iCalculator = Calcs + Formulas

iCalculatorWould you like an easy way to learn the formulas for the popular rates of return commonly used in real estate investing by real estate investment specialists?

You know, those returns, measures and ratios that routinely appear in real estate analysis and marketing presentations created for rental income properties.

Well, you can.

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So you get function and learning.

I’ve included several screenshots below to give you an idea of what iCalculator looks like.

I’ve also included a link to the site where you can preview more screenshots, get more information about the various calculations you can make in seconds, learn more about its many unique features, and save 64% off the retail price (totally risk-free).

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Sample

Click image to enlarge.

sample-calculator

Calculations

iCalculator contains dozens of calculators organized by category. You simply click a category to open a full list of calculators available for that category.

  • Mortgages
  • Time Value
  • Cash Flows
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  • Investment

Click image to enlarge.

sample-category-interface

Specs and Pricing
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Learn More

See all the calculations provided. Preview more screenshots. Purchase at just $24.95. Click here iCalculator details and discount…

 

The Truth Agents Should Hear About Selling Rental Property!

selling rental propertyReal estate agents who sell rental property routinely guard the truth about selling investment property and thereby any advantage to work with real estate investors.

As one who was actively engaged as an apartment specialist with Coldwell Banker in both, Claremont and Costa Mesa California, and later with Prudential Real Estate Professionals in Salem, Oregon, I understand.

After all, who in their right mind (especially a real estate agent competing for business) would be foolish enough to share with others (especially to friendly competition) the benefits a real estate agent receives by selling rental income property?

Of course, you probably guessed it, none would.

Fair enough.

But my DNA also makes me a teacher at heart, so after over thirty years experience selling multi-family properties, I feel that its time to spill the beans.

In this article, I want to reveal the truth about selling rental property as well of the subsequent benefit real estate agents receive by jumping in and getting involved with rental property and working with real estate investors.

The Money

Selling rental property can be one of the most financially rewarding experiences any real estate professional can encounter during his or her career.

Okay, maybe aside from the residential mansions in Beverly Hills where prices are easily in the millions, apartment buildings are commonly sold at prices that exceed residential property prices in most market areas. Thus, apartment buildings are typically going to generate more commission dollars for agents than residential property.

It’s not unlikely, for instance, that in a market where the average sales price of a house is $180,000 that a ten-unit apartment building one block over may sell for two-to-three times that price.

And when you do the math based on a six-percent commission, well, you do the math. It means you get a more substantial payday on every transaction you close with rental income properties and investors.

Repeat Business

Another unsung advantage associated with selling rental property comes in the form of what might be called “the real estate investor psyche”.

Once you sell a house it’s probably safe to say (barring something irregular like a job transfer or change in finances) that the buyer is no longer a potential customer for about five years.

On the other hand, since it is “investors in real estate” who purchase income property, you are always faced with the potential that your customer might want to invest in more rental property; or given the right set of circumstances may even want to exchange one investment property for something larger.

In other words, when you sell investment property, you work with investors who are always buyers and sellers (and therefore by association) you are always in the right position to acquire repeat business and maybe reap the benefit of additional commissions.

This was true with the first investment property I ever sold to an investor, and in most transactions I was involved during the years since.

Why, because real estate investors (by their very nature) are always looking for a property (or another property) that will make them money. And this means repeat business for you, and as a result more commissions earned.

Referral Business

The prospect of getting referral business from colleagues in the office or elsewhere is never lost or taken for granted by any real estate agent.

We love referral business. And the truth is that agents who work with income property do get recognized by agents who do not; and the result routinely equates to referrals.

How to Make the Transition

Fair enough, but you can’t enter the income property arena thinking like a residential real estate person. There are a few things you need to understand about real estate investing protocol to be successful at it.

When you sell rental income property, you need to present the numbers. It’s not enough to simply point out the on-suite bathroom and large walk-in closet because real estate investors are only interested in the bottom line: “How much money does it make me?”

You must present the cash flows, rates of return, and profitability numbers for every rental property to your investors otherwise you could merely “pound sand” and lose the opportunity. This is not difficult with good real estate investment software.

It is also a good idea to become familiar with some of the essential returns real estate investors look for to make investment decisions; otherwise you will appear less-than-capable of working with rental property and can lose credibility with the customer.

So it’s not a free ride.

You will have to make enough of a commitment to do some homework and invest in the proper tools. But it is neither really that difficult nor costly. And at the end of the day, you will reap the rewards.
 

Understanding Break-even Ratio (BER)

break-even ratioThe break-even ratio (BER, also known as default ratio) is a calculation routinely made by lenders in order to decide whether or not to underwrite a loan request made by real estate investors trying to finance a rental income property.

At the same time, however, despite its importance to lenders, it is often a ratio not widely understood by real estate investors, and seldom known how to calculate.

So in this article it seemed needful to discus the break-even ratio, including the lender’s purpose for using it, how it’s calculated, followed by an example to help you understand how to interpret it when analyzing your next real estate investment opportunity’s ability to get funded.

Purpose

BER is used by lenders to gauge the proportion between the incoming and outgoing cash flow generated by a rental property. The purpose being a desire to know what percentage a property’s income can decline before cash flow derived from the investment property breaks even with the debt service (or mortgage payment).

In other words, lenders look to BER in order for them to gauge the vulnerability of a property’s rental income.

Formulation

Break-Even Ratio = (Debt Service + Operating Expenses) / Gross Operating Income

Example

Let’s assume a property’s first-year operating expenses are $25,000, the annual debt service is $25,000, and the gross operating income is $62,000.

Result

50,000 ($25,000 + 25,000) / 62,000 = 80.65%

Interpretation

As a rule of thumb, lenders typically look for a BER of 85% or less (the percentage of cash outflows to cash inflows). That is, they want the assurance that rents can decline no more than 15% for the rental property to still break even.

In our example, cash outflows (expenses) are 81% of cash inflows (income). In other words, even if the rents declined as much as 19% the rental property would still break even. In this case, this would be satisfactory to a lender willing to accept a BER of 85% or less.

Okay, it’s not rocket science. However, successful real estate investing requires some knowledge of ratios like this. So it’s always a good idea to work the numbers before you make the offer, and perhaps avoid wasting a lot of time on a losing investment opportunity.

So You Know

All ProAPOD real estate investment software solutions automatically calculate BER and post the ratio in the appropriate real estate analysis reports.

 

What is Financial Management Rate of Return (FMRR)?

financial management rate of returnThe financial management rate of return (or FMRR) is a unique, but highly complex real estate investing rate of return that some argue is a better reflection of real-world investment situations than both internal rate of return (IRR) and modified internal rate of return (MIRR).

Nonetheless, despite its benefits, because of its complexity, it typically is not provided in real estate investment software, and otherwise requires a good conceptual understanding along with a financial hand-held calculator to compute – which requires a series of steps that are neither quick nor easy.

As a result, financial management rate of return is not commonly used by real estate investors – though it should be for several important reasons.

So in this article, we will look at FMRR in order to show you what it provides for real estate investors in hopes you will consider implementing it in your own real estate analysis.

Why a FMRR?

The model originated because some analysts felt that the one rate used in the IRR and MIRR models do not adequately account for the risk a real estate investor takes based upon the term of the investment.

They would suggest that more risk is incurred in intermediate and long-term investments and therefore higher rates of return would be expected for this higher risk position.

To deal with this, FMRR extends the reinvestment rate assumption to include two different rates.

The FMRR Model

Financial management rate of return addresses the length of investment term as well the risk issue associated with investment by specifying cash outflows and cash inflows at two different rates known as “safe rate” and “reinvestment rate”.

  • Safe rate assumes that funds required to cover negative cash flows are earning interest at a rate easily attainable and can be withdrawn when needed at a moment’s notice (i.e., like from a day of deposit account). Thus, the name “safe” because the funds are highly liquid and safely available with minimal risk when you need them.
  • Reinvestment rate reflects that rate one might expect to receive if the positive cash flows were invested in a similar intermediate or long-term investment with a comparable risk. Reinvestment rate is higher than safe rate because it is not liquid (i.e., it concerns another investment) and thus higher-risk.

FMRR also makes an additional assumption not included with IRR and MIRR. That positive cash flows occurring immediately prior to negative cash flows will be used to cover that negative cash flow.

Formulation

Determine a safe rate and reinvestment rate (higher than the safe rate) to apply to all future cash flows over the course of a specific holding period.

  1. Remove all future negative cash flows by utilizing the prior year’s positive cash flows where possible. In this case, negative cash outflows are discounted back at the safe rate and subtracted from any positive cash inflows.
  2. Discount all remaining negative cash flows (if existing) to the present at the safe rate.
  3. Compound forward (to the end of the holding period) those positive cash flows remaining at the reinvestment rate. These are added to the cash flow (i.e., reversion) anticipated from a sale at termination of the investment at the end of the holding period.
  4. Calculate the IRR.

The result is the financial management rate of return.

So You Know

ProAPOD real estate investment software includes the financial management rate of return calculation in two of its solutions. Executive 10 real estate investing software and iCalculator online real estate calculator.
 

Protect the Integrity of Your Real Estate Analysis

real estate analysis essentialsIt is a common mistake made by real estate investing novices to exclude (or unintentionally misrepresent) three financial data items when creating a real estate analysis.

As a result, the cash flow, rate of return, and profitability numbers presented to real estate investors regarding a particular rental property get skewed and investment decisions become more or less faulty.

After working with investment real estate for more than thirty years, I’ve seen more than one real estate analysis created by a well-intending novice that made the mistake.

So in this article I want to address these items and strongly suggest that you always consider them when evaluating rental income property.

Vacancy and Credit Loss

The rule is to always include a rate for vacancy and credit loss.

Whether the current owner has been experiencing 100% occupancy or not, always show a realistic percentage for a vacancy allowance (let’s say 5%). Bank appraisers do, and it always makes you look better to your investor when you compute one into your proforma for your investor.

Why? Because no one knows for sure why the owner had such good fortune. Maybe the tenants are relatives or are just getting a good deal.

Real estate investors, on the other hand, should never run the risk of assuming that a complex will continue with the minimal vacancy experienced by the current owner and must always make an allowance for it when considering the investment.

Repairs and Maintenance

Here again, agents generally tend to report on numbers achieved by the owner. This can be a two-edged sword that should be avoided.

If the owner was a poor manager, costs for repairs and maintenance can be skewed higher than reality; if the owner is a fix-it type of person (or has a relative that is) costs for repairs and maintenance can be skewed lower than reality.

It is always best to include repairs and maintenance as some realistic percentage of income in the proforma rather than the owner’s numbers. The rate you use will vary depending upon the age and condition of the property but generally falls somewhere between 4-8% of GSI.

Replacement Reserve

Real estate investors may not actually set money aside for a future replacement of things like roofs and appliances, but it should be accounted for in the real estate analysis. Again, no hard-fast rule, but replacement reserves are commonly computed at $200-300 per unit per year.

So You Know

ProAPOD Real Estate Investment Software makes it easy to include all three items and then automatically populates the appropriate reports with the results.

 

A Word About Earnest Money Deposits

earnest moneyThe true sincerity of a buyer who has interest in acquiring a rental property routinely lies in the amount of “up-front” (or earnest money deposit) he or she is willing to put up with an offer to purchase the property.

Think about it.

A buyer who is willing to only make an earnest money deposit of say, just $1,000, on an offer to purchase a million dollar apartment complex is not going to appear very sincere to the seller of that complex. In fact, it could result in the buyer’s offer to purchase being rejected totally by the seller altogether; or at the very least, counter-offered.

So how should do you tailor the amount of your earnest money deposit?

There are no set standards, so you’ve got to wing it. But I would suggest putting a large enough amount of cash on the table to show to the seller that you are really interested in acquiring the property; otherwise you can lose the opportunity.

By the same token, however, protect yourself. Negotiate plenty of contingency clauses so you can rightfully demand the return of your earnest money deposit if they are not fulfilled to your satisfaction and approval.