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Property Report : Abbey Ridge Condos

   


Disclaimer
This tool is provided "As Is". All information is believed to be accurate, but not guaranteed. It is intended for the purpose of illustrative projections. The information provided is not intended to replace or substitute any legal, accounting, investment, real estate, tax or other professional advice, consultation or service. The author of this tool is not responsible nor liable for any damages arising from the use of the tool.

 

Executive Summary

Property Description

Name Abbey Ridge Condos
Address Cobblestone Crossing, McHenry
Type Multifamily
Size 31968 SF
Rooms 64 rooms : 47 bed. + 44 bath. + 21 kitchens
Purchase Price $ 1,995,000
Rent $ 24,500/month

Financing Overview

Purchase Price $ 1,995,000
Down Payment $ 498,750
Mortgage (25yr @ 4.50%) $ 1,496,250
2nd Mortgage (25yr @ 4.50%) $ 400,000
Loan-to-Value (LTV) 95.05 %
Closing Costs $ 5,000
Total Aquisition Cost $ 2,000,000

Income, Expenses and Cash Flow (Year 1)

Gross Operating Income (GOI) $ 294,000
Total Expenses $ 147,000
Net Operating Income (NOI) $ 147,000
Annual Debt Service $ 126,480
Rehabilitaion $ 10,000
Cash Flow Before Taxes (CFBT) $ 10,520
Income Tax Liability $ 0
Cash Flow After Taxes (CFAT) $ 10,520


Financial Analysis

Holding period of 5 years and discount rate of 10% were used for calculation of NPV and IRR. The rest of the financial measures are for the 1st year only and therefore doesn't provide such exact information.

Net Present Value (NPV) $ 898,708
Internal Rate of Return (IRR) 62.94 %
Cash on Cash Return 19.78 %
Return on Equity (ROE) 10.14 %
Capitalization Rate 7.37 %
Gross Rent Multiplier (GRM) 6.79
Debt-coverage Ratio (DCR) 2.32
Operating Expense Ratio (OER) 50.00 %

Resale Analysis

Sale Price in year 5 (Appreciation:7%) $ 2,812,116
Sale Proceeds (Before Tax) $ 949,263
Optimal Holding Period (based on NPV) 30 years
 
 

Property Description

21 Condos

Price $ 1,995,000
Address Cobblestone Crossing, McHenry, 60050, AL
Country US
Year Built 2005
Type Multifamily
Number of Units 21
Size 31968 SF
Number of Bedrooms 47
Number of Bathrooms 44
Number of Rooms 64
Number of Kitchens 21
 

Operation Effectiveness

The Annual Property Operating Data

Incomes % of GOI
Gross Scheduled Rent Income $ 294,000    
Total Gross Income $ 294,000  
Vacancy loss $ 0  
Gross Operating Income $ 294,000 100.00 %
Expenses
50% rule $ 147,000 50.00 %
Total Expenses $ 147,000 50.00 %
Net Operating Income $ 147,000 50.00 %

Cash Flow (1st year)

Net Operating Income $ 147,000 50.00 %
Annual Debt Service $ 126,480 43.02 %
Rehabilitation $ 10,000 3.40 %
Cash Flow Before Taxes (CFBT) $ 10,520 3.58 %
Income Tax Liability $ 0 0.00 %
Cash Flow After Taxes (CFAT) $ 10,520 3.58 %

Gross scheduled income (GSI)

represents the total of monthly rents for the particular property, including the potential rents from vacant units and uncollectable rents.

Vacancy and Credit Loss

represents the part of the potential rental income that is lost because of unoccupied units or uncollectable rent from tenants.

Gross Operating Income (GOI)

is the actual income which is expected to be collected in the property.

Operating Expenses

are expenses necessary for maintaining the property and ensuring its continued ability to produce income (doesn't include mortgage payments or depreciation).

Net Operating Income (NOI)

is simply the gross operating income minus operating expenses.

Operating Ratios

Operating Expense Ratio 50.00 %
Break-Even Ratio 77.90 %

Cash Flow

represents all the inflows and outflows of cash for a certain property (including mortgage payments). We can calculate cash flow before taxes (CFBT) or cash flow after taxes (CFAT) which is CFBT minus any tax liability arising from the operation of the property.

Operating Expense Ratio

is the ratio of the operating expenses to the gross operating income (GOI).

Break-Even Ratio (BER)

is another benchmark used by mortgage lenders. It estimates how vulnerable is a certain property to defaulting on its mortgage if part of the rental income is declined. Most of the lenders are looking for BER of 85% or less.

 

Financial Effectiveness

Financial Measures

Net Present Value $ 898,708
Internal Rate of Return 62.94 %
Profitability Index 9.66
House P/E Ratio 0.71
Annual Depreciation $ 65,291

Holding period of 5 years and discount rate of 10% were used for calculation of NPV and IRR. The rest of the financial measures are for the 1st year only and therefore don't provide such an exact information.

Net Present Value (NPV)

is probably the best measure of any investment thanks to its complexity. It takes into account all future cash flows including the selling price, and it converts all these amounts to their present values using discount rate required by the investor. Therefore in contrast from most of the measurements, NPV count fully with the time value of money. More information and example is on the blog.

Internal Rate of Return (IRR)

is a rate which an investment will return over the estimated period of ownership. It is in fact the discount rate that produces NPV of zero.

Profitability Index

is very similar to NPV. It also calculates with the present values of future cash flows and discount rate, therefore it takes in account the time value of money. Profitability index is a ratio which shows if the present value of the cash flows is worth the initial investment.

House P/E Ratio

is often used when measuring other investment tools, such as stocks. The Real Estate P/E ratio counts with the initial investment and annual net operating income.

Investment Return Ratios

Cash on Cash Return 19.78 %
Return on Investment 154.38 %
Return on Equity 10.14 %
Capitalization Rate 7.37 %
Gross Rental Yield 14.74 %
Gross Rent Multiplier 6.79

Cash on Cash Return

is in fact equity dividend rate. It is a ratio between annual cash flow before taxes and the total initial investment, expressed as a percentage. It is not an exact measurement of an investment, because it does not take in account the future value of money.

Return on Investment

is very similar to Cash on Cash Return, but also takes in account appreciation of the property in the first year.

Return on Equity

is one of the financial measures used as well on other types of investments. In Real Estate the return means cash flow after taxes (CFAT) and equity is the initial investment.

Gross Rental Yield

can be used for a particular property or also as a market indicator when using median values of rent and house prices. It is counted from gross scheduled rent and initial investment.

Capitalization Rate

is calculated as ratio of the net operating income and the value of the property. It is in fact the discount rate, used for discounting the future income to determine its present value.

Gross Rent Multiplier

is counted as a ratio of market value of the property and gross scheduled income.

 

Financing Overview and Analysis

Acquisition Cost
Purchase Price $ 1,995,000
Closing Costs $ 5,000
Total $ 2,000,000
Financing % of Acq.
Down Payment + Costs    $ 498,750 20.78 %
Mortgage $ 1,496,250 62.34 %
2nd Mortgage $ 400,000 16.67 %
Loan to Value Ratio 95.05 %
Debt Coverage Ratio 2.32
Mortgage
Mortgage Amount $ 1,496,250
Length 25 years
Interest Rate 4.50 %
Monthly Payment $ 8,316.64

- Down Payment
- Closing Costs
- 2nd Mortgage
- Mortgage

2nd Mortgage
Mortgage Amount $ 400,000
Length 25 years
Interest Rate 4.50 %
Monthly Payment $ 2,223.33

This chart shows the process of accumulation of the equity which belongs to the investor. There is some equity right from the beginning - the down payment. Over the time the equity is rising by paying off the principal of the mortgage and also by appreciation over the years.
Basically all the green parts is the cummulative equity belonging to the investor and the red part belongs to the bank.

 

Long Term Financial Forecast

Year 012345
Operational Analysis
Gross Scheduled Income $ 0$ 294,000$ 296,940$ 299,909$ 302,908$ 305,938
Vacancy Loss $ 0$ 0$ 0$ 0$ 0$ 0
Gross Operating Income $ 0$ 294,000$ 296,940$ 299,909$ 302,908$ 305,938
Expenses $ 0$ 147,000$ 151,410$ 155,952$ 160,631$ 165,450
Net Operating Income $ 0$ 147,000$ 145,530$ 143,957$ 142,278$ 140,488
Financing
Mortgage Payment $ 0$ 99,800$ 99,800$ 99,800$ 99,800$ 99,800
Payment Interest Part $ 0$ 66,653$ 65,130$ 63,538$ 61,872$ 60,129
Payment Principal Part $ 0$ 33,147$ 34,669$ 36,262$ 37,928$ 39,670
2nd Mortgage Payment $ 0$ 26,680$ 26,680$ 26,680$ 26,680$ 26,680
2nd Payment Interest Part $ 0$ 17,819$ 17,412$ 16,986$ 16,541$ 16,075
2nd Payment Principal Part $ 0$ 8,861$ 9,268$ 9,694$ 10,139$ 10,605
Total Debt Service $ 0$ 126,480$ 126,480$ 126,480$ 126,480$ 126,480
Cash Flow
Rehabilitation $ 0$ 10,000$ 0$ 0$ 0$ 0
Cash Flow Before Taxes $ -103,750$ 10,520$ 19,050$ 17,477$ 15,798$ 14,008
Depreciation$ 0 $ 65,291$ 65,291$ 65,291$ 65,291$ 65,291
Taxes $ 0$ 0$ 0$ 0$ 0$ 0
Cash Flow After Taxes $ -103,750$ 10,520$ 19,050$ 17,477$ 15,798$ 14,008

 

Resale Analysis

Resale Price Evaluation Methods

The property is sold after 5 years.

Appreciation (7.00%) $ 2,812,116
Cap Rate (7.37%) & NOI $ 1,906,211
Gross Rent Multiplier $ 2,076,005

Sale Proceeds

In the resale analysis we don't count with taxes which might occur when selling the property. The tax laws for the resale are rather complex and subjected to frequent changes, and are different in every country.

Projected Selling Price $ 2,812,116
Costs of Sale (7.00%) $ 196,848
Mortgage Balance Payoff $ 1,314,574
2nd Mortgage Balance Payoff $ 351,432
Early Payoff Penalty (0.00 %) $ 0
Sale Proceeds Before Tax $ 949,263

Net Assets and Yield

Net Assets
Sale Proceeds Before Tax $ 949,263
Down Payment $ 498,750
Net Assets $ 450,513
Yield
Annual Net Assets $ 90,103
Average Cash Flow (After Taxes) $ 15,371
Average Annual Yield $ 105,473
Average Annual Return 5.29 %

Optimal Holding Period based on NPV

Holding Period 30 years
Max NPV $ 13,720,449

- Sale Proceeds
- Costs of Sale
- Mortgage Balance Payoff
- 2nd Mortgage Balance Payoff
- Early Payoff Penalty

This charts shows Net Present Value (NPV) when property is sold in various years, i.e. when sold in 5th year, the NPV is calculated from 5 years of Cash Flow (including the selling price) and this NPV is displayed in year 5. Optimal holding period can be estimated, using this method - when NPV is the highest. Please note that appreciation growth can change these numbers severely. It has sometime sense to sell the property even before the end of the mortgage period.

This chart shows the ratio of Cash Flow After Taxes and the accumulatd equity in each year. When the return on equity starts going substantially lower, it indicates possibility of sale. However this method isn't as accurate as the NPV method above.

 

Sensitivity Analysis

Loan to Value ratio

Your current LTV ratio is: 95.05%.

LTV NPV IRR
95.05 % $ 898,708 62.94 %
0% $ -473,198 0.87 %
10% $ -324,141 3.12 %
20% $ -175,083 5.86 %
30% $ -26,026 9.30 %
40% $ 123,032 13.82 %
50% $ 272,089 20.17 %
60% $ 421,146 30.22 %
70% $ 570,204 50.94 %
80% $ 719,261 0.00 %
90% $ 868,319 0.00 %

This sensitivity analysis is using the configured holding period, the length and interest rate of the first mortgage and discount rate of 10%. It counts only with a conventional type of loan.

Mortgage Ammortization (Length)

Your current mortgage ammortization is 25 years.

Years NPV IRR
25 $ 898,708 62.94 %
5 $ -245,859 0.00 %
10 $ 317,652 36.50 %
15 $ 502,370 57.52 %
20 $ 592,448 69.78 %
25 $ 644,733 77.54 %
30 $ 678,184 82.76 %

This sensitivity analysis is using the loan amount and interest rate of the first mortgage and discount rate of 10%. It counts only with a conventional type of loan.

 

Market Indicators

We were not able to generate automatically all the market indicators and therefore we include their definitions and data sources, so you can do the calculations by yourself.


Price to Rent Ratio

price-to-rent-ratio

Data Source: Census Fact Finder

Price to rent ratio (P/R) is a great and simple calculation showing the attractiveness of a certain Real Estate market or area. It compares median house price and median rent in that market. This ratio actually says how many annual rents would have to be spent for buying an average house. Some markets with very high ratio (i.e. California P/R is 25) do not show such a good opportunity for an investment, because the return on investment would be most probably low. This ratio can help an investor to decide which market to invest in. Learn more..



Price to Income Ratio

price-to-income-ratio

Data Source: Census Fact Finder

Price to Income ratio helps with identifying real estate bubbles. The price of Real Estate properties is a result of local demand and supply on the Real Estate market. It was proven that in a long term the demand is mainly influenced by the familial disposable income and therefore there is a close connection between the median familial disposable income and median house prices. Learn more..



Vacancy Rate

Data Source: Census Housing Vacancies

Vacancy rate is a good market indicator for investors as well, because it shows possible problems in a certain rental market. Investment in such a market is much more risky and an investor should use at least the same vacancy rate in the property's calculations as the rate the market shows. Learn more..



   

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