1. 1 REAL ESTATE INVESTMENT SYMPOSIUM 2009 How to Evaluate Real Estate Opportunities Presented by: Mr Faron T Lawrence June 30 2009

2. 2 Benefits of Owning Real Estate  Annual Cash Flow  Appreciation in Value

3. 3 INCOME AND EXPENSE SCHEDULE Gross Rent (Rent collected as though fully occupied) - Vacancy Factor (Rent NOT collected due to vacancy) = Effective Gross Rent (Amount of Rent actually collected) - Operating Expenses (Cash expenses borne by owner) = Net Operating Income ( Cash available to pay lenders and owners) - Debt Service ( Cash demanded by lender) =Cash Flow(Pretax) (Cash available to owner)

4. 4 INCOME AND EXPENSE SCHEDULE  Gross Rent = The total rent you plan to charge for the property.  $ Vacancy Factor = Gross Rent x % vacancy rate  Effective Gross Rent = Gross Rent – Vacancy  Operating Expenses  Maintenance and Repairs  Insurance  Management Fees  Property Taxes

5. 5 INCOME AND EXPENSE SCHEDULE  Net Operating Income Excess of cash collected over cash disbursed for the normal operations of the building. Cash Flow available for distribution to all investors ( lenders and owners).  Debt Service The amount of cash that the lender demands in consideration for providing the loan. Debt service is determined by three factors  Loan amount  Rate of Interest  Term of loan

6. 6 INCOME AND EXPENSE SCHEDULE  Cash Flow (Pre-tax) Annual amount of cash available to the owner after all cash obligations including debt service have been satisfied. Cash Flow (After-tax)  Pretax cash flow – trader’s tax

7. The Cash Flow Pipeline Operating Expenses  Maintenance/Repairs  Management  Insurance  Property Tax Debt Services D/S = L x C Rent Collections Cash Flow to Owner The Remainder

8. 8 The Cash Flow Pipeline  Return on Investment Cash-on-Cash Rate of Return $Cash Flow (Pretax) $Equity The higher the cash-on-cash rate of return, the more attractive the investment. When considering which real estate investment to choose, you choose the one that has the greatest cash return on a given cash investment.

9. 9 The Cash Flow Pipeline  The Breakeven Point Ratio (BEP) BEP = Expenses + Debt Service Gross Rent Indicates how much occupancy must occur to insure that a project’s income meets all required cash disbursements. The lower the ratio the safer the project.

10. 10 PROJECT: E-Z-LIVING  Project Description? A building comprising 2 two-bedroom apartments furnished.  Where will you locate your building?  Who are you going to rent to?  How much rent can they afford?  What is the rent you will charge?  Is your rent charge consistent with the going market rent?

11. 11 E-Z-LIVING  PROJECT COST  Land Cost$ 55,000  Building Cost$445,000  Furn & Appl$ 50,000  TOTAL COST$550,000  FINANCING  Your input/equity $ 55,000 (10%)  Bank Loan $495,000 (90%)  TOTAL FINANCING $550,000

12. 12 E-Z-LIVING: Inc & Exp Schedule  Gross Rent$77,760 (US$1200/apt X 2 X 12 X 2.7)  - Vacancy Factor 0.08 = $6,220 (Est. at 1mo./year = 1/12 = 0.08 X $77,760)  = Effective Gross Rent$71,540  - Operating Expenses$8,850 Maint & Repairs (est.) $250/mo. = $3,000/yr Property Insurance - $5,000/yr Management Fee – Nil (self managed) Property Taxes - $850/yr  = Net Operating Income$62,690  - Debt Service$45,600/yr Loan of $495,000 : 7% : 20 years  = CASH FLOW$17,090

13. 13 THE DECISION: E-Z-LIVING  RETURN ON INVESTMENT (ROI) ROI = Cash Flow / Equity = 17,090 / 55,000 =.31 or 31%  BREAK-EVEN POINT RATIO (BEP) BEP = Expenses + Debt Service Gross Rent =8,850 + 45,600 77,760 =.70 or 70%

14. 14 THE DECISION: E-Z-LIVING ‘GO’ or ‘NO-GO’  Is 31% enough?  What other investments are available to you that can give you an equal or better return?  Are the risks and work involved worth the return? YOU DECIDE

15. 15