Analyzing Income-Producing Properties

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Analyzing Income-Producing Properties

• Chapter 16

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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

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Analyzing Income-Producing Properties

• Disadvantages of Real Estate as an Investment
• Large amount of capital required
• Risk, particularly liquidity risk
• Changing market conditions (overbuilding)

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Analyzing Income-Producing Properties

• Financial Decision Making
• Goal is wealth maximization
• Using the NPV rule
• Using the IRR rule

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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)

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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)

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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)

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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)

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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)

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Analyzing Income-Producing Properties

• Other Performance Measures
• Cash-on-cash return
• Operating expense ratio
• Debt coverage ratio

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Analyzing Income-Producing Properties

• REITs
• As an alternative to direct investment in real
  estate