely to start a career in real estate investors need to know the many ideas, processes, and work procedures involved in this business and what type of people to employ when understanding the various professions involved in the real estate investment work to succeed in the work. And finally, normal people who want to do their homework for their home loan are advised to read this book for its full coverage of the US real estate system and laws.

Before we dive into the book theme a reader needs to know a realistic fact that real estate investment is a very hard business to do though he made it simple because it needs various disciplines to finalize the work. The investors on the top of the business pyramid, financial planners, specialist accountants, management specialists, engineering contractors, marketing and sales specialists, consultant firms specialized in architecture and landscape, Real estate brokers, financial institutions, private funding companies, and normal people.

The real estate work involves Two main parties the developer and the funding organization or company. The book is on the funding side in terms of knowledge and expertise and that is what you will find in this book.

The book’s theme is centered on RISK in the process of real estate investment and work. The word risk appeared in this book 501 times which means every page 1.5 times regardless of the subject of the chapter, and that shows its importance in real estate work in reality.

 First, the author introduces, in the US context, the institutional and legal environment of real estate. Here he presents the major elements of the legal context. The three factors that influence real estate prices are location and location and location. Acquiring title and defining types of ownership like community ownership, partnership, and its divisions the corporation, and trust. In Land use and regulation who defines land use and its densities, coverage, and relation to ownership? For example, when buying a home how legal matters define land ownership not only the house itself. The author goes to the risk facing land ownership (acquiring it) in real estate investment. The developer faces risk when developing on land because of the uncertainty of the future increase in the supply of real estate units. The risk is there are no future commitments to purchase the units. This risk is overcome by selling the units before the start of the development construction.

Second, within the valuation and appraisal, there are various problems and risks. The author illustrates that appraisal is required because of the frequent involvement of the third party between seller and buyer. The buyer and seller might cheat by presenting a real estate property price that is higher than the market to get more funds. The buyer is taking a loan, or the mortgage might default in providing the sequence of loan payments. An appraisal is to provide proper information to the buyer of the correct price of the property and lenders if the property can secure the loan, and the major problem in appraisal is how to obtain the accurate information to build the appraisal. He illustrates in detail the three approaches of valuation and appraisal the cost, market, and income capitalization method. The author defines the resolution to the risk accompanied by appraisal as the real value of the property must be compared with a property value where there is no finance in it.

Third, the financing procedure which is correlated to interest rates and the types of mortgages includes risk to the real estate investment and the two parties the lender and the borrower. The major risk regardless of the type of mortgage taken by the borrower is the increase of interest rates and inflation rates. The borrower of the mortgage pays fixed loan payments throughout the duration of the loan contract. If interest rates increase the borrower is protected because the interest rate is fixed, but if interest rates decrease, he will lose then he has the option to refinance. When the inflation rate increases the lender loses money because the borrower pays fixed installments, with the inflation high money becomes more in amount and the borrower pays less. To solve this problem the lender needs to increase payment. The author illustrates that to solve the problem of this risk is that the loan installment should be variable not constant in amount depending on the market status of interest rate and inflation rate so that the borrower bears some of the risks. Within the types of mortgages taken the flexible payment mortgage and seller financing the author presents an idea of decreasing risk when this mortgage is used. The owner or seller of the property is the mortgage giver like the bank. He gives you money to finance the property but at higher interest rates.

Fourth, Peter shows passive and active real estate investments include some risks. In physical real estate, either actively or passively managed poses risks. Time passes before a transaction is consummated; there are costs of search for buyers and sellers, and costs of brokerage, legal, title, escrow, taxes, and fees. In passive real estate investment, a method of investment is to make a partnership, but this holds a risk of paying the task. The relief for this risk is to invest in a limited partnership that is liable for tax but not in a high percentage and some cases is zero.

The book’s introduction gives a clear message that it aims to provide theoretical knowledge and practice of the strategy for the acquisition and management of physical and financial real estate assets. For physical assets, The phases are research, appraisal, financing, acquisition, development, and management. For financial assets sources of funds, and methods of liquefying real estate are ex­amined. The book provides mathematical and statistical methods of real estate investment and strategy methods and procedures.

Real Estate Investment and Financial Strategy is a book that includes academic knowledge about the financial system of the US. It includes a detailed knowledge of the real estate system and the methods of work. The book also includes all the related laws, regulations, and rules of the US real estate. It provides many ideas from research in the US that researchers whether individuals or companies private or public applied in the real estate market that reduce the risk of investment to protect the lender and the borrower. The book is about the US systems of finance and real estate and the knowledge from the side of the lender, not the developer as the latter work involves many specialties that create risk for the real estate investment in real-world urban development.  

Peter planned to write this book content to fit the real estate investment methods and procedures. In reality, any investor even if he is an American citizen needs to know first the legal context of the finance system, banking system, and real estate system. The first idea any developer or investor has in mind is to evaluate his decision to invest or develop. That is the first step of valuation and appraisal whether by himself or by assigning a company to carry out the work. If he has the financial capacity to develop or invest, then he proceeds directly if not he needs to have knowledge about finance and how to do the math for finance-related matters like calculating benefits and how to calculate tax. The decision to invest is either in physical assets, property, or financial assets, like mortgage securities, and these are detailed in the book. Finally, after deciding to invest the last step is preparing consultants and writing contracts to conduct the investment and in some cases a management company to handle the whole process till handover and completion. The author does not cover some aspects of land issues like renting, buying, and the contractual issues of it for large-scale development.  

Peter as we may say presented ever-green ideas and concepts in his book that could be used in real estate investment if the US system did not change. He included excellent explanation graphs, numbers, tables, and workflows of the relevant content subject of discussion that made the reading enjoyable. The book content is an exact reflection of the book title name and covers real estate investment and financial strategy. The book index gives a clear idea of the book’s content information flow.  

The book provides the best practices and guidelines that most investors would desire to have knowledge of and follow. The author supports the chapter’s contents by providing some real-world examples and its calculations. Peter adds also various notes at the end of every chapter to give more detailed information about the subject under discussion or explanation. At the end of the book, there are relevant book references in the field of specialty of this book.

In 2008 when the global crisis hit the financial systems in the world I was working with a developer. At that time I knew the finance system in the country related to physical real estate investment. The developer stopped all work on all the mega projects. The land is not acquired by the developer but it is owned by a local VIP person. At that time I was thinking about how to solve the problem of land ownership and its related matters if it’s not owned by the developer or bought by him. The projects stopped for a long time and the rent is paid which is a total loss. I decided to go further in acquiring at the very least the theoretical knowledge of real estate investment and finance. That’s why I read this book though the book did not cover matters related to land ownership or the winning deal of physical real estate investment.