INCOME PROPERTY ANALYSIS
Introduction
Why Invest in Income Producing Properties?
1)
Income derived from rents
2)
Expected captial gains
3)
Diversification benefits
4)
Tax benefits
INCOME PROPERTY ANALYSIS
Introduction
1)
Compute expected cash flows
a)
Acquisition
b)
Holding Period
c)
Reversion
2)
Discount expected cash flows
@ required return
3)
Decision rules:
a)
Invest if expected net present value > 0
(Reject if expected NPV < 0);
OR
b)
Invest if expected IRR > required return
(Reject if expected IRR < required return)
INCOME PROPERTY ANALYSIS
Introduction
Where does the required return come from?
1) The required return is the expected return on alternative
investments of comparable risk.
Examples of comparable investments?
2) Sometimes computed by adding an equity risk premium
(300 to 500 basis points) to the return on the (cost of) debt.
Equity investments more risky than debt.
INCOME PROPERTY ANALYSIS
Acquisition Cash Flows
1) Down Payment
= Purchase Price - Loan Amount
2) Financing Costs (amortized over the life of the loan):
a) loan origination fees
b) discount points
c) appraisals
d) fees for other services/documentation required
by the lender and paid by the investor
We will assume financing costs are paid by the equity investor
(e.g. are not financed).
Equity = Down Payment + Financing Costs
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Effective Gross Income
Gross Rental Revenue: Maximum rental income (assumes
the property is 100% occupied)
-
Vacancy Loss (if property not 100% occupied)
-
Loss to Lease (contract rent < market rent)
-
Collection Loss (uncollected rents)
+
Reimbursed operating expenses
+
Non Rental Income:
=
Effective Gross Income
Any additional income received by
the property owner
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Operating Expenses
Fixed Expenses: expenses that do not vary (much) with
occupancy
1)
2)
3)
4)
property taxes
property insurance (hazard and liability)
scheduled repairs and maintenance (e.g. painting,
maintenance/repair of electrical and plumbing
systems, HVAC systems and elevator service)
general and other administrative expenses:
expenses directly related to building
administration (e.g. legal and audit fees, general
office expenses)
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Operating Expenses
Variable Expenses: expenses that tend to vary with occupancy
1) Utilities (e.g. water, electricity, gas, heating oil)
2) Management: fees paid to property managers for
leasing the property, collecting rents, overseeing
maintenance (usually 5% of effective gross)
3) Janitorial/cleaning (e.g. contract labor, cleaning
supplies, trash removal, etc.)
4) Security
5) Grounds maintenance
6) Others
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Dallas Average psf Office Operating Expenses (June 1990)
Fixed Expenses
Repairs/Maintenance
Security/Grounds
Other Fixed
(Taxes and Insurance)
Downtown
$
0.86
0.39
1.72
Suburbs
$
0.86
0.44
1.27
SOURCE: Dallas Building Owners and Managers Association
Other source: Institute of Real Estate Management of the
National Association of Realtors
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Dallas Average psf Office Operating Expenses (June 1990)
Variable Expenses
Janitorial
Utilities
Administration
Downtown
$
0.63
1.33
1.01
Suburbs
$
0.63
1.58
0.82
SOURCE: Dallas Building Owners and Managers Association
Other source: Institute of Real Estate Management of the
National Association of Realtors
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Expense Reimbursement
Some leases for office, retail, and warehouse space require the
tenant to reimburse the property owner for a portion of the
operating expenses. Multifamily properties (apartments) and
hotels do not usually have operating expenses reimbursed.
The amount that tenants reimburse owners for expenses is
determined by an expense stop. Operating (fixed and variable)
expenses in excess of the stop are reimbursed by each tenant in
proportion to the amount of space the tenant leases.
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Expense Reimbursement
For example, if a tenant leases 10,000 square feet of space with
a base rent of $15.00 per square foot and a $4.00 per square
foot expense stop and actual operating expenses amount to
$4.50 per square foot, then the tenant pays:
Base rent: 10,000 x $15.00
= $ 150,000
Expenses: ($4.50 - $4.00) x 10,000 =
Total tenant revenue
5,000
$ 155,000
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Expense Reimbursement
Typically, income property leases gross up expenses to 100%
occupancy prior to allocating excess expenses to tenants.
Grossing up expenses adjusts the variable portion of operating
expenses to accomodate property vacancy.
For example, if a property is 95% occupied and has actual
variable expenses of $100,000, then the variable expenses are
grossed up to $100,000/0.95 = $105,263 prior to allocating
excess expenses to tenants.
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Gross Effective Income (GEI)
Gross Rental Revenue
- Vacancy Loss
- Loss to Leases
- Collection Loss
Total Net Rental Income
+ Reimbursables
+ Non-Rental Income
Gross Effective Income
(GRR)
(VL)
(LL)
(CL)
(TNRI)
(R)
(NRI)
(GEI)
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Net Operating Income
-
Effective Gross Income
Variable Expenses
Fixed Expenses
(EGI)
(VE)
(FE)
Net Operating Income
(NOI)
NOI is the single most important measure of a property’s
ability to produce (before debt and before tax) income.
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Net Cash Flow (NCF) Before Disposition
Capital expenditures are expenditures associated with major
property maintenance or repairs, tenant improvements, or
environmental remediation. Capital expenditures are usually
included in the basis of the property and depreciated.
-
Net Operating Income
Capital Expenditures
(NOI)
(CE)
NCF Before Disposition
(NCF)
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Before Tax Cash Flow from Operations
(BTCFO)
-
Net Cash Flow before Disposition
Annual Debt Service
Before Tax Cash Flow
from Operations
(NCF)
(DS)
(BTCFO)
Annual Debt Service = Monthly mortgage payment x 12
(for fixed payment mortgages)
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Business Expenses
1)
Mortgage Interest
2)
(Straight Line) Depreciation
a.
Depreciable basis
b.
Straight Line Rate 
c.
3)
= improvement value
1
Useful Life
Useful Life:
i) 27.5 years for residential properties
ii) 39.0 years for non-residential properties
Loan Fees
Amortization of Loan Fees 
Loan Maturity
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
Taxable Income & Tax Liability
x
Net Operating Income
Mortgage Interest
Depreciation
Amortization of Loan Fees
Taxable Income
Ordinary Income Tax Rate
Tax Liability
(NOI)
(I)
(D)
(A)
(TI)
(t)
(TAX)
INCOME PROPERTY ANALYSIS
Cash Flows from Operations
After Tax Cash Flows from Operations
(ATCFO)
-
Before Tax Cash Flow from Operations
(BTCFO)
Tax Liability
(TAX)
After Tax Cash Flow From Operations
(ATCFO)
INCOME PROPERTY ANALYSIS
Summary: After Tax Cash Flows from Operations
+
+
-
CASH
Gross Rental Revenue
Vacancy Loss
Loss to Leases
Collection Losses
Net Property Revenues
Reimbursables
Other Income
Gross Effective Income
Variable Expenses
Fixed Expenses
Capital Expenses
NCF Before Disposition
Annual Debt Service
BTCF from Operations
x
-
INCOME
Net Operating Income
Interest
Depreciation
Amortization
Taxable Income
Tax Rate
Tax Liability
ATCF
BTCF from Operations
Tax Liability
ATCF from Operations
INCOME PROPERTY ANALYSIS
Cash Flows from Reversion
Estimate Future Selling Price
Four common techniques used to estimate future sales price:
1) Appreciate purchase price
ex.
Purchase price = $1,000,000;
held for five years;
value appreciates 4% per year (on average).
The future sales price is estimated as:
$ 1,216,653 = $ 1,000,000 x ( 1 + 0.04 ) 5
INCOME PROPERTY ANALYSIS
Cash Flows from Reversion
Estimate Future Selling Price
Capitalize the property’s subsequent NOI:
2)
Value 
NOI
R
where R = capitalization rate
ex.
$ 1,215,789 = $ 115,500/0.095
INCOME PROPERTY ANALYSIS
Cash Flows from Reversion
Estimate Future Selling Price
3)
Estimate future per unit sales price
ex.
4)
Expect to sell 100 unit apartment
complex for $50,000 per unit.
Expected future sales price is $5,000,000
Estimate future sale price.
ex.
Expect to sell property for $5,250,000
INCOME PROPERTY ANALYSIS
Cash Flows from Reversion
Before Tax Cash Flow from Reversion
-
Expected Selling Price
Selling Commission
Sales Proceeds
Mortgage Balance
Prepayment Penalty ( % of MB )
Before Tax Cash Flow from Reversion
(SP)
(SC)
(MB)
(PP)
(BTCFR)
INCOME PROPERTY ANALYSIS
Cash Flows from Reversion
Capital Gain Tax Liability
Sales Proceeds
- Original Cost (Purchase Price + Capital Expenses)
+ Accumulated Depreciation
Capital Gain
x Capital Gain Tax Rate
Capital Gain Tax Liability
CG Tax Rate = Ordinary Income Rate with 20% Maximum
INCOME PROPERTY ANALYSIS
Cash Flows from Reversion
Ordinary Income Credit
Unamortized Loan Fee
+ Prepayment Penalty
Ordinary Reversion Expenses
x Ordinary Income Tax Rate
Ordinary Income Credit
INCOME PROPERTY ANALYSIS
Cash Flows from Reversion
After Tax Cash Flow from Reversion
Before Tax Cash Flow from Reversion
- Capital Gain Tax
+ Ordinary Income Credit
After Tax Cash Flow from Reversion
INCOME PROPERTY ANALYSIS
The Investment Decision: NPV and IRR
The decision to invest in an income property can be made
using:
1) unleveraged (e.g. before debt, before tax) cash flows
2) leveraged cash flows
a) after debt, before tax cash flows (BTCFs)
b) after debt, after tax cash flows (ATCFs)
INCOME PROPERTY ANALYSIS
The Investment Decision: NPV and IRR
1. The net present value (NPV) of the property investment:
PNPV   Price 
T
NCFO t
NCFR T


t
(1  d p ) T
t 1 (1  d p )
where T = expected holding period in years,
dp = unleveraged required return.
2. The internal rate of return (IRR) on the property is that
value of the discount rate, PIRR, that sets PNPV = 0.
Price 
T
NCFO t
NCFR T


t
(1  PIRR ) T
t 1 (1  PIRR)
INCOME PROPERTY ANALYSIS
The Investment Decision: NPV and IRR
1. The before tax net present value (BTNPV) of the investment:
T
BTCFOt
BTCFRT
BTNPV   Equity  

t
T
(
1

d
)
(
1

d
)
t 1
bte
bte
where T
dbte
= expected holding period in years,
= before tax equity required return.
2. The before tax internal rate of return (BTIRR) is that value of
the discount rate, BTIRR, that sets the BTNPV = 0.
Equity 
T
BTCFO t
BTCFR T


t
T
(1

BTIRR)
(1

BTIRR
)
t 1
INCOME PROPERTY ANALYSIS
The Investment Decision: NPV and IRR
1. The after tax net present value (ATNPV) of the investment:
ATNPV   Equity 
where T
date
T
ATCFO t
ATCFR T


t
(1  d ate ) T
t 1 (1  d ate )
= expected holding period in years,
= after tax required return.
2. The after tax internal rate of return (ATIRR) is that value of
the discount rate, ATIRR, that sets the ATNPV = 0.
T
ATCFO t
ATCFR T
Equity  

t
T
(1

ATIRR)
(1

ATIRR
)
t 1
INCOME PROPERTY ANALYSIS
The Investment Decision: NPV and IRR
Decision Rules
Invest if expected net present value > 0
(Reject if expected NPV < 0);
OR
Invest if expected IRR > required return
(Reject if expected IRR < required return)
INCOME PROPERTY ANALYSIS
The Investment Decision: NPV and IRR
Profitability Index (PI)
PV of Cash Inflows @ Re quired Re turn
PI 
Initial Equity
Decision Rule: Invest if PI > 1
INCOME PROPERTY ANALYSIS
Financial Statistics: Ratios, Multipliers, Rates of Return
Financial Ratios
1. Loan to Value (L/V)
2. Debt Coverage (DCR)
=
=
Loan Amount
Market Value
Net Operating Income
Debt Service
INCOME PROPERTY ANALYSIS
Financial Statistics: Ratios, Multipliers, Rates of Return
Financial Ratios
3. Operating Expense (OE) =
Operating Expenses
Effective Gross Income
4. Breakeven Occupancy Level
=
Operating Expenses  Debt Service
Potential Gross Income
INCOME PROPERTY ANALYSIS
Financial Statistics: Ratios, Multipliers, Rates of Return
Multipliers
Income multipliers express the relationship between property
income and property value (e.g. value is ten times income):
Multiplier
=
Market Value
Income
INCOME PROPERTY ANALYSIS
Financial Statistics: Ratios, Multipliers, Rates of Return
Multipliers
Since there are five different incomes associated with property
operations, there are five multipliers:
1.
2.
3.
4.
5.
Potential Gross Income Multiplier
Effective Gross Income Multiplier
Net Operating Income Multiplier
Before Tax Cash Flow Multiplier
After Tax Cash Flow Multiplier
The NOI multiplier is the most frequently used.
INCOME PROPERTY ANALYSIS
Financial Statistics: Ratios, Multipliers, Rates of Return
Rates of Return
1. On the property:
Overall Rate of Return (OAR) =
NOI
Market Value
2. On equity (initial and current)
a. before tax equity:
Equity Dividend Rate
BTROE
Cash on cash return
=
BTCFO
Equity
INCOME PROPERTY ANALYSIS
Financial Statistics: Ratios, Multipliers, Rates of Return
Rates of Return
2. On equity
b. after tax equity:
ATROE
=
ATCFO
Equity
3. On debt:
Annual mortgage constant
=
Annual Debt Service
Loan Amount
INCOME PROPERTY ANALYSIS
Apartment Property Example
Compute the expected cash flows, the NPVs, the IRRs, and
the first year’s financial ratios, multipliers and rates of return
for the following multifamily property. The property is a 100
unit garden apartment complex. The current purchase price is
$4,000,000 (or $40,000 per unit). In addition, the property
will initially require $850,000 in capital expenditures. When
the repairs are completed, the property will provide gross rental
revenues according to the rent roll listed in Exhibit 1. The
property will also provide $1,000 in non-rental income during
the first year of operations. Vacancy losses are 4% of gross
rental revenue, loss to leases and collection losses each amount
to 2% of rents. The first year’s variable expenses are listed in
Exhibit 2 and the first year’s fixed expenses are provided in
Exhibit 3. Capital expenditures are listed in Exhibit 4.
INCOME PROPERTY ANALYSIS
Apartment Property Example
The equity investor is expected to hold the property for
three years. Over this period of time, income is expected to
increase 4% per year while expenses (both fixed and variable)
are expeced to increase 3% per year. Occupancy is expected to
remain stable over the three year period. The future expected
selling price is estimated by capitalizing the property’s year 4
NOI at 10%. The investor will have to pay a 2% commission
when the property is sold.
The acquisition will be financed with a loan for 75% of the
purchase price at 9.0% interest with monthly payments for 25
years. The loan requires a 2% fee and the borrower must pay a
3% prepayment penalty if the loan is repaid within seven years.
INCOME PROPERTY ANALYSIS
Apartment Property Example
For tax purposes, 25% of the purchase price is payment for
land. The improvement (including the additional capital
expenditures) is depreciated using the straight line method over
27.5 years. The investor’s ordinary income is taxed at the 36%
marginal rate and capital gain income is taxed at the statutory
ceiling rate of 28%. The investor has sufficient passive income
to take any passive losses generated by this property and
discounts expected property cash flows at 9%; before tax
equity cash flows at 13%; and after tax equity cash flows at
11%.
INCOME PROPERTY ANALYSIS
Apartment Property Example
Exhibit 1: Rental Revenues
Unit Mix
Unit Type
1BR/1BA
2BR/2BA
Totals
# of units
40
60
100
Avg. SF
600
1000
840
Rent/Unit/Mo.
$
600
$
950
$
810
Mo.
$
$
$
Gross Annual Gross
24,000 $
288,000
57,000 $
684,000
81,000 $
972,000
INCOME PROPERTY ANALYSIS
Apartment Property Example
Exhibit 2: Variable Expenses
YEAR:
Variable Expenses
Management Fee
On Site Office/Gen. Adm.
Payroll & Burden
Utilities
Bldg. Services & Supplies
Security
Grounds Maintenance
Repairs & Maintenance
Advertising & Marketing
Total Variable Expenses
1
$
$
$
$
$
$
$
$
$
$
100,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
260,000
2
$
$
$
$
$
$
$
$
$
$
103,000
20,600
20,600
20,600
20,600
20,600
20,600
20,600
20,600
267,800
3
$
$
$
$
$
$
$
$
$
$
106,090
21,218
21,218
21,218
21,218
21,218
21,218
21,218
21,218
275,834
INCOME PROPERTY ANALYSIS
Apartment Property Example
Exhibit 3: Fixed Expenses
YEAR:
Fixed Expenses
Property Taxes
Tax Service Fee
Insurance
Other
Total Fixed Expenses
1
$
$
$
$
$
100,000
20,000
20,000
140,000
2
3
$
$
$
103,000
20,600
20,600
$
$
$
106,090
21,218
21,218
$
144,200
$
148,526
INCOME PROPERTY ANALYSIS
Apartment Property Example
Exhibit 4: Capital Expenditures
Capital Expenses
Tenant Improvements
Leasing Commissions
REO Cap. Exps. #1
REO Cap. Exps. #2
Loan Cap. Exps.
Replacement/Reserves
Deliquent Taxes
Environmenal Remediation
Other Capital Expenses
Total Capital Expenses
$
$
$
$
$
$
$
$
$
$
850,000
850,000
3
2
1
YEAR:
$
$
$
$
$
$
$
$
$
$
-
$
$
$
$
$
$
$
$
$
$
-
INCOME PROPERTY ANALYSIS
Apartment Property Example
Initial (After Tax) Equity
1) Down Payment
= Purchase Price - Loan Amount
= $4,000,000 - $3,000,000
= $1,000,000
2) Financing Costs
= 0.02 x $3,000,000
= $60,000
3) (After Tax) Equity= Down Payment + Financing Costs
= $1,000,000 + $60,000
= $1,060,000
INCOME PROPERTY ANALYSIS
Apartment Property Example
Financing Cash Flows
Purchase Price
Loan Amount
Annual Rate
Loan Term
= $4,000,000
= $3,000,000
=
9.0%
= 25 years; constant monthly payments
Monthly PMT
= $
Annual Debt Service = $
25,175.89
302,111
Amortization of Fee = $ 60,000/25
= $ 2,400
Unamortized Fees
= $ 60,000 - 3 x $2,400 = $ 52,800
INCOME PROPERTY ANALYSIS
Apartment Property Example
LOAN AMORTIZATION:
Loan Amount
-1-
-2-
-3-
$ 3,000,000
Periodic Rate
0.750%
Periodic Payment
$
(25,176)
Annual Debt Service
$
(302,111)
Beginning Balance
$ (3,000,000) $ (2,966,531) $ (2,929,923)
Ending Balance
$ (2,966,531)
Principal Reduction
$
(33,469)
(2,929,923)
(2,889,880)
(36,609)
(40,043)
INCOME PROPERTY ANALYSIS
Apartment Property Example
Depreciation Calculations
Depreciable Basis
= 0.75 x $4,000,000 + $850,000
= $ 3,850,000
Annual deduction
= $3,850,000/27.5
= $ 140,000
Accumulated
Depreciation
= 3 x $ 140,000
= $ 420,000
INCOME PROPERTY ANALYSIS
Apartment Property Example: Revenues
Year:
1
2
3
4
972,000
$ 1,010,880
$ 1,051,315
$ 1,093,368
less Vacancy Loss
(38,880)
(40,435)
(42,053)
(43,735)
less Loss to Lease
(19,440)
(20,218)
(21,026)
(21,867)
less Collection Loss
(19,440)
(20,218)
(21,026)
(21,867)
967,210
$ 1,005,898
REVENUES and EXPENSES:
Gross Rental Revenue
Total Net Rental Income
$
$
894,240
$
930,010
$
plus Reimbursables
-
-
-
-
plus Other Income
1,000
1,040
1,082
1,125
Reimbursables + Other
1,000
1,040
1,082
1,125
968,292
$ 1,007,023
Gross Effective Income
$
895,240
$
931,050
$
INCOME PROPERTY ANALYSIS
Apartment Property Example: Expenses
less OPERATING EXPENSES:
Variable Expenses
-1$
Fixed Expenses
Total Operating Expenses
$
NET OPERATING INCOME
$
-2-
-3-
-4-
(260,000) $
(267,800) $
(275,834) $
(284,109)
(140,000)
(144,200)
(148,526)
(152,982)
(400,000) $
(412,000) $
(424,360) $
(437,091)
495,240
$
519,050
$
$
(850,000)
NCF Before Dispositions
(354,760)
519,050
543,932
569,932
less Debt Service
(302,111)
(302,111)
(302,111)
(302,111)
$
(656,871) $
216,939
-
569,932
less Capital Expenses
BEFORE TAX CASH FLOW
-
543,932
$
241,821
-
$
267,822
INCOME PROPERTY ANALYSIS
Apartment Property Example: Income Tax
INCOME TAX:
-1-
-2-
-3-
-4-
495,240 $
519,050 $
543,932 $
569,932
(268,642)
(265,502)
(262,068)
(258,312)
Depreciation
(140,000)
(140,000)
(140,000)
(140,000)
Amortization
(2,400)
(2,400)
(2,400)
(2,400)
84,198
111,147
139,464
169,221
(30,311) $
(40,013) $
(50,207) $
(60,919)
Net Operating Income
$
less Interest
Taxable Earnings
Federal Income Tax
$
INCOME PROPERTY ANALYSIS
Apartment Property Example: ATCFO
AFTER TAX CASH FLOW:
Before Tax Cash Flow
-1$
less Federal Income Tax
After Tax Cash Flow
(656,871) $
(30,311)
$
(687,182) $
-2-
-3-
-4-
216,939 $
241,821 $
267,822
(40,013)
(50,207)
(60,919)
176,926 $
191,614 $
206,902
INCOME PROPERTY ANALYSIS
Apartment Property Example: Disposition
DISPOSITION CASH FLOWS:
Estimated Selling Price
less Selling Costs
Net Sales Proceeds
-1-
-2-
-3$ 5,699,324
(113,986)
5,585,338
less Mortgage Balance
(2,889,880)
Prepayment Penalty
(86,696)
BTCF from Reversion
$ 2,608,762
INCOME PROPERTY ANALYSIS
Apartment Property Example: Disposition
Capital Gain Tax:
Ne t Sale s Proce e ds
-1-
-2-
-3$ 5,585,338
less Original Cost
(4,850,000)
plus Accum. Depreciation
Total Gain
420,000
$ 1,155,338
less Recapture
-
Capital Gain
Capital Gain Tax Liability
1,155,338
$
(323,495)
INCOME PROPERTY ANALYSIS
Apartment Property Example: Disposition
Or d in ar y In co m e T ax Ite m s fr o m Sale
(e xclu d in g Re cap tu r e )
Unamortiz ed Fee
-1-
-2-
-3$
Prepay ment Penalty
(52,800)
(86,696)
Or d in ar y In co m e T ax
$
BT C F fr o m Re ve r s io n
$ 2,608,762
50,219
les s Ordinary Inc ome Tax
50,219
Tax on Rec apture
-
Capital Gain Tax
A TCF f rom Rev ers ion
(323,495)
$ 2,335,486
INCOME PROPERTY ANALYSIS
Apartment Property Example: Analysis
FINANCIAL RATIOS:
-1-
-2-
-3-
Loan / Original Value
0.7416
0.7325
0.7225
Loan / Current Value
0.5715
0.5387
0.5071
Debt Service Coverage
1.6393
1.7181
1.8004
Operating Expense Ratio
0.4468
0.4425
0.4383
Break-even Occupancy Level
72.16%
70.57%
69.03%
INCOME PROPERTY ANALYSIS
Apartment Property Example: Analysis
SELLINGPRICEMULTIPLIERS:
-1-
-2-
-3-
x PGI
5.33
5.38
5.42
x EGI
5.80
5.84
5.89
x Net Income
10.48
10.48
10.48
x BTCF
-7.90
25.07
23.57
x ATCF
-7.55
30.74
29.74
INCOME PROPERTY ANALYSIS
Apartment Property Example: Analysis
RATES OF RETURN:
-1-
-2-
-3-
BTR on Original Equity
-61.97%
20.47%
22.81%
BTR on Current Equity
-32.34%
9.38%
9.27%
ATR on Original Equity
-64.83%
16.69%
18.08%
ATR on Current Equity
-33.83%
7.65%
7.35%
Overall Rate of Return
9.54%
9.54%
9.54%
INCOME PROPERTY ANALYSIS
Apartment Property Example: Analysis
Property Net Present Value
543,932  5,585,338
-354,760
519,050
PNPV   4,000,000 


2
1.09
1.09
1.09 3
= + $ 844,326
INCOME PROPERTY ANALYSIS
Apartment Property Example: Analysis
Before Tax Net Present Value
BTNPV  - 1,060,000 
656,871 216,939 241,821 + 2,608,762


2
1.13
1.13
1.133
= + 504,190
INCOME PROPERTY ANALYSIS
Apartment Property Example : Analysis
After Tax Net Present Value
ATNPV   1,060,000 
= + 312,308
191,614  2,335,486
687,182 176,926


1.11
1.112
1.113
INCOME PROPERTY ANALYSIS
Apartment Property Example : Analysis
Property Internal Rate of Return
543,932  5,585,338
-354,760
519,050
4,000,000 


2
1 + PIRR
(1 + PIRR)
(1 + PIRR) 3
PIRR = 16.06%
INCOME PROPERTY ANALYSIS
Apartment Property Example : Analysis
Before Tax Internal Rate of Return
1,060,000 
- 656,871
216,939
241,821 + 2,608,762


1 + BTIRR (1 + BTIRR) 2
(1 + BTIRR) 3
BTIRR = 25.39%
INCOME PROPERTY ANALYSIS
Apartment Property Example : Analysis
After Tax Net Present Value
1,060,000  
191,614  2,335,486
687,182
176,926


1 + ATIRR (1 + ATIRR) 2
(1 + ATIRR) 3
ATIRR
= 18.63%
Insert Archon Multifamily
Spreadsheet Here
INCOME PROPERTY ANALYSIS
Financial Leverage
FINANCIAL LEVERAGE describes the relationship between
the investment return and the amount of debt used to
finance the acquisition
Leverage is POSITIVE when the IRR increases with debt;
leverage is NEGATIVE when the IRR decreases with debt;
and leverage is NEUTRAL when the IRR doesn’t change
with debt.
LEVERAGE can be examined using before or after tax returns
INCOME PROPERTY ANALYSIS
Financial Leverage
Apartment Property Example
Loan Option
BTIRR
ATIRR
Cash
16.06%
11.13%
70% L/V; 9.00% i; 2 points
23.85%
17.39%
75% L/V; 9.00% i; 2 points
25.39%
18.63%
80% L/V; 10.00% i; 3 points
24.15%
18.07%
INCOME PROPERTY ANALYSIS
Sensitivity Analysis
SENSITIVITY ANALYSIS: examines how sensitive expected
investment returns are to changes in one variable.
What are the major uncertainties for income
producing properties?
INCOME PROPERTY ANALYSIS
Sensitivity Analysis
Terminal
Cap Rate
Future
Sales Price
ATIRR
6.20%
ATNPV
12%
$
4,749,437
(177,766)
11%
$
5,181,204
12.16
44,994
10%
$
5,699,324
18.63
312,308
9%
$
6,332,583
25.78
639,024
8%
$
7,124,156
33.80
1,047,419
INCOME PROPERTY ANALYSIS
Simulation Analysis
SIMULATION ANALYSIS examines what happens to
expected investment returns when several variables differ from
base case projections.
For example, if vacancy rates increase, rents will decrease (or
not increase as fast as projected), and values will decrease (or
not increase as fast as projected.