Real-Estate Investment (For Single Property Investment)

Saleable Area 2586

Carpet Area 1722
Cost of Property 5,31,26,118 Plus Govt Taxes
Current Leasing Rate of Loaction 250/sqft Rupees
Rent Calculated On mininmum Lease Rate 190/sqft Rupees

Step 1: Find the ROI

ROI is a fancy word for the yearly "profit" a property generates. Simply subtract the expenses from the rent you recieve
from the tenants! It is very important, because it is used in nearly all steps of the real-estate evaluation process! Don't
skip this first step!

(Revenue)
Rent received for the year : ₹ 58,96,080 IMPORTANT: Make sure it's annual, so take the monthly rent and x12.
(Expenses ) Subtract
Expense 1: ANNUAL Maintenance Fees ₹ - Paid By tenant
Expense 2: ANNUAL Property Taxes ₹ 1,16,901
Expense 3: Insurance (Optional) ₹ -
Expense 4: Miscelleanus ₹ -
ROI=₹ 57,79,179 This is the "yearly profit" you get to keep (if you own the property straight out with no mortgage). Looks like a great number dosen't it? But remember: you
want to buy properties that produce high income relative to their price. There's a great number to compute if you're getting a great return on a property
and it's called a Cap-Rate!

Step 2: Cap Rate

A cap rate is an excellent way to judge the potential income of a property relative to it's price. Higher numbers mean that the property produces more income in realtion to the up -front price. It's
almost like the % on a checking account. Remember: That a insanely high cap rate is usually indicative of increased risk and that's not always good. CAP-RATE = ROI / Price of the commerical

ROI ₹ 57,79,179 Note: Orange text means the computer did the work. You already calcualted the NOI.
/
Price of Commerical ₹ 5,31,26,118 Enter the price of the house.
Cap-Rate = 11% Note: Near Wilmington, Cap-rates near 8% are fairly typical for a buy-and-hold investment. Cap-rates above 10%
usually mean the property is "hood", needs renovations, or has some underlying issue. But you never know, sometimes you may get the
deal of the century. BUT the biggest contributer of a high cap-rate is that the property dosen't appreciate (ie. it's not getting more
valuable with time). This usually occurs with trailors, poorly built/extremly old houses, etc. This bring us to the next calc ualtion....

Step 3: Appreciation 5 years past and 5 years future

Unless the property has an extremely high cap, the next cardinal sin of investing is... Buying things that don't appreciate! And even worse...financing things that don 't appreciate (we'll talk more about that later).
Typically, you want proeprties with nice, steady appreciation. Too much appreciation, too quickly can be a sign of an economic bubble. Quickly declining property prices indicate some type of outside factor such as a
major employer leaving, changes in government, or construction.. General rule of thumb, %3-6 is good! Do not rely on the graph at the bottom of ZIllow for the "price of the property 5 years ago". Find a house that
has actually sold in the past 5 years either A. The actually property itself B. Something within a mile that closely compares.

Price of property 5 years ago 2,84,46,000 Find a property that's comparable that sold 5 years ago. Don't use the graph at the bottom of Zillow. It's NEVER accurate.

Price NOW ₹ 5,31,26,118

13% Yearly Price Increase.
"IF IT'S NOT WORTH SELLING, IT'S NOT WORTH
BUYING"
What the property MIGHT be worth 5 years from now ₹ 9,92,19,026 If the appreciation potential isn't there, don't buy it!!!

Step 4: Financing and "Cashflow"

Unless you can pay for the property in cash, you may need to obtain financing. If you don't know anything about credit, it is a double edged sword! Credit can make you rich or make you very sad. Also, the more money and assets you have, the more money lenders will give you and the greater the risks. Be careful. First, figure
out what your monthly payment is going to be! This applies to a fixed-rate loans only. Call a lender if you have another type of loan in mind.

General rule of thumb: NEVER %100 finance a property. Play around with thie calcualtor enough and you'll soon figure out why!Generally put %20 down (so the "amount" below, will be %80 of the properties price).

What % can you put down? 35% Note: Typically recommend %35.

Amount ₹ 3,45,31,977 (%65 of Commerical property) Monthly Payment ₹ 3,52,506

Interest Rate 9.5% Monthly Rate 0.007591534
Term(Years) 15

Cashflow:

ROI ₹ 57,79,179
(minus) Mortgage ₹ 42,30,075.43
₹ 15,49,104 ANNUAL CASHFLOW Cash-flow is literally straight profit you can keep at the end of the year (even after the renters pay your loan!). If this
number is positive, congratulations! If it's negative, you may want to check your loan amount or re -think this
investment.

Other Fancy & Useful Metrics

Cash-on-Cash Return:

Annual Cash Flow ₹ 15,49,104 Cash-on-cash Return 8.33%

/ Divided By
Down Payment on Loan ₹ 1,85,94,141 Cash-on-cash return highlights the power of credit. This the essentially your yearly return with financing (as
opposed to straight cash). How does this number compare to your cap-rate? It should be higher. This is because
credit allows you to recieve a higher profit "pound -for-pound" to each dollar you invest!

Debt Coverage Ratio:

Annual ROI ₹ 57,79,179 Debt Coverage Ratio: 1.37

/ divided by
Annual Debt Service ₹ 42,30,075 Debt coverage Ration indicates how well you can pay your debts. It is very important to lenders. A debt
coverage ratio of 1.20 or greater is good! A debt ratio below 1.2 means you are just barely paying the
mortgage on that property (That's not good).

Operating Expense Ratio:

Operating Expense ₹ 1,16,901 Operating Expense Ratio 1.98%

/ Divided By
Gross Operating income ₹ 58,96,080 This number is represented as a %, but look at it as "For every Rupee I make, this is the
% of expenses I incur". Is this number over %35 or close to it? You may what to take a
hard look at your expenses. It's easy to get stars in your eye when you glance at the
potential monthly rent, only to figure out the property has massive expenses.
Payback Period:

Amount Invested ₹ 1,85,94,141 Payback Period 12.00 years

/ Divided By
Cash Flow ₹ 15,49,104
Rough and dirty way to estimate the time to payback your original investment. The sooner you
get your money back, the better. To get a quick payback, the property must have a strong
cashflow. Does not take into consideration TVM or the possibility of uneven cashflows.

Break-Even aka "Default" Ratio:

(Mortgage + Expenses) ₹ 43,46,976

/ Divided By Break-Even Ratio 73.73%
Rent Revenue ₹ 58,96,080
Another ratio used by lenders. Expresses the relationship between your property's outgoing cash to
income. Lender's generally look for BER's of %85 or less. If the BER is %85, that means rents can decline
around %15 before not having a postive cashflow!
Step 5: DCF, NPV, & IRR
If you've gotten this far, you must be seriously be looking to invest in real-estate! In order to thouroughly understand DCF, NPV, IRR, I assume you have knowledge of TVM! Even if you
haven't, you can still gain valuable insight into how an investment works just by playing around with the numbers.Remember: If you didn't take out the loan to buy the property, you'll
have to calculate the cash flows manually! If you didn't take out a loan, the cash flow would be the price of the house as the initial investment, the NOI's as the cash flows, and the

Automated NPV & IRR for property above Manual NPV & IRR
Initial Investment ₹ -1,85,94,141 1. The negative Initial Investment (Make sure it's negative) -110000
Cash Flow Year 1 ₹ 15,49,104 number represents Cash Flow Year 1 1000
Cash Flow Year 2 ₹ 16,26,559 the initial investment Cash Flow Year 2 1000
on the property. NO
Cash Flow Year 4 ₹ 17,07,887 Cash Flow Year 4 1000
ROI included.
Cash Flow Year 5 ₹ 17,93,281 Cash Flow Year 5 1000
Cash Flow Year 6 ₹ 18,82,945 2. Each number after Cash Flow Year 6 1000
Cash Flow Year 7 ₹ 19,77,092 is the ROI x %5 Cash Flow Year 7 1000
Cash Flow Year 8 ₹ 20,75,947 (because rents Cash Flow Year 8 1000
Cash Flow Year 9 ₹ 21,79,744 typically increase %5 Cash Flow Year 9 1000
annualy).
Cash Flow Year 10 ₹ 22,88,731 Cash Flow Year 10 1000
Cash Flow Year 11 ₹ 24,03,168 3. The last number is Cash Flow Year 11 1000
Cash Flow Year 12 ₹ 25,23,326 the sale price of the Cash Flow Year 12 1000
Cash Flow Year 13 ₹ 26,49,493 property with the Cash Flow Year 13 1000
Cash Flow Year 14 ₹ 27,81,967 expected Cash Flow Year 14 1000
appreciation % we
Cash Flow Year 15 ₹ 29,21,066 Cash Flow Year 15 1000
used above (20 years
Cash Flow Year 16 ₹ 30,67,119 instead of 5). It also Cash Flow Year 16 1000
Cash Flow Year 17 ₹ 32,20,475 includes the last year Cash Flow Year 17 1000
Cash Flow Year 18 ₹ 33,81,499 of NOI we recieved. Cash Flow Year 18 1000
Cash Flow Year 19 ₹ 35,50,574 Cash Flow Year 19 1000
Cash Flow Year 20 Plus Selling the Asset ₹ 65,00,60,001 Cash Flow Year 20 Plus Selling the Asset 200000

What's this? The discount rate is simply a % return "comparable" to another like investment ie. The stock market (usually %8), another properties cap-rate, etc. I usually keep it at %8 since
Discount Rate: 8% most similar risk investments will be in that range, but you can make it higher if you have another investment that earns a higher rate with comparable risk!
DCF= ₹ 17,11,65,063
NPV= ₹ 14,12,69,372 Discount Rate 12% NPV= ₹ -71,008
IRR= 24% IRR= 4%
DCF= ₹ 30,471

NPV & IRR are used in corporate finance to evaluate whether to finance a new project for a business. Real -Estate Investing is in fact a business and the NPV/IRR are excellent ways to
evaluate uneven cashflows and estimate the present value of an asset. What if you need to dump $10,000 into the property to make it livable to renters? What if you want to build a
new house on a vacant lot? This is where NPV/IRR work their magic: You can still gauge a properties current value with uneven cashflows!

The box to the left is an almost completely automated version of NPV and is a VERY rough projection of what your cash flows would look like. Besides that, it's merely an easy way to
look the potential present value for a property. I'd highly suggest if you really want to look into an investment, going overto the right and filling it out manually. Otherwise, if you're
like me and just want to test it out on properties, the left should give you a decent ballpark.

DCF: aka. "Discounted Cash Flow" essentially if the property cash flowed exactly in the matter above (and accured interest at therate inputed), the value of the property today would
be equal to the DCF. Rule of thumb: If the DCF is higher then the current value of the proeprty, it may be a nice investment! The DCF and NPV are almost indentic al, except the DCF
DOES NOT INCLUDE THE INITIAL INVESTMENT.

NPV: Generally rule of thumb: If the NPV is postitive, take on the project. If positive, the present value of the cashflows are worth more then the original investment. Essentially, at
the interest rate stated combined with the "hit" of the initial investment, the project still makes sense.

IRR: is the "internal rate of return" IRR is difficult concept to understand, but an extremly valuable measrure. With cap -rate, you simply estimated the "return" on the asset yearly with
very room to incorporate other scenarios. IRR is far more elegant because you are essentiallyestimating the "return" with the initial investment, yearly cash flows, AND the sale
price of the property!