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William B. Brueggeman, PhD
Corrigan Chair in Real Estate
Edwin L. Cox School of Business
Southern Methodist University
Jeffrey D. Fisher, PhD
Professor Emeritus of Real Estate
Kelley School of Business
President, Homer Hoyt Institute
REAL ESTATE FINANCE AND INVESTMENTS, FIFTEENTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2016 by McGraw-Hill
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Library of Congress Cataloging-in-Publication Data
Brueggeman, William B.
Real estate finance and investments / William B. Brueggeman, Ph.D., Jeffrey
D. Fisher, Ph.D.Fifteenth edition.
ISBN 978-0-07-337735-3 (alk. paper)
1. Mortgage loansUnited States. 2. Real propertyUnited StatesFinance.
I. Fisher, Jeffrey D. II. Title.
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does
not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not
guarantee the accuracy of the information presented at these sites.
Introduction to Real Estate Finance and Investments
This book prepares readers to understand the risks and rewards associated with investing in
and financing both residential and commercial real estate. Concepts and techniques included
in the chapters and problem sets are used in many careers related to real estate. These include
investing, development financing, appraising, consulting, managing real estate portfolios,
leasing, managing property, analyzing site locations, managing corporate real estate, and
managing real estate funds. This material is also relevant to individuals who want to better
understand real estate when making their own personal investment and financing decisions.
The turmoil in world financial markets during the late 2000s, which was closely tied to
events in the real estate market, suggests that investors, lenders, and others who participate
in the real estate market need to better understand how to evaluate the risk and return associated with the various ways of investing and lending. This requires an understanding of
the legal issues that can impact the rights of lenders and investors, the characteristics of the
various vehicles for lending and investing in real estate, the economic benefits of loans and
investments, and how local economies may affect the investment performance of properties
as well as the goals of lenders and investors.
This book is designed to help both students and other readers understand these many
factors so that they can perform the necessary analysis and make informed real estate finance
and investment decisions. As the books title suggests, we discuss both real estate finance
and real estate investments. These topics are interrelated. For example, an investor who purchases a property is making an investment. This investment is typically financed with a
mortgage loan. Thus, the investor needs to understand both how to analyze the investment
and how to assess the impact that financing the investment will have on its risk and return.
Similarly, the lender, by providing capital for the investor to purchase the property, is
also making an investment in the sense that he or she expects to earn a rate of return on
funds that have been loaned. Therefore, the lender also needs to understand the risk and
return of making that loan. In fact, one of the risks associated with making loans secured
by real estate is that, if a borrower defaults, the lender may take ownership of the property.
This means that the lender also should evaluate the property using many of the same techniques as the investor purchasing the property.
Organization of the Book
From the above discussion it should be clear that many factors have an impact on the risk
and return associated with property investments and the mortgages used to finance them.
This is true whether the investment is in a personal residence or in a large incomeproducing investment such as an office building.
Part I begins with a discussion of the legal concepts that are important in the study of
real estate finance and investments. Although a real estate investor or lender may rely heavily on an attorney in a real estate transaction, it is important to know enough to be able to
ask the right questions. We focus only on those legal issues that relate to real estate investment and financing decisions.
Part II begins with a discussion of the time value of money concepts important for
analyzing real estate investments and mortgages. These concepts are important because
real estate is a long-term investment and is financed with loans that are repaid over time.
This leads to a discussion of the primary ways that mortgage loans are structured: fixed
rate and adjustable rate mortgage loans.
Part III considers residential housing as an investment and covers mortgage loan
underwriting for residential properties. This is relevant for individuals making personal
financial decisions, such as whether to own or rent a home, as well as for lenders who are
evaluating both the loan and borrower.
Part IV covers many topics related to analyzing income property investments. We provide in-depth examples that include apartments, office buildings, shopping centers, and
warehouses. Many concepts also may be extended to other property types. These topics
include understanding leases, demonstrating how properties are appraised, how to analyze
the potential returns and risks of an investment, and how taxes impact investment returns.
We also consider how to evaluate whether a property should be sold or renovated. Finally,
we look at how corporations, although not in the real estate business per se, must make real
estate decisions as part of their business. This could include whether to own or lease the
property that must be used in their operations, as well as other issues.
While the first four parts of this book focus on investing or financing existing properties, Part V discusses how to analyze projects proposed for development. Such development could include land acquisition and construction of income-producing property of all
types to acquisition of land to be subdivided and improved for corporate office parks or for
sale to builders of residential communities. This section also includes how projects are
financed during the development period. Construction and development financing is very
different from the way existing, occupied properties are financed.
Part VI discusses various alternative real estate financing and investment vehicles. We
begin with joint ventures and show how different parties with specific areas of expertise
may join together to make a real estate investment. We use, as an example, someone with
technical development expertise who needs equity capital for a project. A joint venture is
created with an investor who has capital to invest but doesnt have the expertise to do the
development. We then provide a financial analysis for the investment including capital
contributions from, and distributions to, partners during property acquisition, operation,
and its eventual sale. In this section, we also discuss how both residential and commercial
mortgage loan pools are created. We then consider how mortgage-backed securities are
(1) structured, (2) issued against such pools, and (3) traded in the secondary market for
such securities. This also includes a discussion of the risks that these investments pose.
Part VI also includes a discussion of real estate investment trusts (REITs). These public
companies invest in real estate and allow investors to own a diversified portfolio of real
estate by purchasing shares of stock in the company.
Finally, in Part VII, we discuss how to evaluate real estate in a portfolio that also
includes other investments such as stocks and bonds. This includes understanding the
diversification benefits of including real estate in a portfolio as well as ways to diversify
within the real estate portfolio (including international investment). This is followed by a
new chapter on real estate investment funds that are created for high net worth individuals
and institutional investors. We discuss different fund strategies and structures and how to
analyze the performance of the funds relative to various industry benchmarks.
From the above discussion, one can see that this book covers many topics. Depending on
the purpose of a particular course, all or a selection of topics may be covered. If desired,
the course also may emphasize either an investors or a lenders perspective. Alternatively,
some courses may emphasize various industry segments such as housing and residential
real estate, commercial real estate, construction and development, mortgage-backed
securities, corporate real estate, or investment funds. In other words, this book is designed
to allow flexibility for instructors and students to cover a comprehensive range of topics or
to focus only on those topics that are most important to them.
Changes to the Fifteenth Edition
In addition to updating material throughout the text, we are particularly proud to introduce
a new chapter in this edition. Chapter 23 provides extensive coverage of real estate investment funds. These funds now play a major role in the ownership of both residential and
commercial real estate. Typically, these funds are created by professional investment managers and private equity firms that offer opportunities to high net worth investors, pension
plan sponsors, and other institutional investors to invest in professionally managed portfolios of real estate. How these funds are structured, operated, and evaluated are among the
important topics covered in this new chapter.
Another important addition is a new concept box in Chapter 18 that summarizes the
new SEC regulations resulting from the JOBS Act which allow for crowd funding to
raise capital for real estate investments. The new regulations now allow the Internet to be
used to reach investors which is expected to result in a significant increase in investment
from individuals that was not previously available.
This edition also introduces a new cloud-based, lease by lease, discounted cash flow program. It is designed to do investment analysis and valuation of real estate income property
investments, as discussed below.
Excel Spreadsheets and REIWise Software
This book is rigorous yet practical and blends theory with applications to real-world problems. These problems are illustrated and solved by using a blend of financial calculators,
Excel spreadsheets, and specialized software designed to analyze real estate income property. Excel spreadsheets, provided on the books Web site at www.mhhe.com/bf15e, are an
aid for students to understand many of the exhibits displayed in chapters throughout the
text. By modifying these exhibits, students also may solve many end-of-chapter problems
without having to design new spreadsheets.
Students can also register online to get free access to a cloud-based real estate valuation
program called REIWise. We chose this program for this edition of the book because it is
very easy and convenient to use by anyone with an Internet connection (including iPads
and other mobile devices). REIWise is used in several chapters to supplement the use of
Excel spreadsheets when doing investment analysis and solving valuation problems. Once
students (or professors) register, they will also have access to data files that replicate examples in the book. Students can register at the following website: www.reiwise.com/edu.
Internet Tools and Assets
Making informed real estate investment and financing decisions depends on being able to
obtain useful information. Such information may include national and local market trends,
interest rates, and properties available for acquisition, financing alternatives, and the opinions of experts concerning the outlook for various real estate sectors.
The Internet provides a rich source of information to real estate investors and lenders.
Knowing how to find information on the Web is an important part of the due diligence
that should be done before making any real estate investments. This edition includes a
number of Web App boxes that provide exercises that require finding relevant information
on the Internet. These Web App boxes provide practical examples of the types of data and
other resources that are available on the Internet. The fifteenth edition also contains
Web site references that students can use to research various real estate topics. In addition
to research, these resources provide readers with an opportunity to remain current on many
of the topics discussed in the book.
The books Web site, located at www.mhhe.com/bf15e, contains additional helpful
materials for students such as Web links, multiple-choice quizzes, Excel spreadsheets, and
appendixes to the text. Using a password-protected instructor log-in, instructors can find a
solutions manual, test bank, and PowerPoint presentations.
Several ancillary materials are available for instructor use. These include:
· Solutions Manualdeveloped by Jeffrey Fisher and William Brueggeman
· Test Bankdeveloped by Scott Ehrhorn, Liberty University
· PowerPoint slidesdeveloped by Joshua Kahr, Columbia University
We would like to thank several people who contributed to recent editions by either being a
reviewer or providing feedback to us in other ways that helped improve the current edition:
East Tennessee State University
Robert Berlinger, Jr.
University Institute of Technology
Roy T. Black
Georgia State University
Thomas P. Boehm
University of Tennessee-Knoxville
University of Illinois at Chicago
University of North Carolina-Chapel Hill
Grace Wong Bucchianeri
Wharton School, University of
Florida Atlantic University
Real Estate Insights
Homer Hoyt Institute
Santa Clara University
Portland State University
Deborah W. Gregory
University of Arizona
Tennessee State University (USA)
Sun Yat-Sen University (China)
NYU-SCPS Real Estate Institute
W. Keith Munsell
Rutgers University-New Brunswick
University of Southern California
L&B Realty Advisors
Louisiana State University
Santa Clara University
Several people played an important role in providing comments to help revise the
current edition. Brad Case with the National Association of Real Estate Investment Trusts
(NAREIT) and Ron Donohue with the Homer Hoyt Institute helped revise the chapter
on real estate investment trusts. Joe DAlessandro and Rui Shi helped with the revision of
the new chapter on real estate funds. Rhea Thornton with FNMA provided comments
on the chapter that discusses underwriting residential loans. Susanne Cannon with Megalytics helped with a new insert on Crowd Funding. Heather Hofmann helped in the preparation and submission of the manuscript.
Much of the material in the current edition benefited from many people who provided
input into previous editions. Youguo Liang at ADIA provided significant input on the
structure of joint ventures. Charles Johnson and Aaron Temple helped with Web references. Jacey Leonard helped prepare the Excel templates for the previous edition that were
used in this edition. Anand Kumar helped with Web references and spreadsheets. Ji Reh
Kore helped with research on recent trends impacting the real estate finance industry,
as well as with the preparation of the Solutions Manual. Deverick Jordan and Diem
Chau also helped with the Solutions Manual and with chapter exhibits. Nathan Hastings
helped update the legal chapters and provided input on the ownership structures used for
We will miss the late Theron Nelson, who contributed to prior editions of the book, including creating the original version of several of the spreadsheet templates. We appreciate
his contributions to this book and to the real estate profession.
Our thanks to the book team at McGraw-Hill Education for their help in developing the
new edition: Chuck Synovec, Michele Janicek, Jennifer Upton, Melissa Caughlin, M Jane
Lampe, James Heine, Lynn Breithaupt, Douglas Ruby, and Kevin Shanahan.
We also continue to be indebted to people who have contributed as authors to previous
editions, especially the late Henry E. Hoagland, who wrote the first edition of this book,
and the late Leo D. Stone, who participated in several editions. Finally, we thank all of the
adopters of previous editions of the book, who, because of their feedback, have made us
feel that we have helped them prepare students for a career in real estate.
William B. Brueggeman
Jeffrey D. Fisher
13 Risk Analysis 429
14 Disposition and Renovation of Income
Overview of Real Estate Finance
1 Real Estate Investment: Basic Legal
2 Real Estate Financing: Notes and
16 Financing Project Development 517
3 Mortgage Loan Foundations: The Time
Value of Money 42
4 Fixed Interest Rate Mortgage Loans 77
Financing Real Estate Development
17 Financing Land Development
Alternative Real Estate Financing and
5 Adjustable and Floating Rate Mortgage
18 Structuring Real Estate Investments:
Organizational Forms and Joint
6 Mortgages: Additional Concepts, Analysis,
and Applications 148
19 The Secondary Mortgage Market:
Pass-Through Securities 622
7 Single-Family Housing: Pricing,
Investment, and Tax Considerations 183
8 Underwriting and Financing Re …
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