Roger J. Brown

Optimization of residential property management

Purpose – The paper aims to provide an analysis of the principle‐agent relationship between owner (principal) and manager (agent) of investment properties by: developing an optimization model for the net profit scenario that any third party manager of properties in multiple locations faces; and describing the principals (or owners) problem and likewise developing an income optimization model. The model allows illustrating the misalignment of incentives and compensation arrangements common to the business of managing small investment properties.Design/methodology/approach – The paper provides an in depth review of literature on the agency problem, both in general as well as in real estate research and compares the qualitative findings with analytical results provided by the model. The latter is developed by applying a transaction cost framework to the context of income structures in investment properties and their management.Findings – The optimization model shows that profit maximization for the manger ...

Rent control revisited: effects on property management

Purpose – The purpose of this paper is to show how an optimization model previously published by the authors is employed to study the effects of rent control on income optimization for the owner and the manager, as well as on the principal‐agent relationship. The model explains effects on management, maintenance and housing quality observed under rent control.Design/methodology/approach – The optimization model is developed by applying a transaction cost framework to the context of income structures in investment properties and their management. Rent control is introduced into the model as a rent maximum.Findings – Under rent control, the manager is forced to optimize income solely through cost control, without motivation to provide above minimum services. The owner is unable to optimize income. Income and funds available for management and maintenance are reduced by costs uncontrollable by the owner. Consequently, management and maintenance are reduced, if not eliminated, resulting in deterioration of th...

Senior Housing: An Intergenerational Solution

Abstract Classic views of senior housing choice have correctly noted that household family size shrinks with age and resources devoted to elderly housing consumption can then be redirected to other areas. The debate is about the best way to undertake this change. The alternatives are numerous: Sell and buy smaller vs. sell and rent smaller are special cases of the rent-or-buy decision. Accumulated home equity may be used for retirement leisure, unexpected expenses associated with health matters or different kinds of elder care. The equity need not be withdrawn or exhausted if various reverse amortization mortgage plans are employed. Moving in with younger family members is often discussed but nearly as often dismissed as unsuitable for a host of reasons, nonetheless it must be included in the mix of options. This study looks at an intergenerational solution to the housing problem facing the elderly. It describes how a unique combination of family systems, property rights, investment goals, and tax benefits can produce optimal solutions for some families. A theoretical model is presented wherein an older family member optimizes health, housing and bequest options, while at the same time in the same transaction a younger family member seeks an optimal investment.

Land use regulation

This chapter examines land use from the standpoint of the community. If there is a bid rent curve in a particular area, rather than a smooth downward sloping shape, or if there is a series of jagged lines not necessarily pointing in any direction, it may be concluded that the market participants are constrained by regulators who decide what is best for land users regardless of economic considerations. Land use often proceeds not on the basis of its most efficient use, but on the basis of the size and level of protest of vocal groups who have the power to elect or re-elect officials who do their bidding. The landscape is littered with spectacular government-inspired land use failures— such as federal housing projects and rent control, but one also observes the occasional successful urban renewal. This chapter provides a way of thinking about land use regulation and a rational model to describe a conflict between property owners and a regulatory agency. The chapter proposes a theoretical model that permits one to optimize the conditions of regulation in a general sense.

Uncertainty: Risk in real estate

This chapter discusses the usage of non-normal probability distributions to examine and perhaps explain real estate returns. This requires demanding mathematics, but with todays modern computing power the challenge is manageable. Such distributions permit a more robust view of the variation investors face. The chapter provides a theoretical foundation for non-symmetrical distributions based on owner involvement in the operation of the investment. The positive influence the owner exerts, on an average, appears to locate more probability mass on the right. Furthermore, the chapter discusses the real estate. With the advent of plentiful data for real estate, these financial models are not being carelessly borrowed just because they are in place and work elsewhere. Both real estate and stock involve different risks.

Chapter 1 – Why location matters: The bid rent surface and theory of rent determination

This chapter determines the way the market allocates land among consumers, and builds a model that tells who will be located where. Certain tenants, categorized by the way they use the land, have certain needs. Common to all of them is the need to be located in a specific place. That specific place may be dependent on proximity to their customers, suppliers, raw material, transportation arteries, or any number of other attributes of a land market. An analytical way is required to determine the way a parcel of land is better or worse than another, by the virtue of its location, its closeness to some particular desirable other place. Theory predicts that rents (and therefore values) are the highest where economic activity is most intense and productive, hence profitable. Profits are what one observes when land is used efficiently. Therefore, if one land consumer can achieve a greater profitability on a parcel of land than another, the consumer who can use the land most profitably pays the highest price.

Chapter 3 – The “rules of thumb”: Threshold performance measures for real estate investment

This chapter deals with the initial measures used in the field to decide if the collection of more information and performance of further analysis on a real estate investment opportunity is required. The availability of plentiful data for privately owned real estate investments is relatively new. As with any new tool, using it to the full advantage depends on using it correctly. Rules of thumb, having their place in the acquisition of individual properties, also play a role in data analysis. In that role preliminary conclusions about the market in which the target acquisition competes can be reached. Rules of thumb are short cuts. They are for the ‘‘tire kicking’’ stage of a search for a suitable property. They give quick-and-dirty answers. As such, they ignore many important aspects of investing. Rules of thumb are important for two reasons: (1) real estate information is costly, and the decision to pursue more information on one project precludes devoting more time to another, possibly more profitable, pursuit. (2) The smallest income properties often trade in the market solely on the basis of threshold measures. Thus, the decision to purchase a duplex might be based entirely on its gross rent multiplier.Publisher Summary This chapter deals with the initial measures used in the field to decide if the collection of more information and performance of further analysis on a real estate investment opportunity is required. The availability of plentiful data for privately owned real estate investments is relatively new. As with any new tool, using it to the full advantage depends on using it correctly. Rules of thumb, having their place in the acquisition of individual properties, also play a role in data analysis. In that role preliminary conclusions about the market in which the target acquisition competes can be reached. Rules of thumb are short cuts. They are for the ‘‘tire kicking’’ stage of a search for a suitable property. They give quick-and-dirty answers. As such, they ignore many important aspects of investing. Rules of thumb are important for two reasons: (1) real estate information is costly, and the decision to pursue more information on one project precludes devoting more time to another, possibly more profitable, pursuit. (2) The smallest income properties often trade in the market solely on the basis of threshold measures. Thus, the decision to purchase a duplex might be based entirely on its gross rent multiplier.

Fundamental real estate analysis

There are a number of excellent real estate analysis programs for practitioner use in ‘‘numbers crunching.’’ Essentially, these are variant forms of spreadsheets that perform numerical analysis. Moreover, the market is competitive. Principals and brokers compete for the best deals. Hence, decisions must be made quickly. Real estate markets present a unique; the real world analysis of a real estate investment involves many complex variables. All of these, to some degree, change constantly due to market forces. For stock market data a holding period return can be parsed into even increments, because sales of homogeneous assets occur in a continuous auction market. Thus, because annual, monthly, weekly, or daily stock prices are all available, returns may be expressed over any interval.

Chapter 7 – The tax deferred exchange

The private real estate investors add entrepreneurial labor to their capital investment. While this complicates the investment return calculation, it offers significant and often overlooked tax benefits. This chapter explores a particularly powerful strategy available to the real estate investors, who plan transactions in their properties carefully. The investor who adds entrepreneurial labor to increase his rate of return and delays his income tax for a long time is able to build terminal wealth faster. For investors where entrepreneurial issues do not apply and annual returns are moderate, the conclusions are less certain. Given the costs, explicit and implicit, the investor who merely plods along with the rest of the economy must be very careful when undertaking an exchange. In addition, scale factors come into play. The size of the acquired property relative to the disposed property strongly influences whether the cost of an exchange can be justified. For real estate, a sequential taxation policy incrementally taxes each property in a series as it is sold. This encourages more borrowing either for non-taxable refinance and repurchase strategies that reduce investor efficiency, by adding multiple locations or for borrowing to keep ownership levels where they would have been if a tax deferred exchange strategy were available.

The Lender's dilemma

The lender influences the transaction in the way he grants the loan on the property. The buyers interest in the property at any given price is usually dependent on certain loan terms. When loan terms change, the buyers interest in purchasing the property also changes, which can lead to a price change. Included in the lenders offer is a particular loan amount. This is based on a percentage of the propertys value, the loan to value ratio, or the basis of the way the propertys income exceeds the payments on the loan, the debit coverage ratio. The lender typically requires the buyer to furnish an appraisal or the lender completes an appraisal in-house. The decision to grant the loan, amount of loan to offer, and the terms of the loan are all dependent on this appraisal. Furthermore, the chapter discusses the capitalization rate approach versus the mortgage equity approach. The traditional, older, capitalization rate appraisal approach values the property as a whole, as if purchased by the investor for cash, free and clear of debt. It ignores the effect of financing. The mortgage equity approach parallels the discounted cash flow analysis.