* * * Sample In-depth "Investment Value" Study * * *

Stewart L. Mac Donald, CCIM, President
Real Estate Assets Consultants Services


Determining "Investment Value" In An Income Producing Property

Jeanne, our investor, is interested in purchasing an apartment building that is being offered for sale by the owner for $750,000. The owner of the property is of the opinion that his asking price is more than reasonable in light of the Net Operating Income (NOI) of $79,045 detailed in his statement below.


"Seller" Statement; Annual Property Operating Data (APOD form)
Gross Rental Income100,000
Operating Expenses
Property Insurance1,100
Real Estate Taxes10,780
Repairs & Maintenance3,500
Rubbish1,080
Janitorial Service445
Grounds Services350
Electricity1,100
Heating2,600
TOTAL OPERATING EXPENSES20,955
NET OPERATING INCOME (NOI)79,045(Sellers statement)

Jeanne is a pretty savvy investor and has determined that in order to achieve her investment goals some years down the road, she must see a 12% after tax return on her investments. Jeanne schedules a meeting with her CCIM to develop a strategy for arriving at an investment value that will assure her prerequisite yield of 12% after tax. After reviewing the leases and auditing the expenses they arrive at a realistic Net Operating Income (NOI) in the reconstructed income and expense statement below.

"Reconstructed" Statement"; Annual Property Operating Data (APOD form)

Gross Rental Income100,000
5% Vacancy Allowance5,000
Gross Operating Income95,000
Operating Expenses
Accounting and Legal400
Permits120
Property Insurance1,100
Property Management5,700
Real Estate Taxes10,780
Repairs & Maintenance4,700
Rubbish1,100
Janitorial Service1,500
Grounds Services900
Supplies400
Electricity1,100
Heating2,600
Miscellaneous1,900
TOTAL OPERATING EXPENSES32,300
NET OPERATING INCOME (NOI)62,700(Reconstructed statement)

Together with her CCIM Jeanne developed a cash flow model indicating a maximum purchase price that will support her required 12% after tax return. Armed with the data in the following cash flow model, Jeanne was able to negotiate a purchase price of $635,000

CASH FLOW ANALYSIS

ACQUIRE APARTMENTS @$635,000.00, HOLD 5 YEARS

ASSUMPTIONS:
Purchase Price635,000
New Mortgage480,000Monthly 4,361.76 (10%)
Initial Investment165,000
Depreciation/Improvements487,50027.5 Yrs, S/L
Net Operating Income (NOI)62,7004% annual growth
Tax Bracket28%
Capital Gains Rate20%
Passive Loss Allowance25,000
Original Basis635,000
Sale Price end of yr 5727,000
Cost of Sale6%
Hold Apartments 5 yrs; summary of annual after tax cash flows, detailed cash flow analysis in the sections that follow.
YEARCASH FLOW
Initial Investment(165,000)
199810,942
199912,822
200014,553
200116,343
200218,194
2002204,138Net Proceeds of Sale
Internal Rate of Return12,29%
Present Value of
Cash Flows at 12%166,893 PV + mortgage of 480,000= Investment Value of 646,893
Accumulation of Wealth285,093
Hold Apartments 5 yrs; CASH FLOW ANALYSIS
YEAR19981999200020012002
Initial Investment165,000
Mortgage Balance EOY475,454470,432464,885458,756451,986
YEAR19981999200020012002
Net Operating Income62,70065,20867,81670,52973,350
Interest Deduction47,79547,31946,79446,21345,571
Depreciation16,98917,72717,72717,72717,727
Taxable Income2,084-1613,2956,58910,052
YEAR19981999200020012002
Net Operating Income62,70065,20867,81670,52973,350
Less Debt Service52,34152,34152,34152,34152,341
Cash Flow Before Taxes10,35912,86715,47518,18821,009
Income Tax584-459231,8452,815
Cash Flow After Taxes10,94212,82214,55316,34318,194
Analysis of Sale Proceeds EOY year 5
Original Basis635,000
LessTotal Depreciation87,898
Adjusted Basis547,102
Sale Price727,000
Less Cost of Sale43,620
Less Adjusted Basis547,102
Capital Gain136,278
Capital Gains Tax @ 20%27,256
Sale Proceeds:
Sale Price727,000
Cost of Sale43,620
Less Total Encumbrances451,986
Proceeds Before Taxes231,394
Total Tax Liability27,256
Proceeds After Taxes204,138
* * *End of 5 Year Cash Flow Analysis * * *


The contents of this case study, together with all statements and calculations, are not intended as tax or legal advice or counsel . Any and all readers of this case study are advised not to interpret the contents, statements and calculations herein as tax or legal advice or counsel.

This case study is characteristic of the analysis services available to the prudent real estate investor through our "ASAP" Fax E-analysis Services at Real Estate Assets, Inc.

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