Transcript Slide 1

REAL ESTATE INVESTMENT
SYMPOSIUM 2009
How to Evaluate Real Estate
Opportunities
Presented by:
Mr Faron T Lawrence
June 30 2009
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Benefits of Owning Real Estate
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Annual Cash Flow
Appreciation in Value
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INCOME AND EXPENSE SCHEDULE
Gross Rent
- Vacancy Factor
= Effective Gross Rent
-
Operating Expenses
(Rent collected as though
fully occupied)
(Rent NOT collected due to
vacancy)
(Amount of Rent actually collected)
(Cash expenses borne by owner)
=
Net Operating Income (Cash available to pay lenders
-
Debt Service
= Cash Flow (Pretax)
and owners)
(Cash demanded by lender)
(Cash available to owner)
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INCOME AND EXPENSE SCHEDULE
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Gross Rent = The total rent you plan to charge for
the property.
$ Vacancy Factor = Gross Rent x
vacancy rate
%
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Effective Gross Rent = Gross Rent – Vacancy
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Operating Expenses
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Maintenance and Repairs
Insurance
Management Fees
Property Taxes
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INCOME AND EXPENSE SCHEDULE
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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.
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Debt service is determined by three factors
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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
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The Cash Flow Pipeline
Rent Collections
Cash Flow to Owner
The Remainder
Operating Expenses
Maintenance/Repairs
Management
Insurance
Property
Tax
Debt Services
D/S = L x C
The Cash Flow Pipeline
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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
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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
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Project Description?
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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
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PROJECT COST
Land Cost
Building Cost
Furn & Appl
TOTAL COST
$ 55,000
$445,000
$ 50,000
$550,000
FINANCING
Your input/equity
Bank Loan
TOTAL FINANCING
$ 55,000 (10%)
$495,000 (90%)
$550,000
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E-Z-LIVING: Inc & Exp Schedule
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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
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RETURN ON INVESTMENT (ROI)
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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
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‘GO’ or ‘NO-GO’
 Is 31% enough?
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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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