## Maximum Purchase Price Calculation – What Can You Afford To Pay?

It is always helpful to know the maximum price you can afford to pay when you decide to purchase real estate because it filters the search and saves you the time of looking at properties that you aren’t going to purchase.

In this article, we’ll look at the maximum purchase price calculation you can use to do just that.

To make the maximum purchase price calculation we’ll use three criteria: the amount of your cash down payment, your desired monthly mortgage payment, and the interest rate and terms for the mortgage you most likely can obtain.

#### Criteria

• Cash Down Payment How much cash do you have to invest as a down payment toward the purchase of the property? This is straightforward because it represents the amount of cash you have readily available to make the investment.
• Desired Monthly Payment Your desired monthly payment simply denotes the amount of principal and interest you are willing (or can afford) to pay each month for the loan you will borrow to subsidize your purchase of the property.
• Mortgage Terms This is the loan amount you will borrow, the interest rate you will have to pay for the loan and the number of years that the bank will amortize the loan (i.e., number of payments required to pay back the loan in full; or nper).

#### Calculation

1. Calculate the maximum loan amount you can obtain at the specified rate and terms based upon your desired monthly payment. PV(rate, nper, -payment, fv)
2. Add your cash down payment to the maximum loan amount to determine the maximum purchase price. Maximum Purchase Price = Maximum Loan + Cash Down Payment
##### Example

Let’s say you have \$50,000 cash to put down toward a property, desire a monthly loan payment of \$800, and based upon your research you are fully confident that you can borrow all the money you need to make the investment at an interest rate of 5% fully amortized for 30 years.

There are, of course, several ways you can make this calculation such as with MS Excel. However, for our purposes, we will illustrate it using a much easier solution called iCalculator. (Click image to enlarge).

Source: iCalculator by ProAPOD

##### Result

Based upon your cash down payment and desired monthly mortgage payment and terms, you’ve narrowed your search to look at properties priced no higher than \$199,025.

### So You Know

iCalculator makes dozens of real estate calculations with the formulas. You can try it risk-free and save 50% (you pay just \$24.95). Click here to learn more and get the discount.

## Real Estate Investing Tips for Novice Real Estate Investors

Before you pull out the salsa and chips to celebrate your new real estate investment enterprise, perhaps you should first decide whether or not you want to make money at real estate investing.

A totally rhetorical statement, of course, but please bear with me.

Yes, you can certainly make money at real estate investing with some preparation – in fact with better preparation you might even make a lot of money.

But investing in real estate is a two-edged sword. On the one side it can certainly make you a bag full of money, while on the other side it can also cause you to lose a bag full of money (and then some) just as quickly.

Fair enough. So now allow me to explain what I’m suggesting.

Foremost, understand that there is no such thing as a “no-brainer” with any real estate investment. If it were that easy than we would all be engaged in real estate investment and getting rich in the process. Unfortunately, it does require some insight. Real estate investing is about the numbers, and the most successful real estate investors have learned how to play by the numbers.

In this article, I would like to suggest five things you can do to prepare for your first real estate investment. There’s no silver bullet here – no one thing that guarantees your investment success – but they aren’t meant to be. This is simply intended to get those of you who are novice real estate investors started on the right foot with your real estate investing venture.

1. Get familiar with the nuances. You’ll be working with rental income, vacancy rate, operating expenses and cash flows. Try to understand how they effect a rental property’s financial performance and your profitability. I would suggest that you get hold of an Annual Property Operating Data (APOD) and examine it. This is an easy-to-understand report that will give you a general idea of cash inflows and outflows.
2. Acquaint yourself with some reports and returns. You will be encountering a host of rates of returns and reports like cap rate, cash-on-cash return, internal rate of return, Annual Property Operating Data (APOD), Proforma Income Statement. Become somewhat familiar what they are and mean. You can find a variety of real estate articles on the subject posted throughout the web (like on this site, for instance).
3. Learn some formulas. Bear in mind that you aren’t required to become an expert, but at least understand the formulas to some of the more popular returns and measures like cap rate, gross rent multiplier, cash on cash return so you understand how to compute them. This will help you understand their significance and what role they should play in your investment decisions.
4. Obtain a software solution. Having your own real estate investment software gives you the ability to crunch your own numbers. This way you don’t have to rely on what others tell you, and you’re given more control over your investment decisions. Plus, by virtue of using the software, you get a better handle on the process.
5. Work with a qualified agent. Interview several local real estate agents. This is important because you want someone who is aggressive, trustworthy (will look out for your financial interests), and understands real estate investing. Don’t settle for less. You want to know that you’re teamed up with an agent that wants to make you money as well as a commission.

Remember, the more preparation you do before investing in real estate, the better your chances are to make money.

### So You Know

ProAPOD does provide a real estate investor software solution for novice investors looking to conduct a real estate analysis as well as learn the formulas.

## iCalculator: Inflation Rates Updated

ProAPOD has updated the inflation rate index provided in its  Real Estate Calculator through June 2012.  This means that you can compute the buying power of the dollar starting as far back as 1913 up to July 2012.

For example, \$20.00 spent in 1913 would require \$464.27 to purchase the same goods and services in June, 2012 due to a 2221.4% jump in inflation as indexed by the Consumer Price Index (CPI) published by the Bureau of Labor Statistics (BLS).

Of course, updates to our online calculator are always free to current users. Simply go to the ProAPOD website, login, and start calculating.

Why not compute some inflation rates for yourself along with the dozens of other real estate calculations you can make with calculator.

You will find the inflation rate calculator under the category for Time Value.

Thank you for choosing ProAPOD.

## How to Compute Cash Flow and Sales Proceeds Before and After Taxes

The primary purpose real estate investors own income property is to make money; favorably from a steady stream of cash flow generated by the property on a monthly basis as well as a lump sum profit when the property gets sold sometime in the future.

This is the explanation for real estate investing. To buy investment real estate with an “income stream” that regularly generates more rental income than operating expenses and debt service, and to collect sizable proceeds due to the property’s appreciation in value upon sale.

Fair enough. But real estate investors consider more than these cash flows and proceeds before taxes. They are also concerned how much they can expect to collect after they pay federal income taxes.

In this article, we’ll look at both, cash flow before and after taxes and sales proceeds before and after taxes, so you will have an understanding of how they are computed in a real estate analysis.

#### Cash Flows

In essence, both cash flows work the same way. The revenue investors collect prior to income taxes is known as the “before tax” revenue, and the amount of revenue an investor actually can keep after settling up with the IRS is called the “after tax” revenue.

##### 1. Cash Flow Before Tax

Rental Income
less Operating Expenses
less Debt Service
= Cash Flow Before Tax (CFBT)

##### 2. Cash Flow After Taxes

CFBT
less Tax Liability
= Cash Flow After Tax CFAT)

Okay, but that doesn’t explain how we arrived at the Tax Liability, so let’s break it down into the appropriate steps.

Step one. Calculate the “taxable income”.

Net Operating Income
less Interest Expense
less Amortized Points
less Depreciation (real property and capital additions)
plus Interest Earned by the Investor (due to the property’s revenue)
= Taxable Income

Step two. Calculate the “tax liability”.

Taxable Income
x Marginal Tax Rate
= Tax Liability (or savings)

Note: When the taxable income is a positive amount there would be a tax liability because income has been earned (therefore a deduction from CFBT). When it is a negative amount there would be a tax savings because it can be deducted as a loss (therefore an addition to CFBT).

CFBT
less Tax Liability
= CFAT

Or,

CFBT
plus Tax Savings
= CFAT

#### Sales Proceeds

Sales proceeds represent the dollar amount the investor will collect from escrow at closing before payment for income tax.

##### 1. Proceeds Before Tax

Sale Price
less Cost of Sale
less Loan Repayment
= Sales Proceeds Before Tax

##### 2. Proceeds After Tax

This is the dollar amount resulting from a sale after satisfying the IRS for income earned due to the sale of the property.

Sale Proceeds Before Tax
less Taxes Due to Sale
= Sales Proceeds After Tax

Note: “Taxes due to sale” is a combination of the recapture tax (or Cost Recovery Recapture) and the capital gains tax less tax savings due to unamortized loan points multiplied by the investor’s marginal tax rate.

The report provided below illustrates the full computation.

## Making the most of real estate investing as a new investor

In real estate investing, a surge has been experienced recently as lots of investors are making it their first port of call when it comes to first choice of investment. This is based mainly on the fact that apart from being a homeowner, putting finishing touches to the kitchen cabinets and getting a willing and good tenant, there are lots of advantages associated with being a property owner.
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## Investor 4: Name Change

ProAPOD has changed the version number for it’s real estate investor software solution.

The previous version name, INVESTOR 4, is now titled INVESTOR 8. This was done to help clarify the sort order of each software solution according to price and quantity of features. Since our real estate agent software solution is titled AGENT 6 and our real estate investing software solution is titled EXECUTIVE 10, it seemed best that our real estate investor software solution (which is priced between the two solutions, and provides a degree of features between the two solutions)  be placed directly in the middle with the appropriate title, INVESTOR 8.

This title change will not affect the performance of the software; nor will it affect any future updates to the software. Essentially, this name change is “cosmetic” only, and like stated, should help potential customers better understand that INVESTOR is one degree more robust than AGENT and likewise, one degree less robust than EXECUTIVE.