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Real Estate Investment Real Estate Investment
Chapter 14Chapter 14
Computer-Aided Analysis
© 2011 Cengage Learning
© 2011 Cengage Learning
Key TermsKey Terms
Analysis of offer to purchase
Cash flow projections
Cumulative cash flows
Depreciable base
Gross rent multiplier
Holding period
Internal rate of return (IRR)
Investment Analysis
Positive or negative leverage
Return on equity
© 2011 Cengage Learning
OverviewOverview
Many software programs are currently available to help the investor and real estate practitioner in investment analysis.
Many programs are reasonably priced and many can be downloaded from the Internet for free.
An investor should examine the available programs and utilize those that fulfill their needs.
© 2011 Cengage Learning
OverviewOverview
Three of the more useful tools of analysis will be examined in this chapter.
The Excel analysis programs are included as part of this text and can be found on the CD in the book jacket:(1) Cash Flow Projections
(2) Investment Analysis
(3) Analysis of Offer to Purchase
© 2011 Cengage Learning
Cash Flow ProjectionsCash Flow Projections
If the holding period is one year, the investment analysis would be very simple
This is seldom the case
Most investors plan on holding the property for a period of years and then selling at an optimum time
A sophisticated investment analysis can help the investor determine the optimum holding period.
© 2011 Cengage Learning
Entering Data for the Analysis
Date of Report
Property Being Analyzed
First Year End Date
Income and Expense ItemsGross Scheduled Income
Increase in Gross Scheduled Income
© 2011 Cengage Learning
Entering Data for the Analysis
Miscellaneous IncomeIncrease in Miscellaneous Income
Vacancy and Credit LossPercent Vacancy & Credit Loss
© 2011 Cengage Learning
Entering Data for the Analysis
Operating ExpensesIncrease in Operating Expenses
Miscellaneous ExpensesIncrease in Miscellaneous Expenses
Capital Expense & Refurbishment Useful Life for Depreciation
Other Costs
© 2011 Cengage Learning
Entering Data for the Analysis
PURCHASE PRICE
FIRST MORTGAGEInterest Rate
Term
SECOND MORTGAGEInterest Rate
Term
EQUITY: (Price-Mortgages)
© 2011 Cengage Learning
Entering Data for the Analysis
NUMBER OF SQUARE FEETDEPRECIABLE BASEUSEFUL LIFE (27.5 OR 39 YRS)INCOME TAX RATE FOR CASH FLOWSINCOME TAX RATE FOR CAPITAL GAINDISCOUNT RATE
© 2011 Cengage Learning
Entering Data for the Analysis
MONTHLY MORTGAGE PAYMENT (FIRST)
ANNUAL PAYMENT
MONTHLY MORTGAGE PAYMENT (SECOND)
ANNUAL PAYMENT
DEBT COVERAGE RATIO
DESIRED RETURN ON EQUITY
COST OF SALE
© 2011 Cengage Learning
Displaying the Results
All of the cash flows are considered to arrive at the end of the year
A cash flow item such as Capital Expense & Refurbishment is assumed to occur at the end of the year.
Useful life for this item must be inserted since it will be depreciated.
© 2011 Cengage Learning
Displaying the Results
Other Costs
Net Cash Flow Before Tax
Cumulative Cash Flow (Before Tax)
Cumulative Cash Flows (After Tax)
Reversion Proceeds
Cash Flow After Sale
© 2011 Cengage Learning
Displaying the Results
Cumulative Cash Flow (Including Sale/Before Tax)
Cumulative Cash Flow (Including Sale/After Tax)
Discounted Cash Flows
Internal Rate of Return (IRR)
Practical ApplicationSensitivity analysis
© 2011 Cengage Learning
The Heights Colony Apartments
Gross Scheduled Income $ 1,075,200Less Vac & Credit Loss (5%) (53,760)Miscellaneous Income 26,000Adjusted Gross Income $ 1,047,440Operating Expenses
Fixed Expenses $ 259,800Variable Expenses $ 180,800
Total Expenses $ 440,600Net Operating Income (NOI) $ 606,840
© 2011 Cengage Learning
Investment Analysis
Gross Rent Multiplier (GRM)
Constant (on existing loans)
Return on Equity (ROE)
Overall Return or Capitalization Rate (Cap Rate)
Income Going to Debt Service
Income Going to Expenses
© 2011 Cengage Learning
Investment Analysis
Rental Rate (per sq. ft.)
Positive or Negative Leverage
New Loan Amount
New Equity
Suggested Offering Price
© 2011 Cengage Learning
Analysis of Offer to Purchase
As with the Investment Analysis, the Analysis of Offer to Purchase (Table 14.4) is provided automatically. This report is simply a restatement of the data in the previous reports and is found in Sheet 4 of the Excel spreadsheet.The format and data contained in this report can be modified to suit the needs of the analyst.
