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Real Estate InvestmentReal Estate Investment
Chapter 11Chapter 11
Tools of AnalysisTools of Analysis
© 2011 Cengage Learning
© 2011 Cengage Learning
Key TermsKey Terms
Accounts receivable
Accrual method
Appreciation
Audit
Balance sheet
Cash method
Certified Public Accountant
Effective gross income
Equity
Escrow accounts
Fixed expenses
© 2011 Cengage Learning
Key Terms
Income statement
Liquidity
Net worth
Operating expenses
Operating
Statement
Pro forma statement
Profit-and-loss
Profitability
Scheduled gross income
© 2011 Cengage Learning
Introduction
Analysis procedures that will help an investor evaluate and compare investment opportunities.How does one figure investment return and make reasonable comparisons between properties?The returns on investments are generally not precise in measurement
income from real estate can be more subject to fluctuating market conditions
© 2011 Cengage Learning
Balance Sheet
AssetsCurrent
Cash
Rents receivable
Fixed assetsLand
BuildingsLess depreciation
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Balance Sheet
LiabilitiesCurrent
Accounts payable
Long term debt
Less: Principal paid
Balance Due
© 2011 Cengage Learning
Balance Sheet
Net Worth = Assets – Liabilities
On the balance sheet this is shown on the bottom right as:
Total Liabilities $261,800
Net Worth $118,800
Total Assets $380,600 Liabilities plus net worth $380,600
© 2011 Cengage Learning
Profit-And-Loss Statement
Income from operations $148,878Less: Expenses incurred 62,569Net operating income $ 86,309Less: Interest expense 45,324Less: Depreciation allowed 36,531Income before taxes $ 4,454Provision for income taxes 2,048Net Income $ 2,406
© 2011 Cengage Learning
Operating Statement
Scheduled gross income $100,000Less: Vac. and credit losses 7,000Gross operating income $ 93,000Less: Operating expenses* $ 41,300Net operating income $ 51,700
*Taxes, Insurance, Utilities, Advertising, Management, Payroll, including taxes, Supplies, Services, Maintenance, and Other
© 2011 Cengage Learning
Operating Statement
Gross operating incomeIncludes rents, any miscellaneous income from services sold, parking fees, utility charges, etc.
Operating Expensesfixed charges (taxes, insurance, etc.)
Do not vary with occupancy
operating expenses
Reserves for replacement
© 2011 Cengage Learning
Other Important Statements
Pro Forma Statement
Income Tax Statements
Accounting MethodsCash Basis
Accrual Basis
© 2011 Cengage Learning
Preparation of Statements
Certified Public Accountants
Audited Statements
Statements Prepared without Audit
Owner-Prepared Statements
Broker-Prepared Statements
© 2011 Cengage Learning
Problem Areas in Financial Statements
Time Span Covered
Management Costs
Tenant Improvements
Leasing Commissions
Utility Costs
Use of National Averages
© 2011 Cengage Learning
Supplemental Information
Certified Rent ScheduleInventoryAccounts ReceivableAccounts PayableCash ControlsEscrow Accounts
Advance rentals, security deposits, damage deposits.
© 2011 Cengage Learning
Supplemental Information
Insurance Policies
Ad Valorem Taxes
Sales Taxes
Utility Charges
Lease AgreementsFurniture, equipment, storage buildings, land leases, etc.
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Supplemental Information
Contracts OutstandingAdvertising
Maintenance services
Other services
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Salary and Wage Agreements
Labor contracts
Health and accident insurance
Workmen’s compensation
Unemployment compensation
Pension funds
© 2011 Cengage Learning
Statement Analysis
Liquidity
Leverage and the great recession
Income/expense
RatiosActivity
Profitability
