ADVANCED INCOME PROPERTY ANALYSIS
“Advanced Income Property Analysis” is a class designed for the advanced, accomplished investment real estate broker, who has competence in calculating Internal Rate of Return, and is fluent in discounted cash flow analysis and a financial calculator.
The class starts out with the author’s approach to analyzing value and yield in investment properties. 16 “Contributing Elements to Value and Yield” are identified. These are 16 things, which can happen positively or negatively, in the ownership of any one property, which contribute to what is called the overall accumulation of wealth potential of that deal.
Then 7 methods of evaluating value and yield are discussed relative to how many of the 16 Contributing Elements are considered in their calculation. These 7 methods are: Price per Square Foot/ Gross Rent Multiplier/ Cap Rate/ Cash on Cash/ Equity Rate of Return/ Internal Rate of Return/ Financial Management Rate of Return.
Following that basic “ground laying,” there is a refresher section on IRR, complete with a 3 page case study. In this refresher, the Four Deadlies are discussed- the four most common mistakes made in calculator entry. This is a real eye opening section even for many experienced agents, and will prepare the student for the financial calculator work ahead in this course.
Then, one of the main reasons the course was written is discussed: what effect does a changing interest rate environment have on market cap rates, and values? This is a situation which everyone knows is coming- higher interest rates, and the effect this can have on investment real estate values could be devastating. This topic has been basically presented in the author’s 2 day basic “Income Property Analysis” course over the last several years, and the reaction to it was strong enough as to be the genesis of the author’s writing this new advanced course. The students will do another case study wherein they show selling the property at a cap rate higher than the acquisition cap rate, and the effect on overall yield. This is very eye opening.
Then a very thorough discussion of the Net Present Value calculation is done- complete with a case study and the practical application and usage of this very valuable tool are discussed.
The class then moves into a refresher on the Financial Management Rate of Return method- again with a case study and discussion of the very practical application and usage of this tool with “non- institutional” investors. Why FMRR is not used with institutional investors, and why it should be used with private/ non- institutional investors.
This session is followed by a very interesting analysis of a typical 2006-08 all cash Walgreen’s deal. The amazing revelation here is that in order for an investor to preserve his 5.3% after tax return on his 7% cap rate Walgreen’s deal, he will have to sell it 20 years form now at a 5.9% cap rate. When I have briefly presented this subject in my other 2 day “Income Property Analysis” class, the reaction has been unbelievable. Agents have had no idea the effect of: selling a triple net deal, 20 years down the road, with no increases in rents, paying closing costs and recapturing cost recovery, has on their overall yield. It’s devastating.
Finally there is a section on valuing current market deals. We cover the classic “pre crisis” 6-7% cap rate acquisition, that now, because of the recession, is 50% vacant, and their 5-10 year balloon on their financing is coming due. We show the procedure in valuing such assets. There is huge practical application for this knowledge in today’s environment.
All in all this is Advanced Income Property Analysis. The tools that the professional investment broker should have, day to day, are discussed in great detail in this course. So for the agents/brokers who are tired of the simple basic courses, this one will surely test their mettle.