## Financial Calculators? iCalculator is Online and Easier!

On the upside, hand-held financial calculators such as an HP10 and HP12 have proven to be a great tool.

Financial calculators are true calculation workhorses. They enable us to make a series of complex amortization, cash flow and time value of money computations otherwise nearly impossible for most of us.

I’m not a math guy, so I certainly relied upon an HP10 for all of my complex computations.

On the downside, however, my primary complaint has always been that hand-held financial calculators are tedious. They require a number of key-strokes to make a calculation along with a close eye on the owner’s manual for instructions.

So for me at least, despite the benefit a hand-held financial calculator provides, because they are somewhat difficult to work with and generally very time consuming, I wanted an option.

Okay, I went overboard.

I developed iCalculator to mimic many of the same calculations you would make on a hand-held financial calculator. But with less user input and time. PLUS, it teaches you the definitions and formulas.

With iCalculator you can make dozens of calculations.

##### 1) Investment
• Cap Rate
• Gross Rent Multiplier (GRM)
• Cash on Cash Return (COC)
• Acquisition Cost
• Sales Proceeds (before taxes)
• AND MORE
##### 2) Cash Flows
• Internal Rate of Return (IRR)
• Net Present Value (NPV)
• Financial Management Rate of Return (FMRR)
• AND MORE
##### 3) Time Value
• PV, FV, Rate, Years)
• Sinking Fund
• Inflation Rate (1913 – present)
• AND MORE
##### 4) Tax Shelter
• Depreciation
• Cash Flow After Tax (CFAT)
• Return on Equity (after taxes)
• Sale Proceeds (after taxes)
• AND MORE
##### 5) Mortgages
• Mortgage Payment (monthly, PI and PITI)
• Maximum Purchase Price (the most you can pay)
• Maximum Mortgage (the most you can borrow)
• Mortgage Refinance
• AND MORE

#### You Get

• Function. Real estate calculations
• Learning. Real estate investing definitions and formulas
• Mobility. 24/7 mobile online access

### So You Know

You can learn more about iCalculator, including the previewing of screenshots, and purchase at a discount (a one-time payment of just \$24.95). Go to iCalculator discount web page…

## Understanding Debt Coverage Ratio (DCR)

Debt Coverage Ratio (DCR) is one of those terms associated with real estate investing we may routinely hear enough to become familiar with, yet not have a clue about its significance or how to interpret it correctly.

Fair enough.

So in this article, we’re going to discuss debt coverage ratio so those of you engaged in real estate investing will at least have a general understanding about what it is and how to calculate it. We are also providing an example with three scenarios in order to show you how to interpret the results.

#### What is DCR?

Debt coverage ratio is the ratio of cash available for debt servicing to interest, principal and lease payments primarily used by lenders as a benchmark to measure an investor’s ability to produce enough cash to cover the debt (including lease) payments when the investor is financing or refinancing a particular rental property.

In a nutshell, DCR provides lenders with information that help them determine whether the rental property generates enough cash flow to cover its mortgage payment.

#### How to Calculate

The computation is fairly straightforward, but we should say something about net operating income (NOI) before we get to it.

NOI is the amount of property cash flow after being reduced by vacancy and credit loss and all operating expenses in a given year. Furthermore, an operating expense is one required to maintain and keep the rental property in service (i.e., producing an income). Loan payments, depreciation and other consideration of income taxes, and capital expenditures are not considered operating expenses.

Income
– Operating expenses
= Net operating income

##### Formulation

Net Operating Income / Debt Service = Debt Coverage Ratio

##### Example

Let’s assume a borrower is requesting a mortgage on an real estate investment property that generates a net operating income of \$50,000.

Because we want to arrive at three different results to interpret next, we will provide three separate scenarios in which the NOI remains the same (i.e., \$50,000) but with three different mortgage payments.

1. Mortgage payment of \$40,000: \$50,000 / 40,000 = 1.25
2. Mortgage payment of \$50,000: \$50,000 / 50,000 = 1.00
3. Mortgage payment \$55,500: \$50,000 / 55,500 = 0.90
##### Interpretation

Okay, now let’s see how a lender would interpret the debt coverage ratio we computed for each of those three scenarios.

1. 1.25:  This indicates that there are more than enough funds to cover the debt service. In fact, there are 10,000 more dollars (25% more) than the payment requires. This is a good thing.
2. 1.00:  This indicates that there are just enough funds to cover the debt service but nothing would be left over for any margin of error. This is typically not good enough.
3. 0.90:  This indicates that there are not enough funds to cover the debt service and would require the owner to make up the difference “out-of-pocket.” This is absolutely not good enough.

Here’s the idea.

As a quick point of reference just remember that 1.0 is break-even. Therefore the higher this ratio is, the easier it is to obtain a loan. Likewise, a ratio that’s lower means less than enough to cover the mortgage payment and therefore it becomes more difficult to obtain a loan.

Naturally what ratio a lender is willing to accept is up to the lender, but don’t be surprised to find that most look for a DCR of at least 1.20.

### So You Know

ProAPOD Real Estate Investing Software solutions automatically compute debt coverage ratio and then populate the appropriate reports. The computation is also available in ProAPOD’s iCalculator – a totally online real estate calculator that calculates and shows the formulas.

## ProAPOD Executive 10 Software Updated

ProAPOD Real Estate Investment Software has just released an update for it’s Executive 10 real estate investing software solution.

The update primarily deals with features associated with several of this solution’s forms, including modifications to form description headers, form labels, and form label comments.  All of which was felt would help eliminate the confusion that some customers were occasionally experiencing when using Executive 10 software for the first time.

Some modification to the VBA code associated with several forms was also written. Generally to make the forms more user-friendly by better safe guarding (with code) against incorrect data entries customers less familiar with the forms might inadvertently make.

#### The Proforma Form

This is the form used to make adjustments to the Proforma Income Statement regarding future revenues projected for a rental property.

The description header was modified, as were the form labels. Under each category such as Rental Income, the previous labels were replaced with labels that now read Adjustment 1, Adjustment 2 and so on. Behind the scenes, the VBA code will help ensure that the user completes each adjustment in the proper sequence.

#### The UserInfo Form

This is the form provided in the software that collects the user’s profile and business information for inclusion in the real estate analysis reports.

The “Post today’s date” feature – enables users to automatically add the current date to all reports – was modified. The selection will now reflect today’s date rather than the text “post today’s date”. The thirty-second delay required for the software to post the date has been modified to coincide with actual data change, not simply attempting to reenter the same date, or deleting an empty field.

### So You Know

Executive 10 software is ProAPOD’s platinum-grade real estate investment software solution with in-depth cash flow analysis and marketing presentations.

## How Sensitivity Analysis Benefits Real Estate Investors

Sensitivity analysis has become a popular method of “number crunching” real estate investors more frequently benefit from during property valuation and the investment decision process.

This is mainly due to the advent of spreadsheets and real estate investment software. What would have taken hours before makes sensitivity analysis effortless now.

Many investors, of course, are generally aware of this and already include “sensitivity” models. After all, investment real estate stands or falls based on its numbers, so it’s not likely that any prudent investor would want to ignore any “number crunching” that might contribute to smarter real estate investing decisions.

In this article, we’ll discuss sensitivity analysis for those of you who are not aware of what it is or how it’s applied; including several illustrations of sample applications to give you the idea.

#### The Model

Sensitivity analysis involves changing one variable at a time over a possible range of outcomes to evaluate the effect of that change.

In other words, it takes a variable (e.g., property price) and runs a range of values for that variable in incrementally steps of some amount along with the corresponding returns and measures produced by those values.

For example, a rental income property priced at (say) \$500,000 would generate a certain capitalization rate based upon that price. Likewise, a change in that price (say to \$530,000) would also change the capitalization rate for that modified price as result.

This is the benefit of sensitivity analysis. It enables real estate investors to gauge a property’s performance, profitability, and rates of return based upon a range of variables.

There are no specific rules for the analysis. Other than correct calculations for “steps” in the variables and their outcomes, the final report is simply a table comprised of columns and rows. How many rows and columns is arbitrary; as is the variable you step and corresponding outcomes you are evaluating.

#### Sample Applications

Here are three samples where I use the sensitivity model in my real estate analysis presentations. They evolved over time from personal experience and customer suggestions, and have proven to be helpful to real estate investors. So I’m glad to share them with you.

##### 1) Price Sensitivity

This concerns changes to property sale price (the variable). In this case, the outcome being evaluated are the investor’s cash requirement, loan amount, mortgage payment, cash flow, cap rate, and cash on cash return.

This is used for both rental property sellers and buyers. It helps sellers establish a more realistic asking price based upon returns in line with the local market; it helps buyers decide on a purchase price in line with their desired rates of return.

In this illustration I started with the variable amount of \$4,500,000 (in bold) and “stepped” it up and down in increments of \$10,000.

##### Illustration (click image to enlarge)

Source: ProAPOD Real Estate Investment Software

##### 2) Down Payment Sensitivity

This is processed the same way. Except the objective here is to run a range of down payment amounts in order to examine the investor’s annual loan payment, debt coverage ratio (DCR), cash flow before tax, and cash-on-cash return (C-O-C).

In this illustration the variable amount is \$1,200,000 and I “stepped” it up and down in increments of \$5,000.

##### Illustration (click image to enlarge)

Source: ProAPOD Real Estate Investment Software

##### 3) Loan-to-Interest Table

This provides a good way for investors to determine monthly loan payment based upon a range of loan amounts and interest rates. The procedure is not unlike the previous two illustrations, but in this case you want to step the loan amount and the interest rate.

In this illustration I “stepped” the loan amount of \$350,000 in increments of \$5,000 and the interest rate of 6.00% in increments of 0.125%.

##### Illustration (click image to enlarge)

Source: ProAPOD Real Estate Investment Software

### So You Know

ProAPOD Real Estate Investing Software solutions provide all three types of sensitivity analysis discussed in this article.

## Inflation Rate Calculator, Updtate 4-4-13

ProAPOD real estate investment software has updated the inflation rate calculator provided in its online real estate calculator iCalculator according to the latest US government CPI data released March, 2013.

Now you can calculate the annual inflation rate from as far back as 1913 through February, 2013. The previous table reflected CPI data through January, 2013.

#### How to Access

When you are ready, you can access the Inflation Rate calculator online and make an inflation rate calculation simply by doing the following:

• Open the ProAPOD website and click Login
• From iCalculator’s top menu of categories, click Time Value
• In the left menu listing all the available calculators, click the Inflation Rate calculator
• In the appropriate form that appears, enter a Start year, Dollar amount spent, and Ending year for the inflation rate calculation you wish to make
• click Calculate
##### Result

You will be able to see (according to the latest US government CPI data) how much you will have to spend in today’s dollars to match that amount along with the rate of inflation since.

##### Sample

Say that you spent \$3,500 for a family vacation in 1980. Due to inflation that same vacation today will cost you \$9,861.42. That is a rise in the annual inflation rate since 1980 of 181.8% 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%.

## How to Use Net Present Value in Your Real Estate Analysis

Net Present Value (NPV) is a real estate investing measure widely used for investment real estate analysis as a base to determine if the future cash flows expected to be generated by a rental property have a present value larger than the amount of cash required to invest in the rental property.

Simply put, net present value tells the real estate investor whether his or her target rate of return will be achieved, and thus, whether the property should attract the investor’s capital into that investment.

#### The Model

The net present value model is based on a decision rule that states if the discounted present value of future benefits is equal to or greater than the cost of those benefits it is a profitable opportunity. Whereas, if the present value of the future benefits is less than the cost for those benefits, the rate of return will not be achieved and chances are good that the investor should take another look.

#### How It Serves Investors

Let’s consider a simple illustration to help frame the idea.

When you place your money into a savings account (i.e., invest your capital) you expect it to earn interest (i.e., provide future benefits). The bank dictates the return and you are either willing or unwilling to tie up your capital based upon your acceptance of that return. For example, whereas you might deposit \$10,000 to earn 3.8% interest, you might not make the investment for 1.2% interest.

Okay, but suppose a bank doesn’t quote an interest rate and you’re only told what amount of money you’ll collect in the future.

For example, you’re told that you’ll collect \$10,300 next year for a deposit of \$10,000 made today with no mention of interest rate. How would you know what yield your investment is earning, and whether or not to make the investment? That’s the dilemma real estate investors face when evaluating and investment decision.

Though there’s a projection for a future benefit, there’s no mention of yield. Therefore the real estate investor has no idea what rate of return he or she may achieve and therefore no way to compare it to other potential investment opportunities adequately.

That’s where net present value comes in.

It takes your desired rate of return and essentially tells you if the future cash flows (benefits) from a property achieve that yield on your capital investment or not. In other words, you plug in the yield you want and NPV provides a result that will inform you whether that target yield is achieved.

#### How It Works

NPV discounts all future cash flows by the desired rate of return to arrive at a present value of those future cash flows, and then it deducts that amount from the initial equity (capital invested).

##### Example

Let’s assume three separate investment opportunities each requiring an investment of \$100,000. But based upon the present value of  each of their future cash flows the result is \$105,000, \$100,000, \$95,000. The NPV for each of the properties would individually be

• -\$5,000 (100,000 – 105,000)
• zero (100,000 – 100,000)
• \$5,000 (100,000 – 95,000)

The interpretation,

• The negative dollar amount means that the present value of future benefits is less than the amount invested and that the specified rate of return is not met. In other words, you might want to keep looking.
• The zero dollar amount signifies that the desired yield is perfectly met.
• The positive dollar amount signifies that the desired rate of return is met with room to spare. In other words, this property could be a winner.

### So You Know

ProAPOD automatically computes net present value in two of its real estate investing software solutions: Investor 8 and Executive 10. iCalculator also includes an NPV calculation, see it at online real estate calculator.