1. Fundamentals of Real Estate Lecture 3 Spring, 2003 Copyright © Joseph A. Petry www.cba.uiuc.edu/jpetry/Fin_264_sp03

2. 2 Investment Property Analysis

3. 3 In Depth Evaluation of a Potential Property – We will assume that you are interested in apartments, in particular campus related apartments. – You contact a broker, and ask for current listings. – Your broker says that right now the market is tight, but there is one nice apartment building for sale that might be worth looking at. – You ask for information regarding the property You receive a “Rent Roll”, and an asking price of $4,000,000. There are only a few comps, and it will take some digging. A list of operating expenses will take a few weeks to assemble Investment Property Analysis

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5. 5 Constructing Pro-forma Financial Statements – You’ll want to create: Operating Statement Amortization Schedule Sale Proceeds Table – Some of the more important items that you will require to create each of these statements include: RentsVacancy rates Operating expense ratiosUtility expenses Real estate taxesFinancing terms Price movements Investment Property Analysis

6. 6 – What have been the experiences of comparable properties regarding each of these items recently? Over longer periods of time? It is not enough to have only current values for these items. – Appraisers, realtors, other apartment owners are all good sources of information. – As we will see later on, your assumptions are key. If they are off, they will dramatically impact the results of the investments. – Be cautious with your assumptions at this stage. Investment Property Analysis

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14. 14 Investment Property Analysis Financial Analysis of “Campus Apartments” – We will go into much more depth on the types of measures that are typically used to do this type of analysis starting next time. – For now, we will begin with a few basic measures of the financial returns. DSCR=Debt Service Coverage Ratio. NOI/Debt Service Return on Equity. BTCF/Down payment. – BTCF=Before Tax Cash Flow Capitalization (Cap) Rate=NOI/Purchase Price IRR (Internal Rate of Return) GRM (Gross Rent Multiplier)=Purchase Price/PGI

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16. 16 Investment Property Analysis Sensitivity Analysis – Impact from differing assumptions – What happens to your return calculations if: Operating expenses go to 45% of EGI? Purchase price goes down by 250,000? If your vacancy rate goes to 15%? Your cost of borrowing goes to 9%?

17. 17 Investment Property Analysis