A few years ago, a friend of mine explained that many years ago his father and four partners invested in real estate income producing properties. Every Thursday they closed their office, had breakfast and lunch brought in and spent the day calculating Internal Rates of Return.
Other investors of that day (and today) relied on the Cap (Capitalization) Rate which was much, much simpler to calculate. Others preferred Cash-on-Cash because not only was the calculation easy, they claim that cash is all they are truly interested in. An acquaintance in San Francisco swears by the Net Present Value. And so it goes. With the advent of the programmable calculator, but especially the computer, the Internal Rate of Return can be calculated as quickly as the Cap Rate.
A real estate agent should be able to offer a somewhat comprehensive report on the financial aspects of an income producing property. Agents are not allowed to offer tax or legal advice to an investor, but can demonstrate why one property should be preferred over another from a financial aspect.
So, how do new investors learn what they have to know to invest wisely, and how do new agents (at least new to commercial properties) learn what they have to know to talk to investors in an intelligent manner? How do they come up with the rates of return and measures of value accurately and quickly enough? In other words, how do they come up with a mathematically projected Purchase Price?
In today’s world the computer program is the “Tool of the Trade” of choice. We all know what a great tool it is, but we also know that it can take a lot of work to learn how to use that tool. Fortunately, If an investor wanted you to tell him the Internal Rate of Return (IRR) for a certain commercial rental property, could you do it? Could you give him the Cap Rate? Cash-on-Cash? Net Present Value?
OK, so let’s say you are very handy with the programmable calculator. How long would it take you to come up with those values? After you finish all those calculations he asks you what the result would be if you could negotiate the price down some. Again, you go through the painstaking ritual. Then he asks for the results for a slightly lower interest rate, then the results for getting the lender to waive the loan points, or origination fee, or a longer loan term. Then he gets really serious. He tells you of another investment that he could make instead of the one you are offering. He would like to know how your property compares to the other property.
Realistically speaking, we all know we would never be able to take the time to make all of these calculations. We would be calculating for hours. What if we have only minutes? We need to be efficient and avoid trying the patience of our clients.
That is exactly where the “Tool of the Trade” of choice comes in: Your computer program, of course! But, alas, how to use it. How to come up with all those answers?
APODplus of course!
APODplus is a very simple to operate financial analysis program that will give you the answers to all of the questions asked above…and much more! You do not have to know how to make ANY of the calculations referred to above.
APOD is an acronym for “Annual Property Operating Data”. The income and expenses for income producing property is central to determining the return on the investor’s money. The owner of a property for sale, or his accountant, will be able to supply you with this information. (TIP: If the accountant has the information ask for permission to go to the accountant’s office yourself. If he likes APODplus he just might have other prospective investors as his clients).
A key benefit to you is that the minimum amount of information you are required to enter is entered on the first page of the report only. Another key benefit to you is that APODplus displays the results of this information on the same first page. The Cash Flow page and the Sale page are generated completely automatically with no input on your part.
Here is the reason you will be able to work so efficiently: A table at the bottom of Page 1 displays:
- The Client’s Alternative Rate of Return,
- The Internal Rate of Return (IRR) Before Tax,,
- The Internal Rate of Return (IRR) After Tax,
- Cash-on-Cash Return,,
- Capitalization (Cap) Rate,
- Net Present Value Before & After Tax, and
- Debt Coverage Ratio
When the investor, in our example above, asks “what-if” we could get a lower price, or a loan fee waived, or a longer loan term, or any other such question, you enter, say, the lower price onto the worksheet and the entire table changes to reflect the change in every rate of return or measure of value instantaneously.
No more calculating individual returns for each change!
There’s more! As we all know, it takes a certain amount of money to return any given rate of return on invested dollars (down payment and acquisition costs). That amount of money is shown in the table. Also, enter the rate of return the client could make if he invested elsewhere and the difference in the amount of money for that investment and the amount of money your property produces is displayed.
Apodplus is uniquely designed to allow you to very simply determine the dollar amount of the various costs involved. For example, if the Lender charges a Loan Origination Point, like 1%, or any other loan fees as percentages of the loan, and the client elects to repay those fees as part of the loan’s monthly payment, you can easily determine the actual dollar amount those percentages represent. Why could this be important? Because you might want to “buy” a longer loan term with an additional loan point. You do not want to pay more than the longer term is worth.
While negotiating for the Purchase Price you might want to be able to talk about something besides lowering the Price. With Apodplus you will learn that there are several ways of getting what you want other than simply a lower Purchase Price.
Now might be a good time to view the Demo to see some of these strategies in action.
Just RIGHT click on the link below and choose Open Hyperlink in the dropdown widow:
Jack Griffis, Broker
Griffis Realty Investments
7341 W. Charleston Blvd., Suite 160
Las Vegas, NV 89117