Don’t Follow The Crowd ! Nor Yeretsian

It is hard not going with the flow.

There are even books entitled :The Wisdom of Crowds , more act smarter than a few.

It is safer in the crowd , or at least it use to be .

We are human beings after all. We have herd instincts, running with the crowd.

This could be and has been dangerous for investors.

One of the best quotes I ‘ve heard coming from Gov. Sarah Palin, was

when she said that up here in Alaska there is a saying :

“The only thing that goes with the flow is a dead salmon.”

It says something about the fish and something about the direction of the crowd.

At times the crowd may be smarter than a few, elections / the stock market , etc…

However when the markets get hot, and a bubble starts to form -

everyone seems to jump on board and it starts to get scary.

A good book to explore this over the top behavior is Charles MacKay’s  collection

of stories which covers a couple of hundred years and looks at ;

The Mississippi Scheme(1719 and 1720, John Law )

The South- Sea Bubble(1717 -1727)

Tulipomania(1634-1636)

these are classic examples of  Banking ( and paper money )

Real Estate and a Tulip ( an object of affection value ? ) over heated bubbles and Crowds gone wild !

Book reference 1814-1889) Charles MacKay’s  Extraordinary Popular Delusions and the Madness of Crowds .

nyeretsian@yahoo.com   July 21, 2010

Twitter :  EnvoyCapRealty

Envoy Capitol Realty Inc., brokerage    Toronto, Canada

www.capitalmoves.blogspot.com

Money Never Sleeps Nor Yeretsian

With the right investment, income and cash flow will be continuous.

With the wrong investment , expenses and de-valuation will be continuous.

Due Diligence is your short-term and pre-investment requirement
so that  risk(s) will be minimized / mitigated.

Let’s continue the discussion … email us @ capitalmoves@gmail.com

Twitter at EnvoyCapRealty.

Face Book : Nor Yeretsian

www.capitalmoves.blogspot.com

nyeretsian@yahoo.com    (July 19,2010)

Envoy Capitol Realty Inc., brokerage  Toronto, Ontario Canada

Buying/Selling, Leasing, Management, Development of Real Estate in Toronto .

Investment Strategies : Tax free Cash ! Norair Yeretsian

Know your Risk Tolerance before venturing into any investment strategies.

Many options to consider and each has its associated risk(s) and reward(s).

You have the freedom to make money or lose money.

Here is an option : A-II , to consider. It works like this …

You start with a $ 150,000 income producing acquisition in year 2000.

You leverage your investment with a 75% loan- to- value mortgage and
hold the investment for approximately ten years (2009, end).

At which time (2009 / begin 2010) it’s appraised value is determined to be $ 500,000.

Year 2000 —-( ten years)———end of  Year 2009——begin Year 2010
$150,000 ———————————————-$500,000
LTV 75% : Debt equals : $112 ,500 ————LTV 75%: $ 375,000
Equity :   $ 37,500  ——————————- Equity  :  $ 125,000

Debt has been reduced over the ten years , however these principal payments are
with after tax dollars.

Assuming the balance of the mortgage at the end of year ten is $90,000,
we are increasing this with the new financing to $ 375,000.

So that we receive $ 285,000 of new funds into our account [ War chest ].

A number of big assumptions were made :

1. Property is an income producing property …generating Cash Flow !
( your home would work also, but you must have the income to support the debt)

2. For the whole thing to work — Property value must go Up!

3. There is enough Income to support the new financing and you get approved .

4. Since it is a loan to the investment : this amount is tax free ( for now –until sale) .

You have $ 285,000 new funds to enjoy , to invest – to buy another property.

On it goes, it could go on forever or if you over leverage and values drop : you’re out of the game !

The down side concerns :

(1). If property values go down ( and it all becomes upside down, Debt is greater than Values )?

(2) If your income drops off or your tenant(s) leave or stop paying :
can not pay the interest on the loans?

(3) If the  Bank decides not to renew or extend your financing this become a real concern -
may have to liquidate at an inconvenient time: values are low and you are selling under stress. ?

(4). Can you live with the uncertainty  and a little stress ?

(5). You could extend this type of financing indefinitely.

However , if you get to far ahead with a heavy debt burden it becomes
a monster that you may no longer be able to control.
And you are no longer the master ( lord), you have become  the slave to the debt.

Beware.

A professional is always in control.

IF the above numbers held and you Sold the property,
we could do some further calculations to figure out what returns the investor received.
Without the operational cash flows( CFBT – CFAT ; numbers )  to consider or worry about .

Investor Yeretz invests  :
$ 37,500 of equity (year 1 and by year 10) it has grown to and sold for $ 500,000 :
the mortgage has been reduce to $ 90,000 therefore $ 22,500 equity build up .

sale price……………………….. $500,000 sale price
cost of sale (less)…………………. 37,500
balance on mortgage (less)……..90,000

sale proceeds before taxes …. $ 372,500

Return over 10 years     :    $ 372,500
__________________________   =   X          ………..     X = 993 %increase over 10 years

Investment                      :          37,500

Average annual return ( without the benefit of TVM , so simple average ) :  99.3 % a year .

What a large number and yield , wow !

Average annual rate of return on investment (TVM menu on the calculator ): 25.81 % .

1 P-YR    End

N =10

I/YR =  25.8084 %

PV= 37,500

PMT = 0

FV = 372,500

With the beauty of  Time Value of Money , the simple average  of 99.3 % comes down to 25.81% annually .

This is still a great return , relatively speaking .

More in future blogs as we discuss similar types of investments and their returns.

Leave a comment below ….

nyeretsian@yahoo.com    June 18, 2010

Discounted Cash Flow : NPV– IRR % Calculation Norair Yeretsian

Here is a sample calculation — for practice , running cash flows
determining NPV and IRR% . Give it a try on your financial calculator .

With an initial investment ( equity : investment at purchase ,
which includes your down payment plus costs of acquisition) : $ 86,350 .

Cash Flow After Tax ,with a Sales Proceeds After Tax number(s) as follows
with the inputs in to the calculator …

Initial Flow (0)  86,350 [+/-] [CFj]

Flow (1)  15,621  [ CFj]

Flow (2) 13,932 [CFj]

Flow (3) 11,287 [CFj]

Flow (4) 14,863 [CFj]

Flow (5) 15,849 + 94,700 (SPAT) [CFj]

using a given discount rate of  : 10.75 [I/YR]

We solve for  NPV by pressing [shift] [NPV] … + 23,651

and solve for IRR% by pressing[shift][IRR%/YR] … 17.91% .

Thanks to OREA for resource materials from REIA course.

You can follow the same template and simply change the
cash flows and sale proceeds and re-run the numbers.

You can do the above for Before Tax or After Tax numbers.

The real challenge becomes the interpretation of the results
the analysis and the determined action which follows the analysis.

Do we like the investment opportunity

Is it a okay / good / great opportunity for our investment dollars ?

What were our goals and did the results indicate a positive or negative ?

What other tools or metrics work for you as you invest ?

Let’s hear your comments below or Twitter at
EnvoyCapRealty

nyeretsian@yahoo.com       June 16, 2010

Sensitivity Analysis part 2 , Norair Yeretsian

Continuing from our earlier posting on Sensitivity Analysis and the request by
Investor Bob of Sales representative James to provide him with an analysis of
this investment property with the following CFBT numbers which have been
incrementally increased by 4 – 6 – 8 %  to illustrate the impact on bottom line
numbers, having adjusted only the CFBT numbers and maintaining the
Reversionary value for the investment in a series of : what if s .

Scenario ………….A..……………B.…………..C.……………….D

……………………..2%…………4% ……………6% …………….8%

EOY1………$16,784……..$ 16,784………$16,784 ……..$ 16,784

EYO2……..$ 17,120……..$ 17,455……….$17,791 ……..$ 18,127

EOY3..……$ 17,462……..$ 18,153……….$18,858……..$ 19,577

EOY4……..$ 17,811 ……..$ 18,879 ……..$19,990…….. $ 21,143

EOY5………$ 18,167 …….$ 19,635……..$ 21,189………$ 22,835
EOY5 Rev: $ 227,000 …..$ 227,000…..$227,000 ……$227,000

IRR% ……10.8721%……. 11.1757%…… 11.4891%……. 11.8122%

If  investor Bob is happy with an IRR% of 11 % then we have 3 out
of 4 scenarios that deliver this target.

In the event investor Bob wants more than 12% and the realistic cash flows
should not exceed a 8 % increase year over year then we can try to adjust
or refine the reversionary values higher say by 10-20-30 % and observe the results.
These increases in reversionary values have been pre-approved by investor Bob.

Scenario ………A …………B …………C ..…………D

Same CFBT as above for each ……………………….

Reversionary Values (increased 5-10-20-30% )

……….$ 238,350..$249,700 …$ 272,400…$ 295,100

IRR%…11.73% …12.67% …….14.45% …….  16.47%

Well with a 12% minimum requirement by investor Bob,
the above can meet that test 3 out of 4 times based upon
assumptions agreeable by investor Bob as realistic .

With full disclosure and understanding of the underlining assumptions
for any calculation / presentation(s) made, all parties are on an equal
footing . Enter the agreement with the full knowledge and understanding
of all potential risks associated with the investment opportunity .
In the event things do not work out, the investors know why,
as they review quarterly report by quarterly report and can fine tune their
forecasts as time goes by and the property performs (cash flows -happen )
with actual(s).

Lets continue the discussion with your comments, below.

Or on Twitter @ EnvoyCapRealty …

nyeretsian@yahoo.com    June 12, 2010

Calculating a Canadian Mortgage HP10BII Norair Yeretsian

Here is a sample of a Canadian Mortgage calculation on the HP 10 B II , with
the appropriate keystrokes so that you too can reproduce these results.

Sample illustration A :

A property is sold for $ 4,250,000 in Toronto, Ont, Canada and the buyer needs
to  finance it. He approaches a mortgage lender and a package is prepared and
presented to several lenders. One lender offers :  a 65% loan to value ,
with a 5 year term mortgage  and 21 year amortization with monthly payments
with  monthly payments (representing both principal and interest ;
at an interest rate of    8.25 % .

Make sure your first clear all [shift] [C] this resets the calculator to zero.

We must next convert the interest rate from the stated rate 8.25 % to the
appropriate rate which will assist us in getting the correct Canadian monthly
payment, based on a semi-annually compounded  not in advance arrangement
as per Canadian law for blended rate mortgages of principal and interest.

8.25 [ shift] [ Nom%]

2 [shift] [P/YR]

[shift] [EFF%] … displays shows : 8.4202

12 [shift] [P/YR]

[shift] [NOM%] … display shows : 8.1117 this is now parked in [I/YR]

This 8.1117 , is the HP Canadian Mortgage Factor .

The balance of the TVM menu Icons can now be populated
with the appropriate data.

21 [shift] [N] display shows : 252

present value of the mortgage amount $4.25 million x 65%= 2,762,500 loan amount

2,762,500 [ PV] display shows : 2,762,500

0 [FV] display shows : 0

solve for the payment by pressing : [PMT] display shows : - 22,859.30

We can multiple this by  [X ]  12 , which will give us the Annual Debt Service.

ADS = 274,311.64

To get into the Amortization Schedule of the Calculator, we simply press …

[shift] [ Amort ] on the display we see :  (1-12) ,
this represents the full first year : EOY1 numbers ,
Then we press [ = ] display shows Principal payments .
When we  press [ = ] display shows Interest payments.
Then we press [ = ] display shows Balance outstanding for the EOY1 .

By pressing [shift] [Amort] : (13-24) , we get EOY2 numbers, and
again [=],[=],[=] …

If we wanted the EOY5 numbers ; we would press the following ;

1 input 60 [shift ] [ Amrt ] gets us to the end of year 5 :

display shows : (1-60)  [=] 308,437.84 principal amount paid over 5 years

[=] 1,063,120.37 this is the total interest payments paid over 5 years.

Again ; [=] gives us the Balance outstanding at the end of 5 years :
2,454,062  EOY5

Let’s put it all into a Mortgage Schedule :

……………… Principal ………….Interest ……….Balance

EOY1… ….$ 52,137 ………….$ 222,175 ……..$ 2,710,363
(1-12)

EOY2…  ...$ 56,527 …………$ 217,785 ……$ 2,653,837
(13-24)

EOY3 … …$61,286 …………$ 213,025 …….$ 2,592,550
(25-36)

EOY4…….$ 66,447 ………..$ 207,865 ……..$ 2,526,104
(37-48)

EOY5 ……$ 72,042 ………..$ 202,270 ………$ 2,454,062
(49-60)

Totals …$ 308,438 ……..$ 1,063,120 ………$ 2,454,62
(1-60)

Hope this works for you. If you have any suggestions for improvement
sent us a comment below or Twitter @ EnvoyCapRealty

nyeretsian@yahoo.com       June 5, 2010

Present Value Calculation(s) : DCF model……. Norair Yeretsian

Estimating the Present Value of  an income producing property
using the discounted CFBT model ( Cash Flow Before Tax) to arrive at
a valuation of the asset. In reality your biggest challenge in applying
this technique will be in the appropriate selection of the discount rate.
Appropriate to the investment(s) under consideration and the investor(s)
perception of risk and cost of capital over a reasonable timeframe (5-20 years).

Let’s focus right now on the mechanics of calculating the Present Value
with an assumed discount rate, to see  how all the numbers would line up
and how they would be inputed into your financial calculator or
your Excel spreadsheet. We will use the numbers from a previous
financial worksheet we developed ( in previous Blogs ) to help us illustrate
the workings and later ( future Blog) we will do some analysis of the
findings/ resulting numbers.

Illustration : A-1 , Discounted CFBT [ using the HP 10 BII ] :

set to 1 P/Yr  :  1 P_Yr

Recall the  CFBTs :  EOY1 to EOY5 with EOY5 adjusted for SPBT number.

Step 1 : Initial Flow set to zero ” 0 ” [CFj]

Step 2 : input all CFBT’s into the Cash Flow journal of the calculator ;

Flow 1 — > 122,610 [CFj]
Flow 2 — > 137,323 [CFj]
Flow 3 —> 153,802 [CFj]
Flow 4 -–> 172,258 [CFj]
Flow 5 -–>1,192,929 [CFj] (this is made up of EOY5 CFBT + SPBT)

Step 3 : entering discount rate :

enter an appropriate discount rate : 17.25 %  [ I/YR]

Step 4 : to determine the estimate of present value of the cash flows ;

[ shift ] [NPV] :  929,353.06

The display on the calculator represents the Present Value of the  Equity portion
of the investment.

Step 5 : We need to finally add in the present value of the mortgage ($ 2,412,000)
to arrive at the total value of the investment.

Estimate of PV  (equity portion ) : 929,353 + 2,412,000 (mortgage or debt portion)

Total value of the investment : $ 3,341,353 .

Let’s discuss it below or Twitter at : EnvoyCapRealty .

nyeretsian@yahoo.com       June 1, 2010

Skyscraper Dreams…….. by Norair Yeretsian

Some of us just dream, and some of us actually acquire,build, manage and add value.

The story of the Great Real Estate Dynasties of New York is chronicled in
the book Skyscraper Dreams by Tom Shachtman (1991).

Harry Helmsley “could forecast the economic direction in which a
neighborhood was heading, knew what improvements (new elevators,
more shine to the brass, better windows) would bring in new tenants,
and could figure out which rental leases could most easily be renewed
at higher rates.” Helmsley’s business was not only brokerage ( sales)
like most brokerages, he made a significant fraction of his income from
management, ” which gave him a broader perspective.”

Harry Helmsley understood the sale-and leaseback structure, this
would enhance his company’s capacity to make deals for buildings
but also the fortunes of his property management firm, which could
operate future properties when sellers didn’t want to .

” At the time, the banks, insurance companies, and investment houses
wanted to have nothing to do with real estate.
Burned in the depression, they were overreacting by staying
completely out of the kitchen.

Scarcity of financing translated into fewer groups trying to buy, even
though a plethora of attractively priced buildings were available.
So there were tremendous opportunities for people with both the money
and the acumen to buy. Helmsley found and evaluated the properties,”
and his partner Wien checked his analyses and provided the cash to
buy them : ” a perfect match .”

” In acquisition real estate, partnerships are always desirable.
What you looked for was someone ( preferably a relative) with a body
of expertise that overlapped your own but was different, who could follow
your logic, correct fallacies or inaccuracies, and then bet with you on a
common project and accept the gains or losses from it without breaking
stride or quitting the field of play. You tested that partner on one or two
transactions; if you were still in tandem after several, you kept going and
grew closer together and more bold in your outside reach. “

Here is part of  the formula for your successful partnership and
acquisition vehicle, the other consideration(s) follow.

” In New York real estate, a successful operator later wrote,
” Property is appraised according to the return it brings investors, and
the effect of the syndicate has been quite simply to double values.
A building worth $ 5 million to a corporation is now worth $ 10 million
to a syndicate. ” Because the syndicate would pay taxes at an individual
rather than a corporate rate, Wien and Helmsley could offer top dollar,
spend more to acquire properties than other buyers, and beat out almost
any other bidder.

Though Wien invested alongside the other members of the syndicate,
Helmsley did not. Harry’s  income came from his broker’s fee and from Wien
allowing him to assign the management of the building to his own subsidiary ,
which guaranteed him a continued income from the building.
Wien and Helmsley pledged investors at least a 10% percent annual return
for a period of  ten years; after that, the building would probably be sold,
and investors would then receive 50 percent of any profit — which could
be very considerable, as most buildings went up in value.”

This could be the simple framework and timeframe for your syndicate in the future.
Becareful not to over estimate the returns you pledge to your syndicate partners,
you do not want to disappoint, by not delivering.

Your success going forward will be impacted by your delivery.

With the advantage of hind sight , there is a lot to learn from the  great real estate
Empires and Dynasties of New York, about their successes and failures.

As a real estate practitioner, Harry Helmsley covered all bases of the real estate
business and leveraged his experiences and knowledge to achieve great success
in the business of real estate. Having started as a bicycle courier in the City,
Harry Helmsley owned or had an ownership interest in over 200 buildings in
New York City and an empire valued above $ 1 billion,
by the end of his career in real estate.

Let’s continue the discussion @ EnvoyCapRealty : Twitter  or below…

nyeretsian@yahoo.com May 27, 2010

The Money Tree and Compounding Values… Norair Yeretsian

Growing your money is easy with the help of a financial calculator,
I recommend the HP10BII or the HP17B+ . These are great calculators,
my preference is the HP 17BII+ it works wonderfully with cash flows
and ‘what if ‘ scenarios.

Here are some classical examples of  compounding values / payments
and a wonderful illustration of time value of money . Essentially
how time effects money over the time period you establish (set) .

Example  1:

One dollar invested in an opportunity that yields a doubling each
period for twenty periods, what would the future value be. With
no other payments /investments made.

Step 1 : make sure the calculator is set to  1   P/ YR , and clear all .

keystrokes would be ;  1 [shift] p/yr  [shift] [c]

Step 2 : into your TVM menu insert the following relevant numbers

20 [ N]

100 [ I/YR]

1.00 [+/-]

0 [PMY]

solve for future value by pressing [ FV]

the display should read : 1,048,576 .

Therefore according to the math , if you invested one dollar into an investment
opportunity that afford you a doubling ( 100%) each period for twenty period, you
would have $ 1,048,576 . This could be over twenty years, months,hours etc…
The calculator work on an annual basis or bias.

This is how easy it is. Compounding is the process of starting in the present
and building / growing at a certain rate (interest rate/ growth rate /compound rate)
into the future. Discounting is the reverse process, where we start with a large
amount of cash flow and with an appropriate discount rate work back to the
present – hence present value ) . Compounding we start with a small value
and grow it into the future ( a larger value ).

Example 2 :

Look what happens when we go from $ 1 to one penny $ 0.01 as our investment
in PV and we simply change the time frame from 20 periods to say 30 periods in [N].
Everything else stays the same as above;

30 [N]

100 [I/YR]

0.01 [+/-] [PV]

0 [PMT]

solve for future value :  pressing  [FV]

result on the display says :  $ 10,737,418.24

Wow ! , take the penny . Yes, but what is the real story here ?

It’s that time is working in your favor to give you this incredible number.

Starting with 100 times less money you could have ten times more money
( if that is the object of the game ) then a wealth competitor.
If you start early enough to let the Magic of compounding work in your favor.
Talk about the Laws of attraction, I’m attracted .

A real life example , I have used is the coke ‘s IPO ( initial public offering )

back in 1919 at $ 40 a share, if held for a 74 year period .
Over which coke’s stock averaged annual  growth rate of approximately 15.8 % was achieved .
How much would you have by 1993 ?  Back to the calculator ; TVM menu .

74 [N]

15.8  [I/YR]

40 [+/-]

0 [PMT]

solve for future value :  [FV] =  2,072,494.50

Wow ! Now this number does include all the dividends reinvested and all the stock splits .
Simple – buy and hold  ( for a very long time ).
But no market timing, no watching the stock ticker every 5 minutes, etc…

Real Estate is a great long term investment and in future blogs, we will try
to include some examples of successful buy and hold investment strategies
and the yields received / earned over the periods held.

If you have any stories you wish to share with us , we would love to hear them
and in turn share them with our readers.

Let’s continue the conversation on Twitter : EnvoyCapRealty or below

nyeretsian@yahoo.com May 23, 2010

Income Producing Property+Financial Worksheet, Norair Yeretsian

You are looking at a simple income producing property :

Northstar Plaza
its made  up of 10 retail tenants on the ground level and 20 office tenants
on the second floor.Its has recently been purchased at the appraised value
of $ 3,216,000 and the lenders (bank) have agreed to lend on a 75% LTV;
loan to value (ltv), which means the purchasers have invested  an
Equity position of $804,000 ( 25% of the value ) plus closing costs.
Closing costs includes; land transfer tax plus MLTT (in Toronto),
legals, mortgages applicantion fees, survey, appraisal report,
environment assessments ; report 1/2/3/, building inspection report.
For the purposes of our discussion, we will estimate these to be $223,100.

According to the financial worksheet for the property :
a simplified Property Analysis Worksheet  follows ;

Northstar Plaza : 1234 Main Commercial Street    ( retail/office )

Potential Rental Income                   $ 700,000
- Vacancy + credit losses (6%)           (42,000)
Effective Rental Income                   $ 658,000
+ Other Income ( roof top sign)           12,000
Gross Operating Income                  $ 670,000

Total Operating Expenses(52%)     ($348,400)

Net Operating Income $ 321,600

- less Annual Debt Service               ($198,990) : interest only mortgage

CFBT ( cash flow before tax)          $ 122,610

With Value of the property at $ 3,216,000 and a LTV of 75% , thererfore
there is a mortgage amount of $ 2,412,000 with a simple interest / interest
only loan at 8.25%, resulting in ADS of  $ 198,990.

Lets now explore the above information with our formulas ;

Cash on Cash / Pay back / Break Even ratio / GIM and capitalization.

Therefore , here we  going :

Cash on Cash = CFBT / initial investment  :  122,610 / 804,000 = 15.25 %

15.25 % = 122,610 / 804,000  , this is a one year picture, but its a nice one !

Cost of capital is running at 8.25 % and you are receiving 15.25% return .

Pay Back Period = initial investment / CFBT   :
804,000 / 122,610= 6.56 years pay back

This is not bad , the shorter the better in this area. ( no TVM , here)

Break Even Ratio = (operating expenses+Debt service )/ gross operating income

( 348,400 + 198,990 ) / 670,000 =  81.70

Out of every dollar that comes in  81.70 committed , the lower this number the better.

GIM = Sale Price / gross operating income

3,216,000/ 670,000 = 4.8 is the factor

this is a comparative tool, and effective by location/size of complex/age of building
just to name a few of its challenges .

OCR  = NOI / Value  ; Capitalization
10%    =     321,600/ 3,216,000

The higher the OCR the better for the purchaser (investor) ,
the lower the value and therefore the lower  purchase price.

This work will keep you busy !

nyeretsian@yahoo.com                                      May 19 , 2010