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REAL ESTATE INVESTMENT SYMPOSIUM 2009

How to Evaluate Real Estate Opportunities

Presented by:

Mr Faron T LawrenceJune 30 2009

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Benefits of Owning Real Estate

Annual Cash Flow Appreciation in Value

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INCOME AND EXPENSE SCHEDULE

Gross Rent (Rent collected as though fully occupied)

- Vacancy Factor (Rent NOT collected due to vacancy)

= Effective Gross Rent (Amount of Rent actually collected)

- Operating Expenses (Cash expenses borne by owner)

= Net Operating Income (Cash available to pay lenders and owners)

- Debt Service (Cash demanded by lender)

= Cash Flow (Pretax) (Cash available to owner)

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INCOME AND EXPENSE SCHEDULE

Gross Rent = The total rent you plan to charge for the property.

$ Vacancy Factor = Gross Rent x % vacancy rate

Effective Gross Rent = Gross Rent – Vacancy Operating Expenses

Maintenance and Repairs Insurance Management Fees Property Taxes

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INCOME AND EXPENSE SCHEDULE

Net Operating Income Excess of cash collected over cash disbursed for the

normal operations of the building.

Cash Flow available for distribution to all investors ( lenders and owners).

Debt Service The amount of cash that the lender demands in

consideration for providing the loan.

Debt service is determined by three factors Loan amount Rate of Interest Term of loan

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INCOME AND EXPENSE SCHEDULE

Cash Flow (Pre-tax) Annual amount of cash available to the

owner after all cash obligations including debt service have been satisfied.

Cash Flow (After-tax)Pretax cash flow – trader’s tax

The Cash Flow Pipeline

Operating Expenses

Maintenance/RepairsManagementInsuranceProperty Tax

Debt Services

D/S = L x C

Rent Collections

Cash Flow to Owner

The Remainder

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The Cash Flow Pipeline

Return on Investment Cash-on-Cash Rate of Return

$Cash Flow (Pretax) $Equity

The higher the cash-on-cash rate of return, the more attractive the investment.

When considering which real estate investment to choose, you choose the one that has the greatest cash return on a given cash investment .

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The Cash Flow Pipeline

The Breakeven Point Ratio (BEP) BEP = Expenses + Debt Service

Gross Rent

Indicates how much occupancy must occur to insure that a project’s income meets all required cash disbursements.

The lower the ratio the safer the project.

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PROJECT: E-Z-LIVING

Project Description? A building comprising 2 two-bedroom

apartments furnished. Where will you locate your building? Who are you going to rent to? How much rent can they afford? What is the rent you will charge? Is your rent charge consistent with

the going market rent?

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E-Z-LIVING

PROJECT COST Land Cost $ 55,000 Building Cost $445,000 Furn & Appl $ 50,000 TOTAL COST $550,000

FINANCING Your input/equity $ 55,000 (10%) Bank Loan $495,000 (90%) TOTAL FINANCING $550,000

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E-Z-LIVING: Inc & Exp Schedule Gross Rent $77,760

(US$1200/apt X 2 X 12 X 2.7)

- Vacancy Factor 0.08 = $6,220 (Est. at 1mo./year = 1/12 = 0.08 X $77,760)

= Effective Gross Rent $71,540

- Operating Expenses $8,850 Maint & Repairs (est.) $250/mo. = $3,000/yr Property Insurance - $5,000/yr Management Fee – Nil (self managed) Property Taxes - $850/yr

= Net Operating Income $62,690

- Debt Service $45,600/yr Loan of $495,000 : 7% : 20 years

= CASH FLOW $17,090

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THE DECISION: E-Z-LIVING

RETURN ON INVESTMENT (ROI) ROI = Cash Flow / Equity

= 17,090 / 55,000 = .31 or 31%

BREAK-EVEN POINT RATIO (BEP) BEP = Expenses + Debt Service

Gross Rent

= 8,850 + 45,600 77,760

= .70 or 70%

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THE DECISION: E-Z-LIVING

‘GO’ or ‘NO-GO’ Is 31% enough?

What other investments are available to you that can give you an equal or better return?

Are the risks and work involved worth the return?

YOU DECIDE

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