1. Analyzing Income-Producing Properties Chapter 16

2. Analyzing Income-Producing Properties Advantages of Real Estate Investment –Attractions of real estate as an investment Cash flow from operations Appreciation Portfolio diversification Financial leverage

3. Analyzing Income-Producing Properties Disadvantages of Real Estate as an Investment –Large amount of capital required –Risk, particularly liquidity risk –Changing market conditions (overbuilding)

4. Analyzing Income-Producing Properties Financial Decision Making –Goal is wealth maximization –Using the NPV rule –Using the IRR rule

5. Analyzing Income-Producing Properties The Discounted Cash Flow Model –Initial equity investment –Forecasting after-tax cash flow (ATCF) Calculating net operating income –Potential gross income (PGI) –Vacancy and credit losses (VCL) –Effective gross income (EGI) –Operating expenses (OE) –Net operating income (NOI)

6. Analyzing Income-Producing Properties The Discounted Cash Flow Model –Before-tax cash flow (BTCF) NOI less Debt Service –Taxes from Operation NOI Interest Expense Depreciation (DEP) –27.5 years for residential, and 39 years for nonresidential Taxable Income Marginal Tax Rate –After-tax cash flow (ATCF)

7. Analyzing Income-Producing Properties After Tax Equity Reversion (ATER) –Gross sale price –Less Selling expenses –= Net sale proceeds –Mortgage Balance outstanding –Before-tax equity reversion (BTER)

8. Analyzing Income-Producing Properties After Tax Equity Reversion (ATER) –Before-tax equity reversion (BTER) –Taxes due on sale (TDS) –After-tax cash on sale (ATER)

9. Analyzing Income-Producing Properties Taxes Due on Sale (TDS) –Net Sale Procedes (SP - Selling Expense) –Book value (Adjusted Basis) Original Investment - Depreciation Charged –Taxable Capital Gain –Taxes due on sale (TDS) (cap gains tax rate) –After-tax cash on sale (ATER)

10. Analyzing Income-Producing Properties Other Performance Measures –Cash-on-cash return –Operating expense ratio –Debt coverage ratio

11. Analyzing Income-Producing Properties REITs –As an alternative to direct investment in real estate