The Real Estate Income Statement. The value of any investment is simply the present value of its expected cash flows, using a discount rate that reflects.

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Presentation transcript:

The Real Estate Income Statement

The value of any investment is simply the present value of its expected cash flows, using a discount rate that reflects the riskiness of the cash flows. However, there are several ways of estimating the PV of a real estate project.

The most general way of valuing a project is to capitalize the Net Operating Income (NOI) of the investment. Value = NOI / Capitalization Rate This works well as a general valuation tool because it uses information that is reasonably similar for all investors.

Cap Rate What is a cap rate? How do you calculate a cap rate? How does risk affect your cap rate? What is the downside of valuing projects using only NOI and a cap rate?

Simplistic Operating Statement PGIPotential Gross Income -V&BDVacancy and Bad Debt + MI Miscellaneous Income EGIEffective Gross Income - OE Operating Expenses =NOINet Operating Income Assuming competent management, these numbers should be similar for all investors.

The Bottom Half (Investor Specific) NOI -DS Debt Service =BTCFBefore-Tax Cash Flow -Taxes =ATCFAfter-Tax Cash Flow Where do we get the tax amount?

Taxes (Operations) NOI -Depreciation -Amortized Financing Cost -Interest =Taxable Income X Marginal Tax Rate = Tax Liability

After-Tax Equity Reversion Selling Price -Selling Expenses =Net Selling Price -Loan Balance =Before-Tax Equity Reversion -Taxes Due on Sale =After-Tax Equity Reversion

Taxes Due on Sale Net Selling Price -Book Value -Unamortized Financing Cost =Taxable Gain X Tax Rate =Taxes Due on Sale