COMPARATIVE INVESTMENT ANALYSIS

This form can be used for each property or investment considered. It will give a total equity rate which can be compared to other types of investments. It does not compare risks nor does it take into account any present value calculations but it is an excellent tool for initial evaluation.

1. Sales Price- non expendable transaction costs

2. Less Total Loans

3. Equity

PROPERTY INCOME ANALYSIS

4. Gross Scheduled Income

5. Less Vacancy and Credit Losses

6. Gross Operating Income

7. Less Operating Expenses

8. NET OPERATING INCOME

TAXABLE INCOME

9. Net Operating Income

10. Less Interest Payments

11. Less Depreciation

12. Taxable Income (If negative, can be offset by passive income. If owner has 10% or more interest and income is under $100,000, $25,000 of loss may be offset against regular income. Otherwise passive loss may not be used and must be carried forward)

SPENDABLE INCOME

13. Net Operating Income

14. Less Principal and Interest Payments

15. GROSS SPENDABLE

16. Less Income Tax (Subject to qualifications above) (If a negative number, remember that minus a negative number becomes a PLUS)

17. Less Capital Improvements

18. NET SPENDABLE ANNUALLY

19. Per Month

EQUITY INCOME

20. Net Operating Income

21. Less Interest on Loans

22. Less Income Tax (Subject to qualifications above)

23. NET EQUITY INCOME

24. Net Equity Income Rate

25. Plus Equity Growth Rate (What is expected appreciation? Keep realistic)

26. Total Equity Rate

Here is a relatively simple example for the analysis of a $1,000,000 property. Rounded numbers

1. Sales Price- non expendable transaction costs $1,000,000

2. Less Total Loans $750,000 @ 8% for 30 years 750,000

3. Equity 250,000

PROPERTY INCOME ANALYSIS

4. Gross Scheduled Income 125,000

5. Less Vacancy and Credit Losses 10,000

6. Gross Operating Income 115,000

7. Less Operating Expenses 30% 35,000

8. NET OPERATING INCOME 80,000

TAXABLE INCOME

9. Net Operating Income 80,000

10. Less Interest Payments (Assume $60,000 of $66,600) 60,000

11. Less Depreciation (Land at $300,000; Improvements at 39 years) 18,000

12. Taxable Income 2,000

SPENDABLE INCOME

13. Net Operating Income 80,000

14. Less Principal and Interest Payments 66,000

15. GROSS SPENDABLE 14,000

16. Less Income Tax (Use 28% x 2,000) 500

17. Less Capital Improvements

18. NET SPENDABLE ANNUALLY 13,500

19. Per Month 1,125

EQUITY INCOME

20. Net Operating Income 80,000

21. Less Interest on Loans 60,000

22. Less Income Tax 500

23. NET EQUITY INCOME 19,500

24. Net Equity Income Rate ($19,500/$250,000= 7.8%) 7.8%

25. Plus Equity Growth Rate (Estimated at 4%) 4.0

26. Total Equity Rate 11.8%

Is this reasonable or adequate considering the additional risks of non liquidity? What are other financial markets doing. What is the expected economic environment of the area. How strong are the tenants? The leases?

One might compare this to stocks that have produced 10% annually with almost absolute liquidity. (Remember to always add some subjective risk for the illiquidity of real estate. I have several clients in Southern California that couldn't sell their commercial properties (or simply held on too long) and have watched the values drop precipitously.) Is the projected additional 1.8% worth the extra risk? That's the call to make but this puts objectivity to the process.

THIS ANALYSIS CAN WORK FOR ALMOST ANY INVESTMENT. Just be sure your inputs reflect reality and you know the risk scenarios of other investments.

Real Estate (TERRI CULLEN 2002) . If you buy and hold an investment property and rent it out over an extended period of time you'd be hard pressed to come as close to a "sure thing" with any other type of investment. The average annual return for apartment investments, including price appreciation and rental income, over the past 20 years has been around 12%, according to the National Council of Real Estate Investment Fiduciaries, an industry trade group in Chicago. That compared with an average annual return of about 9.5% for stocks and 5.1% for bonds, found in a recent study by the National Center for Policy Analysis, a public policy research group in Washington, D.C.

One way to gauge the economic outlook for the region in which you're looking to buy is to track job growth. The Bureau of Labor Statistic's Web site offers a helpful tool here. Its "State and County Employment and Wages" section includes a screen that allows you to track job growth by county (in section 3, scroll all the way to the bottom to select "all industries"). Another screen, found in the agency's "Local and State Unemployment" section, will show you whether unemployment is on the rise in that county.

Vacancy rates for apartment buildings managed by institutional investors rose to 8.91% for the first quarter of 2002, up from 8.16% during the fourth quarter of 2001, according to the National Council of Real Estate Investment Fiduciaries. This is the highest vacancy rate for apartments since 1991.

How to tell whether there's a tenant shortage in your area? The U.S. Census Bureau's Web site offers stats on vacancy rates for 75 of the largest metropolitan areas up to 2001. A quick check of data tracking vacancy rates show Buffalo, N.Y., Birmingham, Ala., Columbus, Ohio, Las Vegas, and St. Louis, Mo., among the cities with steadily rising vacancy rates, while Los Angeles and Fresno, Calif., and Milwaukee, Wis., all have seen vacancy rates decline.

Population growth also can determine whether you'll have difficulty attracting tenants. Check out the Census bureau's population growth estimates for your region. You'll want to avoid any market where population growth is below 1% or declining.

Real Estate: The answer varies from city to city, depending on zoning standards, supply of new homes, school quality and the strength of the local economy, to name a few. Those things produce a confusing bunch of percentages to compare and contrast. For instance, both Denver and San Jose could see their housing bubble burst in coming months, but for very different reasons, according to The Wall Street Journal (6/4/02). In Denver, rapid building has produced a glut that could lower prices, while San Jose has a shortage of homes but fewer shoppers due to high unemployment. It makes sense once you know all the factors, but nobody like a know-it-all. To see what's playing in the housing market near you, check these local listings.

No matter where you live, there are things to consider whether you're buying or selling:

One predictor of falling prices is how long homes are on the market before they sell. Check it out in your neighborhood.

Beware mortgage brokers bearing bizarre deals to keep buyers buying. Interest-only loans or smaller down payments are tactics that could prolong your agony in a down market.

What drives the economy where you live? If there's just one place to work or one industry to choose from, be careful when making your housing decisions. Think Silicon Valley.

Pick a house and a neighborhood you'll enjoy for awhile. Much like other investments, the housing market fluctuates. The longer you're willing to live somewhere, the easier it will be to handle possible ups and downs.

A good school district won't always make the grade. As baby boomers age and the number of school children shrinks in good districts, neighborhoods may not hold their value.

Check out the housing market status on a map of metropolitan areas.

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