Understanding Profitability Index

profitability indexProfitability index is one of many returns real estate investors calculate as a method of measuring their investment return.

It closely follows net present value (NPV) in the sense that both weigh the present value (PV) against the initial investment made to purchase the property. But the index should certainly not be regarded as simply another way of expressing the same result as does net present value.

Allow me to explain.

NPV takes the sum of present values of all future cash flows and subtracts the amount of initial investment. The result is a dollar amount. If the difference is either a zero or a positive dollar amount, then the real estate investor can be assured that the rate of return he or she desires (as indicated by the discount rate) has been equaled or exceeded.

Whereas, with profitability index, instead of calculating the dollar amount difference between present value and initial investment, it calculates the proportion of dollars returned to dollars invested as a ratio. In this case, an index equal to, or greater than, 1.0 means the present worth of future cash flows equal or exceed the investor’s cash investment.

Formulation

Profitability Index = Present Value of all Future Cash Flows / Initial Cash Investment

Advantages

The primary advantage profitability index offers comes into play when the real estate investor wants to compare two investment opportunities that require different initial investments. Because the index is a ratio that is not sensitive to the amount of initial cash investment (unlike NPV). It measures the proportion only, regardless of the amount.

Example

To illustrate how important it is for investors to calculate the index in addition to NPV, we’ll consider a very simple example in which the investor is trying to determine which of two investment opportunities offer the better rate of return. We’ll list the assumptions for both properties then calculate NPV and index for both.

  1. Property A Cash investment of $150,000 with a PV of all future cash flows at $160,000
  2. Property B Cash investment of $90,000 with a PV of all future cash flows at $99,000

NPV
In this case, the net present value would calculate the dollar amount difference between initial investment and PV of cash flows and result in the following:

  1. Property A $10,000 (160,000 – 150,000)
  2. Property B $9,000 (99,000 – 90,000)

INDEX
At first glance the NPV makes Property A seem to appear more profitable than Property B because the difference in dollar amounts is higher. But look what happens when the index is calculated for both properties.

  1. Property A 1.07 (160,000 / 150,000)
  2. Property B 1.10 (99,000 / 90,000)

The profitability index reveals that Property B is actually more profitable than Property A because the proportion of dollars returned to dollars invested is higher. Again, a very simplified example. But you get the idea.

Summary

  • Exactly 1.0 You have exactly achieved your desired rate of return
  • Greater than 1.0 You exceeded your desired rate of return
  • Less than 1.0 You failed to achieve your desired rate of return

So You Know

ProAPOD Real Estate Investment Software provides two solutions – Investor 8 and Executive 10 – that automatically calculate profitability index in addition to net present value.

 

Inflation Rate Calculator, Update 2-28-13

iCalculatorProAPOD iCalculator has updated its annual inflation rate calculator to reflect the latest US government CPI data released on February 21, 2013.

This means that you can calculate the annual inflation rate from as far back as 1913 through January 21, 2013. The previous table reflected CPI data through December 31, 2012.

To access the Inflation Rate calculator and make a calculation simply do the following:

  • Login. Open the ProAPOD website and click Login
  • Select category. From the calculator’s top menu of categories click Time Value
  • Select calculator. In the left menu click the Inflation Rate calculator
  • Complete form. In the appropriate form that appears enter a Start year, Dollar amount spent, and Ending year
  • Click Calculate
Sample

Are you aware that the $2,500 you spent for a family vacation in 1988 will now cost you (in January 2013) the sum of $4866.44? That is a rise in the annual inflation rate since 1988 of 94.7%. Or, that a new car you purchased in 1995 for $20,000 will now cost you over $30,000 because the inflation rate has increased over 51% since then. Yes, sad but true, but that’s according to the latest US government CPI data.

Update is Free

This iCalculator update is free to current customers. Simply login as usual and start using.

So You Know

iCalculator includes an array of calculators that enable you to quickly and instantly make dozens of calculations PLUS learn the formulas. Learn more and SAVE 50% by clicking learn more about iCalculator and save 50%.

 

Please Read the Instructions

real estate investment softwareEach ProAPOD Real Estate Investment Software solution includes a “Read Me” page that will help you easily address and resolve common issues associated with MS Vista and later operating systems.

The resolution is typically easy and will insure that you will not become frustrated later on once you start using ProAPOD.

However, you must read the the instructions. When you don’t, you might encounter issues (thanks to MS) that will get you on the phone discussing it with me. I don’t mind, but it really can be avoided (and save you a call) if you just read the instructions.

In most cases, the instructions on the “Read Me” page for each real estate investment software solution are self-explanatory and routinely resolved immediately (if not, instantaneously) by users.

For those rare instances when the issues are not resolved and questions still exist, please note the link to Customer Support that contains an array of articles (with screenshots) that undoubtedly will help you resolve the issue.

Naturally, we want you to experience the full potential ProAPOD Real Estate Investment Software provides, so if you still feel yourself scratching your head and utterly confused after reading these articles, then by all means call us directly.

 

Why Serious Investors Use Real Estate Investment Software

real estate investment softwareReal estate investing is a numbers business and real estate investment software is a tool that will help you to precisely crunch those numbers and grow your business.

As a result, serious investors have come to rely on good real estate investment software to help them make smart investment property decisions. So should you.

In this article we’ll consider why serious real estate investors use a real estate investing software solution to insure the best return possible on their real estate investments.

Benefits of Software

  1. It’s fast. A good solution make it possible to analyze cash flows, rates of return, and profitability of rental properties in minutes. This allows individual investors to quickly and easily collect the data required for smart decision-making.
  2. It’s precise. A good solution makes accurate calculations for a wide-range of returns and measures deemed crucial for a sound real estate analysis. Faulty math is the last thing an analyst should have to worry about.
  3. The reports are informative. A good solution creates professional-quality reports investors can print for evaluation purposes and then confidently pass on to colleagues, partners, and lenders.
  4. It knows what data is required. A good solution provides specially designed forms that gather the appropriate facts and figures about a property. This is particularly helpful to real estate investors with little or no rental property analysis experience because they just fill in the forms and print.
  5. It keeps the seller’s data honest. A good solution provides investors with the ability to run the numbers themselves. This will help prevent anyone from presenting unrealistic property numbers and perhaps “slipping one” by.
  6. It’s inexpensive. A good real estate investor software solution does not have to cost an arm and a leg. Anyone can create a top-notch real estate analysis with dynamic reports for just a few hundred dollars.

The Alternative

  1. You can create your own spreadsheet. Excel makes it possible for anyone to create a spreadsheet. But it takes a lot of time to include the correct calculations and format quality reports. So ask yourself whether you are inept enough about real estate investing and Excel before you get started. Just bear in mind that your goal is make a profit on investment properties and not to spend countless hours creating spreadsheets.
  2. You can rely on rules of thumb. It’s easy to calculate a property’s cap rate or gross rent multiplier. But what about mortgage amortization, cash flow after tax, internal rate of return, depreciation allowance as well as the other other important computations? You’re planning to make a huge property investment. So rely on returns more meaningful than upon simple calculations you can do in your head.
  3. You can accept the seller’s data. But it’s never a good idea to accept property performance data point blank because it leaves too much room for others to embellish reality. You must always verify the numbers you are presented for any investment opportunity so you can be sure that they comply with your real estate investing plan.

When You’re Ready

Once you’re ready to invest in good real estate investment software you’ve got to know what to look for. So here are a few suggestions.

  • Look for user-friendly. You want to know what to do from the moment you open the software. If not, be sure you have a number you can call for tech support.
  • Preview the reports. Are they easy to read? Do they contain concise data on the cash flows, rates of return, and profitability you need to make intelligent investment decisions? Are they professional quality?
  • Consider what rates of return you desire. For example, are you interested only in suitable returns calculated without consideration for the elements of tax shelter, or would you prefer full consideration of tax shelter? If so, then look for real estate investment software that includes calculations for things such as depreciation, mortgage interest, amortization of loan points, and cash flow after tax.
  • Would you like both analysis and marketing presentations? If so, then look for a real estate investment software solution that will create an Executive Summary and/or Marketing Package in addition to an APOD, Proforma Income Statement, and Rent Roll.

So You Know

ProAPOD Real Estate Investment Software provides three solutions to meet your business objective and budget that are user-friendly, precise, and of the utmost quality.

 

Calculating Adjusted Basis When You Sell Investment Property

adjusted basisAdjusted basis is a calculation that might mean little to a real estate investor until he or she sells a rental property; then it plays a major role because it always determines how much the investor will actually gain as a result of the sale.

The objective for real estate investing for any typical investor is, of course, to buy income property low and then sell it high in order to realize a gain on the sale.

But in order to calculate the gain, it is necessary for the investor to know his or her adjusted basis.

In an effort to help you understand this process, this article will show you how to make the computation for the basis as well as the computation for gain on sale. We have also included an example that will walk you through the process and hopefully further clarify it for you.

Adjust Basis

This represents the beginning basis of the investment property (i.e., the original cost of the property).

Then to that are added costs for capital improvements (made during the holding period), plus costs of sale (i.e., costs at re-sale), less accumulated depreciation (taken during the holding period on both the structures and capital additions).

Original Basis (Purchase Price)
+ Capital Improvements
+ Costs of Sale (at re-sale)
– Cumulative Depreciation (Real Estate)
– Cumulative Depreciation (Capital Improvements)
= Adjusted Basis at Sale

Example

Say you purchase a rental income property for $300,000. The following year you make $75,000 in capital improvements. By the time you sell the property you have also taken $21,000 in depreciation for the real estate and $4,000 on the additions. You wind up paying $25,000 to sell the property (real estate commissions and closing costs). The computation would go like this.

$300,000 (original cost)
+ 75,000 (capital improvements)
+ 25,000 (cost of sale)
– 21,000 (depreciation taken for property)
– 4,000 (depreciation taken for additions)
= $375,000 (adjusted basis)

Gain on Sale

Once the basis is computed you would use it to calculate the gain on sale.

Selling Price
– Adjusted Basis
= Gain on Sale

Example

Okay, now let’s assume you sell the property for $500,000 and want to know what you can expect to gain on the sale. If we use the calculations made above here’s your bottom line.

$500,000
– 375,000
= $125,000

So You Know

It should be noted that ProAPOD Real Estate Investment Software does automatically compute the Adjusted Basis and Gain on Sale in it’s Investor 8 and Executive 10 software solutions.

 

ProAPOD Executive 10 Software Updated

executive 10 softwareProAPOD Real Estate Investment Software has updated it’s real estate investing software solution Executive 10. It is available for immediate download to existing Executive 10 customers.

This update was released on 2/14/2003, however, so if you purchased this software solution after that date, you are already using the most current version and DO NOT need to update.

You can install the update at your convenience. Simply login to your account from our website at real estate investment software and download the new version located under the heading Updates.

What’s New

It is now possible for you to add your company logo image to the Cover Sheet, Marketing Package, and Executive Summary. Furthermore, you can now add your personal picture to the Executive Summary.

  1. Cover Sheet (add company logo)
  2. Marketing Package (add company logo)
  3. Executive Summary (add company logo and personal picture)

You can preview these updated reports at Executive 10 Reports.

Bear in mind, however, that you must install the update unto a computer where Executive 10 is currently installed. It will not install on a computer where the current software solution already resides.

So You Know

Executive 10 is a rental property financial analysis and marketing solution for real estate professionals who want to include all elements of tax shelter and time value of money in the revenue projections. Learn more at real estate investing software.