Advanced Investment Tools
Andre J. van Rensburg
CCIM, ALC, CIPS
1
CAVEAT EMPTOR
CAVEAT EMPTOR
Session Setup
•Only have 90 minutes
•Download information
www.andrejvanrensburg.com
•Personal contact information
[email protected]
(904) 669 6575
4
Where are we going ?
Learning Objective
Overview:
–
–
–
–
Investment Model
Investment Methodologies
Software
Questions
5
Approaches to Investment Value and/or Investment Performance
Ranked in ascending order of complexity
Discounted
Cash Flow
Uses data for the entire holding period.
(multiple years plus reversion)
Uses first year CFBT
Cash on Cash
Uses first year NOI
Direct Capitalization
Uses first year PRI
Gross Rent Multiplier
$/SF of similar properties
Sales Comparison
6
Discounted Cash Flow Methods
Three types of Discounted Cash Flow:
Internal Rate of Return
Another term for interest or yield.
IRR
Net Present Value
Discounts all cash flows back to time
period zero at investors discount rate
NPV
Capital Accumulation
The Grand father of them all. Wealth
accumulation calculation.
7
Notes
• Common investor misconception:
Cap rate = Return on Investment
• CAP = snapshot
• IRR = complete investment period
• IRR = return ON investment
8
GRM, CAP RATE, CASH ON CASH
CAP RATE
9
Internal Rate of Return
10
Investment Phases
• Acquisition – Initial Investment
• Operations – Cash flow during holding period
• Disposition – Sales proceeds
11
Holding period
The Cash Flow Model
Initial investment
Cash flows from
operations
+
Cash flows from
disposition
12
Sources of Property Income
• Cash flows at acquisition
• Cash flows from annual operations
• Cash flows from sale of the property
Sometimes called
Reversion, Sale
Proceeds, SPBT or
SPAT
The initial investment
is always negative to
the investor
Can be either positive or
negative cash flows
before-tax or cash flows
after-tax
Cash Flow Model
n
0
1
2
3
$
(Initial Investment)
Cash Flow
Cash Flow
Cash Flow
n Cash Flow
CF from operations
CF’s can be + or (-)
+ Sale Proceeds
Components of the Cash Flow Model
• Initial Investment (PV)
• Investment Holding Period (N)
• Cash Flow from Operations (PMT)
• Sales Proceeds from Sale (FV)
• Interest rate / Yield (I)
INITIAL INVESTMENT
PURCHASE PRICE
- MORTGAGE
+ OTHER COST OF AQUISITION
________________________
= INITIAL INVESTMENT
Cash Flow Model
n
$
0 (Initial Investment)
1
2
3
n
Cash Flow Model
Time
n
0
1
2
3
$
(Initial Investment)
Cash Flow After Tax
Cash Flow After Tax
Cash Flow After Tax
CF from operations
CF’s can be + or (-)
n Cash Flow After Tax
The
GOLDEN number ????
20
Cash Flow After Taxes
Potential Rental Income
+ Other income (not affected by vacancy)
- Vacancy and Credit Losses
Effective Rental Income
+ Other Income (Collectible - affected by vacancy)
Gross Operating Income
- Operating Expenses
Net Operating Income (NOI)
- Annual Debt Service (ADS)
Cash Flow Before Tax
- Tax Liability
Cash Flow After Tax
Cash Flow Model
Time
n
0
1
2
3
$
(Initial Investment)
Cash Flow After Tax
Cash Flow After Tax
Cash Flow After Tax
n Cash Flow After Tax + Sale Proceeds
How much money is left over after
you sell the investment
•pay all closing cost
•pay off the mortgage
•pay all capital gain taxes ?
SALES PROCEEDS AFTER TAX
SALES PRICE
- COST OF SALES
- MORTGAGE BALANCE
________________________
= PROCEEDS BEFORE TAX
- TAX LIABILITY / (SAVINGS) ON SALE
____________________________
= SALES PROCEEDS AFTER TAX
Potential rental income
- Vacancy and credit losses
Effective rental income
+ Other income
Gross Operating Income
- Operating expense
Net operating income
- Annual debt service
Cash flow before tax
- Tax liability
= Cash flow after tax
n
0
1

n
-
Sale price
Sale Costs
Mortgage balance
Proceeds before tax
Tax liability
= Sale
proceeds after tax
Purchase price
Mortgage
Other costs
+
= Initial Investment
$
(Initial investment)
Cash flow after tax

Cash flow after tax
+
Sale proceeds after tax
Holding period
The Cash Flow Model
Initial investment
Cash flows from
operations
+
Cash flows from
disposition
28
Internal Rate of Return
• The IRR for an investment is that rate of return that
each dollar earns each year while it remains in the
investment.
• IRR represents the “return on” the dollars invested.
• In order to have a “return on” there must be a
“return of” invested dollars.
29
If an investor pays $100,000 for an investment today that is
anticipated to produce net sale proceeds of $280,300 at end of
year 10, what is the anticipated IRR?
EOP
$
($100,000)
0
PV
1
PMT $0
n 10 x 1
PMT
$0
+ FV $280,300
I/YR10.96? %
30
IRR of a Single Amount Received
N $
0 (100,000)
1 0
N = 10
I = ???
PV = (100,000)
Pmt = 0
10 0 + 280,300
Page 6.11
FV = 280,300
IRR of a Single Amount Received
N $
0 (100,000)
1 0
N = 10
I = 10.96
PV = (100,000)
Pmt = 0
10 0 + 280,300
FV = 280,300
EOP
If an investment requiring a $200,000 initial investment is
forecasted to produce income of $30,000 per year for five
years and will be sold at the end of year 5 for $200,000,
what is its projected IRR?
$
($200,000)
0
PV
1
PMT
$30,000
PMT
$30,000
n 5x1
+ FV $200,000
I/YR15 %?
33
Time value of money calculator keys
N
$
0 (200,000)
1 30,000
2
5
30,000
?
(PV)
PMT
PMT + 200,000 FV
I/YR
34
IRR of an Annuity and Lump Sum
N $
0 (200,000)
1 30,000
N =5
I =
15
PV = (200,000)
PMT = 30,000
5
30,000 +
200,000
FV = 200,000
If an investment requiring a $200,000 initial investment is forecasted
to produce income of $30,000 per year for five years and will be sold
at the end of year 5 for $160,000, what is its projected IRR?
EOP
$
($200,000)
0
PV
1
PMT
$30,000
PMT
$30,000
n 5x1
+ FV $160,000
I/YR11.84? %
36
Time value of money calculator keys
N
$
0 (200,000)
1 30,000
2
5
30,000
?
(PV)
PMT
PMT + 160,000 FV
I/YR
37
IRR of an Annuity and Lump Sum
N $
0 (200,000)
1 30,000
N = 10
I =
11.84
PV = (200,000)
PMT = 30,000
FV = 160,000
5
30,000 +
160,000
IRR with Variable Cash Flows
N
0
1
2
3
4
5
6
7
8
9
10
$
(60,000)
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000 + 45,000
IRR = 8.61%
IRR with Variable Cash Flows
Make sure calculator is on annual
compounding period
N
0
1
2
3
4
5
6
7
8
9
10
$
(60,000)
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000 + 45,000
(60,000) CFj
10,000 CFj
Continue till 9th year
46,000 CFj
IRR
IRR = 8.61%
Pros and Cons of IRR
• PROS
– Comprehensive approach
– Uses the cash flow model
• CONS
– Only measures dollars while “in”
– Doesn’t account for dollars taken “out”
– Discounts all cash flows at the IRR
41
Net Present Value
Calculate the IRR
IRR =
13.83
15 i
Solve for NPV
N $
0 (100,000)
1 10,000
2 11,000
(2,770)
3 12,000 + 110,000
What does this mean?
100,000 – 2,770 = 97,230
42
Net Present Value
Calculate the IRR
IRR =
13.83
12 i
Solve for NPV
N $
0 (100,000)
1 10,000
2 11,000
4,534.89
3 12,000 + 110,000
What does this mean?
43
Net Present Value
Definition
The Net Present Value (NPV) of an investment is
the sum of the present values (PVs) of all future cash flows
netted against (added to) the initial investment.
OR
NPV = [Initial Investment] + Sum of all future cash flows @ discount rate
THE SPOUSE’s VERSION
6.18
Net Present Value
Helpful Thoughts
• ‘Net’ – PV of future cash flows is added to initial investment (negative number
from investor’s point of view)
• Future cash flows are discounted to PVs using appropriate discount rate
• The investor’s discount rate is the rate he/she could earn on a comparable
investment of similar risk - also called desired yield, target yield or opportunity
cost
6.18
45
Set up
• You have found the following opportunity for your
investor. He has an expected yield of 16%
• What should he pay for this opportunity?
47
Keystrokes
100,000 +/N
0
1
2
3
4
$
(100,000)
0
10,000
50,000
100,000
Enter 16 I/YR
CFj
0 CFj
10,000 CFj
50,000 CFj
100,000 CFj
IRR/YR
NPV
IRR = 14.21%
NPV=(5,306.38)
48
Negative Net Present Value
• A negative (NPV) measures how much less you would
pay for an investment, when comparing the investor’s
desired yield against the IRR of the investment.
Desired Yield 16.00%
$100,000 Investment Value
IRR 14.21%
(5,306.38)
Price
Cash Flow
49
Proof
n
0
1
2
3
4
$
(94,693.63)
0
10,000
50,000
100,000
i = 16%
Solution: NPV = $0
50
Zero NPV
If NPV is:
Then the investment is achieving:
Positive
More than the target yield
Negative
Less than the target yield
Zero
Equal to the target yield
51
52
Software
http://www.andrejvanrensburg.com/CRE_Tools.html
CCIM Financial Calculator
SOFTWARE
• Discount Cash flow Software
Learning Objective Recap
Overview:
–
–
–
Investment Model
Investment Methodologies
Software
55
Questions
CAVEAT EMPTOR
THANK YOU
• Andre J. van Rensburg CCIM, ALC, CIPS, CDEI
• Prudential Commercial Realty
Jacksonville, Florida
• [email protected]
• 904 -669 6575
• http://www.andrejvanrensburg.com/CRE_Tools.html

Résultats 3 pistes 2015

Year 10