Real Estate Investment Chapter 11 Tools of Analysis © 2011 Cengage Learning

Key Terms Accounts receivable Accrual method Appreciation Audit Balance sheet Cash method Certified Public Accountant Effective gross income Equity Escrow accounts Fixed expenses

© 2011 Cengage Learning Key Terms Income statement Liquidity Net worth Operating expenses Operating Statement Pro forma statement Profit-and-loss Profitability Scheduled gross income

© 2011 Cengage Learning Introduction Analysis procedures that will help an investor evaluate and compare investment opportunities. How does one figure investment return and make reasonable comparisons between properties? The returns on investments are generally not precise in measurement income from real estate can be more subject to fluctuating market conditions

© 2011 Cengage Learning Balance Sheet Assets Current Cash Rents receivable Fixed assets Land Buildings Less depreciation

© 2011 Cengage Learning Balance Sheet Liabilities Current Accounts payable Long term debt Less: Principal paid Balance Due

© 2011 Cengage Learning Balance Sheet Net Worth = Assets – Liabilities On the balance sheet this is shown on the bottom right as: Total Liabilities $261,800 Net Worth $118,800 Total Assets $380,600 Liabilities plus net worth $380,600

© 2011 Cengage Learning Profit-And-Loss Statement Income from operations $148,878 Less: Expenses incurred 62,569 Net operating income $ 86,309 Less: Interest expense 45,324 Less: Depreciation allowed 36,531 Income before taxes $ 4,454 Provision for income taxes 2,048 Net Income $ 2,406

© 2011 Cengage Learning Operating Statement Scheduled gross income $100,000 Less: Vac. and credit losses 7,000 Gross operating income $ 93,000 Less: Operating expenses* $ 41,300 Net operating income $ 51,700 *Taxes, Insurance, Utilities, Advertising, Management, Payroll, including taxes, Supplies, Services, Maintenance, and Other

© 2011 Cengage Learning Operating Statement Gross operating income Includes rents, any miscellaneous income from services sold, parking fees, utility charges, etc. Operating Expenses fixed charges (taxes, insurance, etc.) Do not vary with occupancy operating expenses Reserves for replacement

© 2011 Cengage Learning Other Important Statements Pro Forma Statement Income Tax Statements Accounting Methods Cash Basis Accrual Basis

© 2011 Cengage Learning Preparation of Statements Certified Public Accountants Audited Statements Statements Prepared without Audit Owner-Prepared Statements Broker-Prepared Statements

© 2011 Cengage Learning Problem Areas in Financial Statements Time Span Covered Management Costs Tenant Improvements Leasing Commissions Utility Costs Use of National Averages

© 2011 Cengage Learning Supplemental Information Certified Rent Schedule Inventory Accounts Receivable Accounts Payable Cash Controls Escrow Accounts Advance rentals, security deposits, damage deposits.

© 2011 Cengage Learning Supplemental Information Insurance Policies Ad Valorem Taxes Sales Taxes Utility Charges Lease Agreements Furniture, equipment, storage buildings, land leases, etc.

© 2011 Cengage Learning Supplemental Information Contracts Outstanding Advertising Maintenance services Other services

© 2011 Cengage Learning Salary and Wage Agreements Labor contracts Health and accident insurance Workmen’s compensation Unemployment compensation Pension funds

© 2011 Cengage Learning Statement Analysis Liquidity Leverage and the great recession Income/expense Ratios Activity Profitability