1. Valuing Real Estate
Return on Investment Calculation (ROI)

2. Buying a house (Before 2000)
Consumers required to put a 20% down payment
For a $500,000 home:
$100,000 down payment & borrow $400,000 (mortgage)
$400,000 fixed rate loan paid back over 30-years
Loan is less than the value of the house
So banks take very little/no risk of default

3. Methods to Value Real Estate
Rent vs. Buy Analysis
Compare monthly cost of renting vs. buying property
Calculate tax advantages
ROI Investment Property Valuation
Assume you pay “cash” for property
Calculate an implied % rate of return (roi)
Compare to other investment options: bonds, stocks, etc…
$500,000
Condo for sale

4. Rent vs. Buy Analysis
Compare total cost of loan including all expenses vs. rent for property
Consider job stability, level of savings, expected time period
Consider transactions costs, tax advantages, etc… (6% real estate fee to sell)
Total Expenses per month
Mortgage: $1,200 (260,000
Prop. Taxes $500
Homeowners $200
Ins. & Maint. $300
Other $100
Total = $2,300 per month
If Condo Rent = $2,500
Condo is “too cheap”. Buy it!
Tax deductions make true cost of condo, about $2,000 per month

5. Investment Property Valuation
Total Expenses (Costs) per month
Mortgage: $1,900 (450K
Prop. Taxes $500
Homeowners $200
Ins. & Maint. $300
Mgt. Fee $100
Total = $3,000 per month
Rent per month= $2,500
$600,000 House for sale
Valuation of Property:
Assume you pay cash (no mortgage!)
Subtract mortgage from expenses
-$3,000 – 1,900 (mtg) = -$1,100 expenses per month
Rent = +$2,500 income per month
==============================================
Positive Cash Flow = +1,400 per month or $16,800 per year
$16,800/$600,000 = +2.8% Cap or ROI
Compare Alternative Investment:
Pay $600, year Gov’t
Cash Flow = +$18,000 per year
Corporate 5.0% = +$30,000 per year
Stocks?
Bottom Line: This property is too expensive
Look for properties with higher ROI!

6. Return on Investment Worksheet