VIEWS: 385 PAGES: 11 CATEGORY: Financial Planning POSTED ON: 3/16/2010
Every possible evaluation method for real estate investing. Explains everything from calculating an equity position, to cap rates, to cash on cash returns. A must for any real estate investor.
FINANCIAL ANALYSIS To analyze the $h#t out of $tuff By Brian Christensen EQUITY POSITION The Loan-to-Value ratio or LTV ratio is calculated by dividing the loan balance of a property by the market value and is expressed as a percentage. The Loan-to-Value Ratio can be used to estimate the amount of equity you have in a property. If the LTV ratio for a property is 75%, your equity position in a property is 100 minus 75 or 25%. Balance of Loans (or purchase price) LTV Ratio = x 100 Market Value Equity Position = 100 - LTV CASHFLOW ANALYSIS 1. Calculate the annual potential income 2. Select a vacancy allowance (5-10%) 3. Identify all additional income • Parking • Laundry • Vending Machines = EFFECTIVE GROSS INCOME (EGI) 4. Identify all operational expenses: • Property Management • Advertising • Insurance • Property Taxes • Utilities • Trash Removal • Snow Removal • Lawn Care • Attorney Fees • Repairs • etc = NET OPERATING INCOME CASHFLOW ANALYSIS Gross Annual Income 54,500 - Vacancy Amount 2,500 Gross Operating Income 52,000 - Operating Expenses 17,000 NOI Net Operating Income 35,000 - Annual Debt Service 20,000 Before-Tax Cash Flow 15,000 Cashflow Analysis Resources: Fair Market Rent: http://www.huduser.org/datasets/fmr/fmrs/index.asp?data=fmr10 http://www.zilpy.com/ http://www.rentslicer.com/ http://www.rentometer.com/ Mortgage Calculator: http://www.mortgagecalculator.org/ http://www.mortgage-calc.com/ GROSS RENT MULTIPLIER The Gross Rent Multiplier or GRM is a ratio that is used to estimate the value of income producing properties. The GRM provides a rough estimate of value. Only two pieces of financial information are required to calculate the Gross Rent Multiplier for a property, the sales price and the total gross rents possible. Generally speaking, properties in prime locations have higher GRMs than properties in less desirable locations. When comparing similar properties in the same area or location, the lower the GRM, the more profitable the property. GRM (monthly) = Sales Price / Monthly Potential Gross Income (ex: 125,000 sales price / 2,500 monthly gross income = 50 GRM) Estimated Market Value = GRM x Potential Gross Income (ex: 50 GRM x 2500/m = 125,000) 3 APPROACHES TO VALUE Appraisers typically use on of the following methods to estimate the value of a property: 1. Comparable Sales – most common method, using comparables of other homes that have sold in the area. Since comparable sales are not usually identical to the subject property, adjustments may be made for date of sale, location, style, amenities, square footage, site size, etc. 2. Income Approach – used to value commercial and investment properties. Because it is intended to directly reflect the expectations and behaviors of typical market participants, this approach is generally considered the most applicable valuation technique for income-producing properties. This can be done using revenue multipliers or capitalization rates applied to the first-year Net Operating Income. 3. Replacement Costs – The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. In most instances when the cost approach is involved, the overall methodology is a hybrid of the cost and sales comparison approaches. The cost approach is considered reliable when used on newer structures, but the method tends to become less reliable for older properties. The cost approach is often the only reliable approach when dealing with special use properties (i.e. -- public assembly, marinas, etc). OTHER VALUATION METHODS 1. BPO (Broker Price Opinion) – a tool used by lenders and mortgage companies to value properties in situations where they believe
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