Week 3 Flashcards
define cash flow
Cash Flow = Cash flow is the amount of cash and cash equivalents moving into and out of a business/development project/ asset.
o Only actual movement of cash is considered ‘cash flow
example:
You bought a house for 1 million in 2016, and its value increases to 1.1 million this year, is the capital growth of 0.1 million a cash flow? = Not a cash flow as money does not enter into bank account only a rise in investment.
o You sell this property for 1.1 million in March, and the date of settlement is in May. Assuming you receive the money of selling this property on the date of settlement. Does this 1.1 million cash flow happen in March or in May?
May, As the 1.1 is deposited into the bank account in May
what is the holding period
o How far into the future the cash flow should be estimatd
o E.g. when the property is expected to be sold
o Or assume notional sale after 5-10 years
o Analysis beyond 10 years may not be accurate due to; difficult prediction cash flows, distant receipts have little effect on today’s value
Forecast the expected cash flows from an investment based on reasonable expectations
explain the Three major cash flows for property investment
- Cash flow related to purchasing the property (Property price/Initial investment outlay – used to Analyse the feasibility of the investment)
- Cash flows from operation (NOI/after tax CFs)
- Cash flow from resale of property (expected selling price /Resale proceeds after tax)
explain Purchasing property Cash Flow – Initial outlay:
The money invested by the investor when acquiring an income-producing property (equity)
Majority of cash outflow
purchasing price of property
(+) costs of acquisition
(+) any additional repairs or improvements required to make the property leasable
(-) the amount of borrowed funds
= the initial outlay
cost of acquisition includes
o Stamp duty o Legal fees (solicitor/conveyance) o Building inspections o Mortgage application fees o Mortgage insurance o Other settlement and related fees
define gross floor area
The total area of the building at all floor levels
Define NLA
Excludes external walls, standard services e.g. stairs, lifts
Define efficient ration
The proportion of leasable space in a building to the total space
=NLA / GFA
Define gross income
The total of all rental income (annual) derived directly from the property assuming that there is no vacancy
•
How to calculate this?
Net Lettable Area (NLA) X Market rent per m2 per annum
Current market rents are determined by comparison with recent new lettings of similar premises
efficient ratio formula
=NLA / GFA
potential gross income formula
Net Lettable Area (NLA) X Market rent per m2 per annum
explain vacanncy and collection allowance
Estimated income lost due to tenants vacating the property and/or tenants defaulting (not paying) their rent
• Is expressed as a % of potential gross income
Example:
Potential gross income per annum is $480,000
Ratio of vacancy and collection allowance is 2%
Vacancy and collection allowance= $480,000*2%=$9,600
what is miscellaneous income
Any income other than the rental income Examples ◦ Naming rights ◦ Satellite dish space ◦ Communication towers ◦ Subsidy from government
explain the break down of operating costs
Recurrent expenses arising from ownership or operation of the property, property related only. Include:
- Fixed expenses– real estate tax and insurance expense
- Variables expenses-operating expenses that generally vary with the level of occupancy or the extent of services provided (e.g. the more you use the property the higher the expenses e.g. utility)
- Replacement allowance- provides for the periodic replacement of building components that wear out more rapidly than the building’s the economic life
(Some components in a building depreciate at a faster rate than the life of a building – short life items)
Property operating expenses (outgoing)(unrelated to the property)
• Excludes:
- Debt service
- Investors‘ income tax and corporation operating costs
- Book depreciation of property
calculating outgoings estimation
Method 1 – For relatively standardized structures, the size of the building is multiplied by the square metre cost of OPEX
Total OPEX = GFA x OPEX per m2 per annum
Method 2 – The costs of the individual OPEX components in the building are estimated individually and added together
define capital expenditure
Expenses that occur irregularly for major repairs, replacements or improvements.
Capital expenditure should be deducted from reselling price to calculate capital gain.
explain NOI
Reflects property related income after property related operating expenses are deducted, but before investors’ income taxes and interest are deducted.
o Often considered the best measure to assess the financial health of a property
o Provide investors with an idea of the income a property might provide, as it shows the remaining cash balance after OPEX are paid.
o Net Income ratio: The ratio of NOI to PGI
see example (coffee :))
selling expenses
Real estate agents’ fees and transfer fees
% of the resale price
Agents’ commissions on a sliding scale
If resale price is $250,000, selling expenses would be about 4%
$5 million – 1.5%
how to calculate capital gains
When a property is sold for more than it was purchased, it is a ‘capital gains tax event’
property resale price:
(-) estimated selling costs
(-) costs of acquisition and other related costs
(-) Total of capital expenditure incurred during holding period
= capital gain
see examples
tax on capital gains
Tax due on Capital gains:
Depends on country’s tax policies
Australia – 30%, some owners are entitled to discount their realised capital gains before calculating taxes
◦ Individuals, partnerships, trusts – 15%(30%*0.5)
◦ Super funds – 20% (30%-30%/3)
◦ Companies – 30% no discounts
Using the above example, calculate capital gain tax for three scenarios
calculate resale proceeds after tax
expected selling price (-) selling expenses (-) outstanding loan (-) taxes due on capital gains = resale proceeds after tax
what is the replacement allowance
Funds raised to provide for the periodic replacement of building components that wear out more rapidly than the building’s the economic life.
- You are considering investing in a small office building using the interest-only loan, and this investment has the following inputs.
Selling price $ 1,600,000
Loan amount $ 1,280,000
Gross floor area 1000m2
Efficiency ratio 75%
Gross rent per m2 $300 per annum
Miscellaneous income $20,000 per annum
Operating expenses $ 95 per annum per m2 of net lettable area (NLA)
Vacancy and collection allowance 7% per year of potential gross income
Loan interest rate 8% per annum
Corporate tax rate 30%
Compute the NOI and after-tax cash flow from operation for year 1.
:) poppy andrews
