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Lesson 7.docx

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FINA 210
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Lesson 7 The Investment Decision Criteria No book ChapterDefine decisionmaking criteriaCalculate Payback Periods PBCalculate Returns on Assets ROACalculate Returns on Investments ROI or Returns on Equities ROECalculate Gross Income Multipliers GIMCalculate Net Operating Income Multipliers NIMCalculate Overall Capitalization Rates OCRThe Investment Decision CriteriaDefinitionThe purpose of investment decision criteria in real estate is to quantify certain measures in order to compare them to a predetermined benchmark or to rank properties according to the decision criteria of choice ie paybackUltimately using these tools will facilitate the decisionmaking processThere are several formulas we use to evaluate real estate investment Some are simple rules of thumb approach and can be calculated quite easily using a basic calculator others are more complex and require a financial calculator or a scientific calculator In this course we will use the Rules of Thumb TechniquesThe Rules of Thumb Techniques are based on the real estate income statement which is similar to the traditional income statement that companies use in their annual financial statements However the terms used on the statements differ For example instead of the sales which usually appear on traditional accounting statements potential gross income is used in real estateA Typical Real Estate Income Statement The real estate income statement is a tool that will assist you in calculating Net Income Multipliers NIM Gross Income Multipliers GIM and Overall Capitalization Rates It is also very helpful in determining the cash flow after taxes CFAT on assetsOperationCalculationPotential Gross IncomePGILessVacancy and Credit LossesVCLEqualEffective Gross IncomeEGILessOperating Costs without Depreciation or CCAOEEqualNet Operating IncomeNOILessDepreciation or Capital Cost Allowance CCACCAEqualEarnings Before Interests and TaxesEBITLessInterest expenseIEEqualEarnings Before TaxesEBTLessTaxesTAXEqualEarnings After TaxesEATAdd BackDepreciation or Capital Cost AllowanceCCALessPrinciple portion of Mortgage PaymentPRINEqualCash Flow After TaxesCFAT1
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