Chapter 11 Traditional Investment Criteria

Chapter 11Traditional Investment Criteria

Rules of Thumb Criteria– General Characteristics– Payback Period Methods

• Gross Income Multiplier

• Net Income Multiplier

• BTCF Multiplier (Re)

• ATCF Multiplier


Rules of Thumb Criteria– Average Rate of Return Methods

• Average Rate on Net Operating Income

• Average Rate on Before Tax Cash Flow

• Average Rate on After Tax Cash Flow

• Adjusting for Reversion

– Decision Rules– Limitations of Rules of Thumb


Ratio Analysis– Leverage and Operating Ratios

• Mortgage Debt to Property Value Ratio (LTV)

• Debt Coverage Ratio (DCR)

• Default Ratio (DR)

• Total Asset Turnover Ratio (TAT)

• Operating Expense Ratio (OER)


Ratio Analysis– Profitability Ratios

• Profit Margin Ratio

• Return to Equity on Total Investment

• Return on Equity

• “System of Financial Analysis”

– Limitations of Ratio Analysis


Traditional Appraisal Methods– Key Concepts

• Anticipation - TVM

• Change - Four Forces

• Substitution

• Contribution


Traditional Appraisal Methods– Sales Comparison Approach

• Comparable sales data– Selection

– How many comparables?


Traditional Appraisal Methods– Sales Comparison Approach

• Adjustment of sales data– Elements of comparison

» Property rights conveyed

» Conditions of sale

» Financing terms

» Market conditions

» Locational characteristics

» Physical characteristics


Traditional Appraisal Methods– Cost Approach

• Estimating site value• Estimating Building Cost

– Reproduction cost– Replacement cost

• Estimating accrued depreciation– Physical deterioration– Functional obsolescence– Economic obsolescence

• Entrepreneurial Incentive


Traditional Appraisal Methods– Income Approach

• Gross income multiplier

• Net income capitalization

• Discounted cash flow

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Chapter 11 Traditional Investment Criteria