Real Estate Investment Analysis: How To Evaluate an Income-Property Investment

 

A Six-Part Video Series

Do you know how create and interpret a real estate investment pro forma?

You've done your due diligence (or have you, really?) and now it's time for you to put all the numbers together and make some sense of this potential income-property investment. Where to start? What to do?

Watch this video series to see how it's done.

You'll begin with a "back-of-the-envelope" approach, just to find out if this property holds out enough promise to merit spending your time before you spend your money. Then you'll proceed logically through a more detailed analysis of revenue, expenses, cash flows, taxes -- even partnership possibilities. You'll end up reshaping the deal on terms that would work for you.

Start by downloading the written case study -- a mixed-use property -- so you'll have the necessary facts and figures. Then watch the first video in the series -- it's free. Then purchase the remaining set of five videos here, all for just $59.

Video #1: The Quick Analysis Time: 16:32

In this series of videos, we'll examine the basic financial analysis of a potential real estate investment, using a mixed-use property as our example. You can download the case study that describes this investment at http://www.realdata.com/files/urbancenter.pdf. In future episodes we'll perform an in-depth analysis of this property, but for this first video we're going to start the way many investors might: with a quick and simplified first pass. Our purpose here is to vet some of the key numbers in order to decide if we think this property is worth taking a more careful and in-depth look. You can try this first video free

Video #2: Residential and Commercial Revenue Time: 14:46

This mixed-use property has revenue from both residential and commercial rental units. We see how the apartment revenue is generally straightforward, but how the commercial units may involve special considerations like step increases, expense recoveries and tenant improvement allowances.

Video #3: Real Estate Operating Expenses Time: 13:45

Now that we've accounted for our mixed-use property's revenue, we'll look next at operating expenses. In a real estate investment, are there some costs that we can classify properly as operating expenses and some that we cannot? Why does it matter?

Video #4: Cash Flow Time: 12:54

In this video we'll begin with our property's first cash flow -- the sources and uses of funds at the time of our purchase. We'll look at our operating cash flows and see what role funded reserves and taxes might play; and we'll look at the final cash flow that occurs when we sell our investment property.

Video #5: The Key Metrics Time: 12:16

In this video we look at the calculation of our mixed-use property's taxable income and again at its cash flow. We also look at debt coverage ratio, depreciation, funded reserves, capital improvements, the eventual resale of the property, and its Internal Rate of Return. Then we'll cycle back and re-examine some of our assumptions. Do they all seem reasonable? What should we pay for this property to achieve a reasonable return? Have we overlooked anything?

Video #6: Real Estate Investment Stress Test and Partnership Time: 16:08

In this final video of our series, we try to reshape this transaction to yield an acceptable Internal Rate of Return. First, we look at alternative methods of financing. Next we stress-test with varying purchase prices and re-sale capitalization rates. Finally we bring in equity investors and try to structure a win-win partnership.

Presenter

Frank Gallinelli, founder of RealData Software, is the author of Mastering Real Estate Investment and What Every Real Estate Investor Needs to Know About Cash Flow, one of the top-selling real estate books on Amazon.com since 2003. He teaches real estate finance in Columbia University's MS program in Real Estate Development.