1. Real Estate Investment Chapter 14 Computer-Aided Analysis © 2011 Cengage Learning

2. Key Terms Analysis of offer to purchase Cash flow projections Cumulative cash flows Depreciable base Gross rent multiplier Holding period Internal rate of return (IRR) Investment Analysis Positive or negative leverage Return on equity

3. © 2011 Cengage Learning Overview Many software programs are currently available to help the investor and real estate practitioner in investment analysis. Many programs are reasonably priced and many can be downloaded from the Internet for free. An investor should examine the available programs and utilize those that fulfill their needs.

4. © 2011 Cengage Learning Overview Three of the more useful tools of analysis will be examined in this chapter. The Excel analysis programs are included as part of this text and can be found on the CD in the book jacket: (1) Cash Flow Projections (2) Investment Analysis (3) Analysis of Offer to Purchase

5. © 2011 Cengage Learning Cash Flow Projections If the holding period is one year, the investment analysis would be very simple This is seldom the case Most investors plan on holding the property for a period of years and then selling at an optimum time A sophisticated investment analysis can help the investor determine the optimum holding period.

6. © 2011 Cengage Learning Entering Data for the Analysis Date of Report Property Being Analyzed First Year End Date Income and Expense Items Gross Scheduled Income Increase in Gross Scheduled Income

7. © 2011 Cengage Learning Entering Data for the Analysis Miscellaneous Income Increase in Miscellaneous Income Vacancy and Credit Loss Percent Vacancy & Credit Loss

8. © 2011 Cengage Learning Entering Data for the Analysis Operating Expenses Increase in Operating Expenses Miscellaneous Expenses Increase in Miscellaneous Expenses Capital Expense & Refurbishment Useful Life for Depreciation Other Costs

9. © 2011 Cengage Learning Entering Data for the Analysis PURCHASE PRICE FIRST MORTGAGE Interest Rate Term SECOND MORTGAGE Interest Rate Term EQUITY: (Price-Mortgages)

10. © 2011 Cengage Learning Entering Data for the Analysis NUMBER OF SQUARE FEET DEPRECIABLE BASE USEFUL LIFE (27.5 OR 39 YRS) INCOME TAX RATE FOR CASH FLOWS INCOME TAX RATE FOR CAPITAL GAIN DISCOUNT RATE

11. © 2011 Cengage Learning Entering Data for the Analysis MONTHLY MORTGAGE PAYMENT (FIRST) ANNUAL PAYMENT MONTHLY MORTGAGE PAYMENT (SECOND) ANNUAL PAYMENT DEBT COVERAGE RATIO DESIRED RETURN ON EQUITY COST OF SALE

12. © 2011 Cengage Learning Displaying the Results All of the cash flows are considered to arrive at the end of the year A cash flow item such as Capital Expense & Refurbishment is assumed to occur at the end of the year. Useful life for this item must be inserted since it will be depreciated.

13. © 2011 Cengage Learning Displaying the Results Other Costs Net Cash Flow Before Tax Cumulative Cash Flow (Before Tax) Cumulative Cash Flows (After Tax) Reversion Proceeds Cash Flow After Sale

14. © 2011 Cengage Learning Displaying the Results Cumulative Cash Flow (Including Sale/Before Tax) Cumulative Cash Flow (Including Sale/After Tax) Discounted Cash Flows Internal Rate of Return (IRR) Practical Application Sensitivity analysis

15. © 2011 Cengage Learning The Heights Colony Apartments Gross Scheduled Income $ 1,075,200 Less Vac & Credit Loss (5%) (53,760) Miscellaneous Income 26,000 Adjusted Gross Income $ 1,047,440 Operating Expenses Fixed Expenses $ 259,800 Variable Expenses $ 180,800 Total Expenses $ 440,600 Net Operating Income (NOI) $ 606,840

16. © 2011 Cengage Learning Investment Analysis Gross Rent Multiplier (GRM) Constant (on existing loans) Return on Equity (ROE) Overall Return or Capitalization Rate (Cap Rate) Income Going to Debt Service Income Going to Expenses

17. © 2011 Cengage Learning Investment Analysis Rental Rate (per sq. ft.) Positive or Negative Leverage New Loan Amount New Equity Suggested Offering Price

18. © 2011 Cengage Learning Analysis of Offer to Purchase As with the Investment Analysis, the Analysis of Offer to Purchase (Table 14.4) is provided automatically. This report is simply a restatement of the data in the previous reports and is found in Sheet 4 of the Excel spreadsheet. The format and data contained in this report can be modified to suit the needs of the analyst.