Is this the New Normal or Double Dip coming? Norair Yeretsian

Mr. Mohamed El-Erian (PIMCO, CEO: over sees more than $ 1 trillion of assets )
said we need only look to the key indicators to understand
where we are and what is happening in our economy and here is the short list ( below ).

This is the new normal economy get use to it . Things will move slower, on employment front.

Employment :  rather unemployment , well at least it is not increasing — its steady .

Consumer Spending : consumers are cautiously spending and not taking on any new debt.

They are starting to work on reducing debts.  Household’s de-leveraging – working on reducing of debt .

Government spending : Government is increasing spending and taking on more debt .

Government is increasing leveraging ,  increasing debt . This is not going to help in the long run.

Business :  Small businesses can’t borrow to spend and grow .
Big corporations have the credit ( and lines of credit ) but  not borrowing and
using their cash to buy back stock.
Not expanding , investing in new plant and equipment to grow.
This is not good for the long-term.

Housing starts : steady , stabilizing , getting better .

Demographics : the population, increasing / decreasing — aging .
The new tax base and the pension(s) – health care, more things to worry about.

The economist Nouriel Roubini described things and generally things are not good
in the economy and government does not appear to be doing anything right at this point
- this is a major concern and will affect all our lifestyles  in America.
With the future only having increasing taxes and possibly cuts to spending in many areas.

There is good liquidity in the economy, Government printing lots of money .

The U.S. economy is still the best on the planet, however  Asia will be coming up .

Roubini is concerned we may be heading for another Dip as the stimulus money
runs out and few to no other measures available for more stimulus.

El-Erian believes we are not heading towards a Dip again, however we
should not expect the economy to perform as it has/ had in the past.

It is always good to have at least two views on where we are and where we may be heading
think about your local economy and the status of its health :
where you are and where you might be heading.
The Key indicators and plus the Demographics of your location should give
you a better understanding of what is happening at the Micro level.

What is happening with the supply of re-sale housing , listings to sales
how many weeks / months supply is there at current demand ?

Most of my colleagues complaint of  lack of inventory ( good salable listings).

What’s the employment statistics in your area of the country .
Does the national average – really matter to you / your area’s economic health ?

If interest rates move, how will that effect the supply – demand dynamics in your area?

Will the interest rate movement effect affordability to the extent that
prices/valuation will be impacted in your location.

One of these factors ( variables) a lone, will give us the answer we are seeking -
- but the mix of these variables at the right time will lead us in the direction we end up.

What happens at the Macro level ( the nation) is more challenging to understand
immediately and we see the data historically ( end of quarter / half/ year ).

Mohammad El-Erian and Nouriel Roubini  [ Crisis Economics , new book ] on CNBC discussion June 15/2010

( The Realist and The New Normal )

Mirco -data ( and what it says ) and Marco ( what actually happens ).

What about innovations by individuals and companies ?
What about alternative energy sources development and implementation into our economy?
What about new discoveries  , that are game changers for the economy ?

What is happening in your area of the economy or country that is raising hope
for a new dynamic economy where new types of  jobs are be created and
new demands for housing are being driven?

Let’s discuss it below with your  comments / or on Twitter EnvoyCapRealty .

nyeretsian@yahoo.com    June 20, 2010

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

Blue Horizons with a little white mist ………… Norair Yeretsian

There are many reasons to be hopeful and optimistic
in this time of uncertainty and market jitters.
It is usually times like these that the bold and the brave go out
and invest and create opportunities for themselves.

The Pearl : Toronto, Ontario is in a unique place in this interest time.
People are coming here. People are investing here.
Based on Demographics and the increasing numbers of the population
in this area of North America.
The economies of scale are being achieved to support and
fundamentally under pin values and price justification.

Demand is being created by the increasingly new net immigration in to the GTA.

Forecast is that this will continue for some time to come.

The Creative people live here and creative industries and job creation will follow.

Despite what government(s) may do and are doing, with inefficiencies and
overspending, over taxing at the City of Toronto level,
and not investing in infrastructure and renewal of infrastructures.
Over taxing to cover budget shortfalls self created by incompetent spending
by the City of Toronto, in almost all areas from computer leasing
( budget was $ 40 million, spent $ 80 million plus another $20 million spent
for an inquiry that went nowhere and no one went to jail .
And city staff end up with old computer equipment and technology
to work with to serve our City and its loyal citizens  – shame . )
The St. Clair streetcar construction nightmare and costs doubled again the budget numbers and
destroyed a beautiful street by putting up a concert curb. in the middle of the street,
causing a distortion to street life + business and traffic chaos for years to come.
Bloor Steet is suffering the same fate by the  City contractors under
the leadership of  Mayor Miller , seem to be hard at work trying to destroy .
But despite this  either impotence or incompetence by the guys running the City,
the population keeps moving forward and will over come these minor
setbacks  in the grand scheme of things.
There is hope, there are elections coming — please vote for competent leadership
and good managers for our City and then we : Toronto will be unstoppable as
we head towards a prosperous future.

Yes we have challenges on all fronts, at the City level .
The provincial level with the new HST (13%, on purchases and commercial leases)
coming in July 1, 2010. (21 days and counting) and major issues with Healthcare.
The Bank of Canada, feeling the need to raise interest rates
(because things are better here then anywhere else on the planet currently)
and commercial lending being tight.

Regardless of  these issues, things are generally good and getting better.

But wait a minute, new housing starts fall in May the headline reads…

Yes, yes… with every blue horizon there is the occasional white mist of a cloud.

And yes the economy in housing, in real estate goes through a natural up and
down rhythm it is expected and it is healthy for the market place.

What do you think? Where are we going ?
Should we be raising interest rates, now ?

Let’s discuss it , leave a comment below or Twitter @ EnvoyCapRealty

nyeretsian@yahoo.com             June 9 , 2010

Moody’s Mideast forecast Negative

Martin Kolhase , Asst VP of Moody’s Mideast says the problem is the classic
economic problem of supply and demand. They have simply over built in all sectors
residential and commercial. He said although the area is made up of several
small countries, it can easily be looked at as a region.
And as a region these are its problems; over building and lack of demand.
Also there is another problem potentially on the horizon by 2012, a number of
large commercial real estate portfolio will need to re-finance or deal with financing
and we don’t know what will happen at this time.

The moderator Nadin Hawa of CNBC asked what Moody’s believes could
be the key drivers to resolve these problems.  What can they do ?

Martin Kolhase, answered this by saying : to re-balance the local real estate economy,
they need to increase the population –increase demand to absorb the supply.
Maybe provide financial incentives …

Any other ideas ? Let’s continue the discussion @ Twitter : EnvoyCapRealty

or here , below… leave a comment.

nyeretsian@yahoo.com       May 29, 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

Money for Real Estate : One Norair Yeretsian

One of your greatest challenges after searching, finding, analyzing,
deciding and negotiating to purchase an income producing property ;
is finding the Money to  cement the deal together.

Well , if you already have all the needed funds you’re there .
( no need to continue to read this blog move on the strategies )

Residential mortgages for single units or multi-unit residential
apartments are much easier to arrange and close.
In Canada, these loans are  CMHC insured and the lenders have
reduced exposure to risk.

Commercial and Investment lending is not insured , so much
more risk to possible loss by lender(s). The lenders are less motivated
to lend to commercial. Commercial loans are more complex, there are
financial statements to consider, appraisal reports to read,
environmental assessments to consider, etc.
It costs the lender more money to facilitate and administer, so they charge for it.
They need people who are smarter and trained in this area, this is usually lacking
at most banks in the country.

This also creates a degree of  illiquidity in the
commercial real estate market place, which the private lenders take advantage
of and move in with their money at higher rates and more challenging
terms (negotiable).

This puts downward pressure on any price increases in commercial /
investment real estate.
This maybe another reason why valuations and pricing is less volatile in
commercial real estate in Ontario.

Where do you find this money ?

What is the cost of this money ?

What are the terms for this money?

Scenario  1 : 25% down payment 75 % financed
You have some equity, but need to find the balance of the Acquisition Price.

Scenario 2 : 10/20/30 + down payment , balance VTB / STB financing

Scenario 3 : set up a   limited partnership / or a simple partnership
You have no money. Where do you start ?

Scenario 4 : syndicate the project , through a corporate vehicle.

Scenario 5: WEIT  ( whatever it takes ) +  AAC ( at any cost )

Where can you find money ?

Usual sources include : the banks, trusts + credit unions,
life insurance companies, some pension funds…

You may want to go to a broker first and have them access
these sources on your behalf and for a brokerage fee(s) but
they will organize a presentation for you and they are motivated
to get you and your project the funds.
Make sure they only get compensated on performance
( the loan actually happens ).

Private money is also potential available, you can access them
through the gatekeepers: lawyers /accountants/business managers.

Depending on the amount(s) you may be seeking , if the local lenders are tight
you may consider going international.
Some of these groups have offices here in Toronto/ Montreal/Vancouver , Canada .

What is the cost of this money ?

This is a good question to ask because , you want to know whether
your  investment can’t handle it . Is there room to pay this amount and
still keep it interesting for you and your group.

The cost is not a fixed item, it is negotiable.
It could range from zero ,1,2,3,4 points or percent of the amount borrowed.

There are also costs such as application fee,  appraisal(s) , environmental
assessments, survey  and other due diligent costs. These again are not fixed
amounts, but they will be in the thousands and not hundreds of dollars.

And its all negotiable, yet another reason to get a professional on your team.

Some of the name(s) in our local market place with respect to finding funds
for your real estate investment opportunity :

Commercial Financial One : www.cfogroup.com
……………………………. (905) 886-6542 : Mark Kay

Firm Capital : www.firmcapital.com

First National : www.firstnational.ca

Romspen : www.romspen.com

Exercise caution when dealing with any lender, remember they are in business and their prior is their interest , not yours .

The better professionals you have on your team,  less costly errors will be made. Using a knowledgeable realtor is an asset.

Let’s continue the discussion on Twitter @ EnvoyCapRealty

nyeretsian@yahoo.com       May 22, 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