How to Determine Property Value! (no replies)

admin — Mon, 26 Jan 2009 23:45:25 -0500

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How to Determine Property Value!

I've been in real-estate for many years, and have made substancial return on my initial investment. Don't underestimate my age. I have a lot of years of experiences, and invested thousands of dollars on books, seminars, and institutions, such as Trump's institute. I own numerous real-estate properties, so please listen to what I am teaching you for free. Some of my favorites books, just to name a few, are "Rich Dad, Poor Dad" by Robert Kiyosaki, "The Secrets of the Ages" by Robert Collier, The Magic of Thinking Big, by David J. Schwartz, Ph.D and The Secret Law of Attraction as explained by Napoleon Hill, Two Years to a Million in Real-Estate, and The Millionaire Real Estate Mindset, by Russ Whitney

There are three approaches to determine property value.

Comparable Sales Approach
Replacement Cost Approach
Income Approach (Capitalization Approach)

1) (Comparable Sales Approach)

It is determined by sales of similars properties sold within half a mile radius from the property in questioned, and within a period of six months. The average of at least four properties sold within these requirements is the market sale's price or comparable sales appoach. Other things that will be taken into consideration is the conditions of the property being sold. For instance, if your property has broken windows, you'll deduct from the average comp the replacement of windows. The comp can be easily determined by logon on www.MyFico.com and paying about five dollars to get comps (market prices on property sold recently). Then of course, you will get an appraiser to determine the actual value of your property.

2) (Replacement Income Approach)

This approach is mostly used by insurance companies, and the local government. This is determined by how much will it cost to replace a property -- minus the land value -- if for example the property became ruin by catastrophe or fire. Furthermore, this is also use to determine depreciation on a property. (depreciation) It represents a capital reserve for replacing the property (not the land) after it has exhausted its total expected "LifeSpan". The I.R.S. allows you to depreciate a property over 27.5 years. ie. depreciation formula on a $300,000 property is $300,000/27.5 = $10,909.09 per year that you may deduct from your taxes owed.

3) (Income Approach or Capitalization Approach)

Is the primary method for evaluating income-producing properties. This approach considers the revenue (Rental Income) generated by the property and its operating expenses to determine value. The income approach uses the capatalization rate (Cap Rate) to determine property value.
Cap Rate equals Net Operating Income divided by the value of the property (Price).
Formula (NOI)/(Price) = (Cap Rate)

This formula allows you to determine the cap rate, or the rate of return based on one year's projected (NOI)

Or

Value or the property (price) = NOI/cap rate.

Net operating income = Total gross income - Net operating expenses.

Total gross income is the total gross scheduled rental income if all units were rented plus any other income generated by the property (i.e., Laundry income, rental parking, garages, vending machines, and so on).

Total gross operating income = Total gross income minus vacancies and credit loss.
Vacancy is the revenue you lose when your apartments are not occupied by paying tenants. If your potential annual income is $50,000 and you have a 5 percent vacancy rate, then you expect to earn only $47,500 for the year because your vacancy loss is $2,500.

Total operating expenses are expenses that are necessary if a property is to continue producing revenue. These expenses include: utilities, repairs, management fees, taxes, landscaping, snow removal, and so on. Mortgage payments, capital expenditures, and depreciation are not operating expenses. Operating expenses include any expense required to maintain and manage the property for one ful year. The operating expenses typically add up to about 30 to 50 percent of the gross operating income. If they are more than 50 percent, the property isn't being manage correctly.

Evaluating the Deals
Cash Flow Template

When evaluating a deal, one must do its due diligence (Period before closing to investigate everything about the property). One of my first conditions (contingencies) on my offer to purchase is a minimum of the past two years Schedule E tax returns, or profits and loss statement. Why do I ask for this? Because a property owner might have been awared for the past year that he/she was planning to sell the property, therefore will lower its maintenance fees, and raise its suppose rental income; thus, raising the property value. And. by asking for at least the past two years of Schedule E tax returns, you can really determine the properties value, or how much you should offer to purchase. For example, I once bought a mixed-used four family and store space for $148,000. The original asking price was $199,000. However, because I had a good real-estate attorney, a clause on my contract, and the owner was in danger of foreclosure, I was able to bring the price down at the closing table to $148,000.

When I first became intrested on this property, although I had no prior experience, I had attended seminars that educated me on how to determine a good real-estate deal. The landlord, that I was purchasing the property from, charged $450 rent on three apartments, and the fourth one was empty. I knew that after I renovated them, I could've charge easily $700 a month rent on each apartment. I also knew that while I finished repairing one apartment, the tenants could have been moved around from the damage apartment into the new one. Which that became the case. Although, they were paying more, they were happy with the new ammenities and fully renovated apartment.

Now, keep in mind the when I first became interested in the property (592 Bushwick Ave) the asking price was $199,000. So, let's use the formulas to see if I was getting into a good deal or not. The property I knew that it was going to get renovated because I was getting an FHA 203 K Loan. This is a loan guaranteed by the government that if you default, the government will cover the loan to the bank minimizing the bank's risk in lending you money. Furthermore, the down payment is only 3% down compared to a conventional loan 20% down. Making it more possible for low income family to obtain the American dream of home ownership. In addition, not only does this loan allow me to purchase the property with a low down payment, it also allows an additional loan -- depending on the market price of the property -- to renovate the property to market value. However, take into consideration that on income producing properties, the value can then be determine by the rental income (Capitization Approach).

I projected with four renovated apartments, that I can easily charge $700 a month each, and at least $1,500 a month rent for the empty store space. That's a Gross Scheduled (rental) Income of $51,600 minus 5% vacancy loss of $$2,580. Total (Projected Annual) Gross Operating Income was $49,020. I also knew that the operating expenses (according to the schedule E tax returns) was $12,800. So, the gross operating income of $49,020 minus Total Annual Operating Expenses fo $12,800 equals the Net Operating Income of $36,220

Examples of Operating Expenses are: Taxes, Insurance, Utilities (light & Gas), Water and Sewer charges, Trash removal, Landscaping and Snow removal, Advertising, repair and maintenance, supplies, other. However, it does not include debt services (Mortgage payments).

When you implement the formula NOI / Cap rate (minimum that I look for is 9%(.09) = Value
NOI of $36,220 / .09 = $402,444(value) yet, I was purchasing the property for $148,000 with an $8,000 down payment that wasn't even mine. OPM(Other People's Money) Therefore, my initial (borrowed) investment of $8,000 will be used to determine Cash Flow Formula and my cash on cash return on investment. (Cash Flow Formula) NOI - Total annual debt service(Mortgage payments).
NOI($36,220) - Projected Total annual debt Service($23,880) = ($36,220 - $23,880) = $12,340 Projected Annual Cash Flow or revenue (before taxes) $12,340

Cash on Cash return = Annual Cash Flow / Down Payment or any other up front expenses.
$12,340 / $8,000 = 1.54 or 154% return on my initial investment. Where would you get such a high interest return on your investment if not real-estate. That's why I love it because Real-estate is Real. And you control it unlike the stock market.

Another formula that banks typically prefer or use is call a debt coverage ratio or DCR, DSCR
DCR = Net Operating Income / Annual Debt Service DCR = $36,220 / $23,880 = 1.51
Banks typically prefer a DCR of 1.2 or higher to give you a loan on a income producing property. I hope this lesson becomes beneficial to you. There is tremendous value here for free, so take advantage of it, and recommend us to your friends.

Brought to you by George Almodovar,
CEO of Striving for Better Days, Inc's website.>:D<

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How to Determine Property Value! (no replies)