Financial Analysis - PDF by TheInvestorBroker

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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.

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									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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