Lecture 07 Investment Analysis - Feb 10 09

Lecture 07 Investment Analysis - Feb 10 09 - Investment...

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1 Investment Analysis of Income Properties Chapter 11
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2 I. Motivations for Investing Price appreciation – Inflation Diversification – Stocks, bonds, money market Tax benefits – Interest deduction, depreciation, tax rates
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3 II. Real Estate Cycle Large Market Highly Competitive Ownership is fragmented
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4 Exhibit 11-1 Percent Occupied Normal Range Recovery Expansion Balance Decline Market Condition Apartments Office Warehouse Retail
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5 III Investment Strategies What did PPR recommend as an overall strategy?
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6 Investment Analysis IV. Real Estate Operating Statements: The discounted cash flow pro forma Traditional income statements show operating income “when earned” and operating expenses “when incurred” . Real estate operating statements report actual cash inflows and outflows and non operating cash flows such as those from debt service, income tax and capital expenditures. (con’t)
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7 Investment Analysis Real Estate Operating Statements: The discounted cash flow pro forma (con’t) The pro forma usually required for five years by lending institutions. Structure of the pro forma now widely available in specialized software products (e.g. Argus). (con’t)
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8 Investment Analysis Real Estate Operating Statements: The discounted cash flow proforma (con’t) Expected Cash Flow Ratio Analysis Measure Potential Gross Income (PGI) Minus Vacancy Allowance and Rent loss Plus Other income (e.g. parking, vending machines, laundromats) Equals Effective Gross Income (EGI) Gross Income Multiplier = Sales Price/EGI Minus Operating Expenses (OE) Management fees, Salaries, Utilities, Insurance, Supplies, Advertising, Maintenance/ Repairs, Property tax Operating Expense Ratio = OE/EGI
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9 Investment Analysis Real Estate Operating Statements: The discounted cash flow proforma (con’t) Equals Net Operating Income (NOI) NOI = Cap Rate Purchase Price Minus Debt Service (DS) Mortgage Constant= DS/(Initial Mortgage Principle) Debt Coverage Ratio = NOI/DS Breakeven Ratio = (OE+DS)/PGI Equals Before Tax Cash Flow (BTCF) Equity Dividend Rate = BTCF/Equity = Cash-on-Cash Return on total capital investment = NOI/ (Equity + Depreciation Allowance) Minus Taxes (Tax Saving) from operation Equals After Tax Cash Flow (ATCF) After Tax Cash-on-Cash = ATCF/Equity
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10 What about Taxes and the Sale of property?
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11 Expected Taxes from Operation Expected Taxes from Operation Effective Gross Income Minus Operating Expenses Equals Net Operating Expenses Minus Interest of Debt Minus Depreciation deduction Minus Amortized Financing Costs Plus Replacement Reserves Equals Ordinary Taxable Income Times Marginal Tax Rate Equals Taxes (Tax Saving) from operation
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12 Expected Cash Flow at Reversion Cash Flow at Sale Selling Price Minus Selling Expenses Equals Net Sales Proceeds Minus Unpaid Mortgage Balance Equals Before Tax Equity Reversion Minus Taxes due on Sale Equals After Tax Equity Reversion
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13 Expected Taxes at Reversion
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Lecture 07 Investment Analysis - Feb 10 09 - Investment...

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