Posted by Zee on March 30, 2000 at 03:11:31:


Good luck with this. I, too, am making my first deal (flipping a building lot, posted above), so, I am in sympathy with your desire to win.

I’ll share a practical thought process from “The Real Estate Game”, by William J. Poorvu, of the Harvard Business School:

It’s called “Back of the Envelope” analysis. It’s a quick & dirty financial analysis to help see if you want to take any further interest in a prospective deal.

Year 1 (based on selling price and existing rents p.s.f.)

Cash Flow from operations (CFO) $_________
Mortgage Payment (interest & principal) $_________
Cash Flow after financing (CFAF) $_________

Return on Assets(ROA): CFO/Purchase Price = __. %
Financing cost (FC): Payment/Amt. financed = __. %
Return on Equity (ROE): CFAF/cash invested = __. %

Glossary of BOE (back of envelope) Terms:

p.s.f. (or rents psf): per square foot. For comparing costs between copmarable properties in your market

net operating income (NOI): net property revenues less building operating expenses.

cash clow from operations (CFO): NOI less capital expeditures or reserves for such items as tenant improvements (TI’s), leasing commissions, and structural reserves.

financing costs (FC): dept or mortgage payments of principal and interet, often in the form of a constant payment that amortizes the loan over a given time.

cash flow after financing (CFAF): CFO-FC

return on assets (ROA): CFO/puchase price

return on equity (ROI): CFAF/cash invested or cash on cash

So, now you have a “set up”, that is, a snapshot of a property’s financial performance at a given point in time. It’s focus is cash flow (not financial accounting). Cash flow not only reflects what an investor can actually spend, but untimately will determine that you can borrow or sell properties for.
Use the set up to monitor performance of properties already owned, or to evaluate the financial feasibility of a potential acquistion.

Plug in your numbers, but read the book for an emplanation.


Posted by Maurice on March 30, 2000 at 24:07:51:

Hey I think I found the deal to get me started. My credit is fair but I?m maxed out (Wife isn?t working anymore) and I have about $3000 to use of my money. Anyway it?s 5 2br row houses. Each has it?s own furnace and metering, can also be deeded separately. 2 of the homes are vacant and in need of extensive repair, the other 3 are in fair condition, but are rented ($775mo) tenants pay utl. Asking price is 47K and is listed with a realtor. I estimate that the repairs will be around 25K max. Taxes are $600. Now for the finishing touches. It had a tax assessment value in 1986 for 74K. Which way should I go with this one?
I know this is a lot, but I wanted to give as much info as possible.

Thanks for you help and insight. This board is great!!