Investment Analysis Metrics Flashcards
What does Present Value measure
Present Value refers to the current value of a series of future cash flows. In other words, it is the amount that you would be willing to pay today in order to receive a cash flow (or a series of them) in the future. Literally translated, present value means “what is it worth right now?” The Present Value formula applies the desired rate of return as a discount to a “future value” to reflect the present value of that “future value”. Ex: if a 10% return is the investors standard requirement for acceptable investments the PV formula applies that rate as a discount to the “future value” to determine what the present value of the “future value” is.
What is Break Even Ratio
(total expenses: debt service + operating expenses – reserves) / gross operating income = break-even ratio
The break-even ratio helpful since it tells them the occupancy level needed to cover the bills to maintain a property.
The higher the Break Even Ratio the higher required occupancy is needed to break even. A break-even ratio of 74% means that you could have 26% vacancy and property expenses will still be covered.
In general, lenders like to see a break-even ratio of about 85% or less.
What does Net Present Value reflect?
It represents the profit $ to be earned from an investment that generates a stream of future cash flows as evaluated against a desired rate of return. The present value of the future cash flows less the cost of the investment. Net Present Value is the calculated $ amount of the Present Value of a future stream of cash flows less an initial invested amount. The NPV is a direct measure of “cost versus benefit.” It represents the economic profit to be earned by making an investment. Rational investors will take all investment opportunities that have an expected NPV greater than or equal to zero. Example, if the desired rate of return is 8% and the NPV is calculated to be greater than “0” it means that the investment is returning at least 8% plus the amount of the NPV
What is Cap Rate
It is the unleveraged return for an investment Net Operating Income / Fair Mkt Value or Assigned Value of Property. Or NOI / Total all in cost
What is Cash on Cash Return — What is annualized return
Net Annual Cash Flow / Net Amt Invested in Property.
Annualized divide cash on cash rate of return by % of year expended to earn return
What does the Gross Rent Multiplier show
Fair Market Value / Total Annual Gross Rents.
Reflects how long it will take to pay off investment from gross rents only. The less time (lower GRM) the more desirable the investment all other things equal.
What does the Debt Coverage Ratio show. How is it calculated
DCR = NOI / Total Annual Debt Pmts. A DCR ratio of 1.25 means that the NOI is 25% greater than the total debt payments
How do you measure Net Operating Income
(Gross Rental Income + Other Income) - (Projected Credits or Allowances + Vacancy Allowance) Less all operating expenses such as Insurance, repairs, property taxes, license fees. Debt payments are not included in NOI
What is Internal Rate of Return?
The compound average annual rate of return — expected to be earned on an investment — assuming the investment is held for its entire life — and that the cash flows are reinvested at the same rate as the desired IRR. Investments that have an IRR greater than or equal to the cost of funds should be accepted. See more at: http://www.tvmcalcs.com/terminology#PrincipleValueAdditivity
How is the IRR different from the PV and NPV of an investment?
PV and NPV determine a $$$ value of a stream of cash flows based on a required or desired rate of return. Using the same stream of cash flow the IRR solves for the actual “rate” or percentage that will calculate a zero NPV. A zero NPV means that we are achieving the desired profit return. The Modified IRR takes into consideration that the return generated by reinvesting the proceeds from the projected cash flows is not the same or constant as achieved by the IRR.
What is target NOI for rental properties?
Target NOI ratio is 58%. Goal is to keep expense equal to or less than 42% of Gross Revenue. For budgeting don’t exceed 45%
Mortgage Rate Constant “K” Calculation
To calculate the annual mortgage constant, we would total the monthly payments for the mortgage for one year and divide the result by the total loan amount.
The mortgage constant can also be computed monthly by dividing the monthly payment by the mortgage loan amount. To get the annualized mortgage constant multiply the monthly constant by 12
To get the monthly mortgage constant factor for a specific term and loan rate make the Present Value (PV) $1.00 N=term % = loan rate solve for PMT. to get annual mortgage Constant factor multiply by 12 once the factor is known multiply factor x amt loan
What does the 2% Rule show investor
The 2% rule projects how much cash flow to expect. Cash Flow is Gross Rent Income less Rental Operating Expenses (not including debt service).
Formula: Current Monthly Rent / Property Value
Goal is to be in the range of 1% - 2% the higher the better
Rule helps narrow down prospective properties to assess
What does the 50% Rule show an RE investor?
The 50% Rule of thumb projects how much cash flow to expect over extended time on average.
This ratio is impacted by different areas that have different average costs.
