Forecasting Property Value workbook example for Maegen's Magic Manor

This workbook has been designed to illustrate the process of forecasting the income and value of an investment property. Although its primary function
is to accompany the example in the text (Maegen's Manor), the worksheet is flexible enough to accommodate almost any income-producing real estate
investment, including non-residential properties. Note that the individual worksheets are integrated and that they build upon each other. Inputs need only
be made in yellow boxes; the inserted formulas will make all necessary calculations. More in-depth explanations of the numbers used here can be found
in chapters 6, 9, 10, 11, 12, 13, and 16.
Anticipated holding period: 6 (may be from 2 to 10 years)
Potential Gross Rent inputs: Units Monthly Rent Input in yellow cells only.
Type 1: Two-Bedroom 50 $858 (input for purchase price is on the Sale worksheet)
Type 2: One-Bedroom 150 $704
Type 3: Studio Units 80 $528
Square Feet Annual Rent / SF
Non-residential input:
0* 1 2 3 4 5
Increase in rents: 2.5% 5.0% 5.0% 3.5% 3.5% 3.5%
(to the following year) * fill in this box only if monthly rents above are current and need to be adjusted for the first year of operations
1 2 3 4 5
Estimated vacancy rates: (for each year) 7.5% 4.0% 4.0% 6.0% 6.0%
Other income: 4.7% (enter as a percentage of collectable rents)
Potential Gross Rent Estimate for first year:
Source: Dr. Greg Smersh, Florida State University
This workbook has been designed to illustrate the process of forecasting the income and value of an investment property. Although its primary function
is to accompany the example in the text (Maegen's Manor), the worksheet is flexible enough to accommodate almost any income-producing real estate
investment, including non-residential properties. Note that the individual worksheets are integrated and that they build upon each other. Inputs need only
be made in yellow boxes; the inserted formulas will make all necessary calculations. More in-depth explanations of the numbers used here can be found
Input in yellow cells only.
(input for purchase price is on the Sale worksheet)
Annual gross rent estimate:
6 7 8 9
* fill in this box only if monthly rents above are current and need to be adjusted for the first year of operations
6 7 8 9 10
6.0%
Potential Gross Rent Estimate for first year:
$2,288,900
$2,346,100
Operating Expenses (Chapter 6)
As discussed in the text, operating expenses for Maegen's Manor are expected to increase at an annual rate of 3.5% except for management expenses
(which are 5% of EGI), and property taxes (which are expected to increase by 25% in year 4).
Annual Operating Expense Increase: 3.5% Management Fee (% of EGI):
0* 1 2 3 4
Increase in property taxes: 25.0%
(to the following and continuing years) * fill in this box only if property taxes below need to be adjusted for the first year of operations
Potential Gross Rent
Less : Allowance for Vacancies
Plus : Other Income
Effective Gross Income
Current Expense Estimates:
Operating Expenses (from Table 5.6)
Management Fee (% of EGI)
Salary Expense
Utilities
Insurance
Supplies
Advertising
Maintenance & Repairs
Property Taxes
Net Operating Income (NOI)
Note: all numbers are annual and rounded to the nearest $100
300,000 $
197,100 $
105,300 $
35,500 $
21,000 $
32,000 $
181,900 $
As discussed in the text, operating expenses for Maegen's Manor are expected to increase at an annual rate of 3.5% except for management expenses
Input in yellow cells only.
Management Fee (% of EGI): 5.0%
5 6 7 8 9
* fill in this box only if property taxes below need to be adjusted for the first year of operations
Table 6.1 First-year Operating Forecast
Current Expense Estimates:
Note: all numbers are annual and rounded to the nearest $100
113,600
300,000
36,700
204,000
109,000
2,346,100 $
176,000
2,170,100 $
102,000
2,272,100 $
1,006,400
21,700
33,100
188,300
1,265,700 $
Operating Statement (Chapter 6)
The annual operating statement for all years of the anticipated holding period are shown below as well as the operating expense ratio for each year. Not that all
of the cells below contain formulas and changes should ONLY be made on the previous two worksheets.
Table 6.2 Operating Forecast
1 2 3 4 5
1. Potential Gross Rent 2,346,100 2,463,400 2,586,600 2,677,100 2,770,800
2. Vacancy Allowance 176,000 98,500 103,500 160,600 166,200
3. 2,170,100 2,364,900 2,483,100 2,516,500 2,604,600
4. Other Income 102,000 111,200 116,700 118,300 122,400
5. Effective Gross Income 2,272,100 2,476,100 2,599,800 2,634,800 2,727,000
6. Operating Expenses
7. Management Fee 113,600 123,800 130,000 131,700 136,400
8. Salary Expense 204,000 211,100 218,500 226,100 234,000
9. Utilities 109,000 112,800 116,700 120,800 125,000
10. Insurance 36,700 38,000 39,300 40,700 42,100
11. Supplies 21,700 22,500 23,300 24,100 24,900
12. Advertising 33,100 34,300 35,500 36,700 38,000
13. Maintenance & repairs 188,300 194,900 201,700 208,800 216,100
14. Property Taxes 300,000 300,000 300,000 375,000 375,000
15. Total Expenses 1,006,400 1,037,400 1,065,000 1,163,900 1,191,500
16. Net Operating Income 1,265,700 1,438,700 1,534,800 1,470,900 1,535,500
Table 6.3 Forecasted Operating Expense Ratios
1 2 3 4 5
44.3% 41.9% 41.0% 44.2% 43.7%
The annual operating statement for all years of the anticipated holding period are shown below as well as the operating expense ratio for each year. Not that all
of the cells below contain formulas and changes should ONLY be made on the previous two worksheets. No inputs on this worksheet.
6 7 8 9 10
2,867,800 0 0 0 0
172,100 0 0 0 0
2,695,700 0 0 0 0
126,700 0 0 0 0
2,822,400 0 0 0 0
141,100 0 0 0 0
242,200 0 0 0 0
129,400 0 0 0 0
43,600 0 0 0 0
25,800 0 0 0 0
39,300 0 0 0 0
223,700 0 0 0 0
375,000 0 0 0 0
1,220,100 0 0 0 0
1,602,300 0 0 0 0
6 7 8 9 10
43.2% 0.0% 0.0% 0.0% 0.0%
Mortgage Borrowing (Chapter 9)
For Maegen's Manor, a mortgage for $8 million is expected (based on roughly 70% LTV). Terms are 20 years with monthly amortization and an annual
interest rate of 8%. Inputs below calculate the annual debt service, portions due to interest and principal, and the mortgage balance for each year of the
anticipated holding period. Input in yellow cells only.
Mortgage Amount:
Mortgage Term: (enter in years) Mortgage calculator:
Interest Rate: (enter annual %) Monthly Debt Service:
Amortization: (annual = 1, monthly = 12) Annual Debt Service:
Annual Debt Service (ADS):
Table 9.6 Amortization Schedule
1 2 3 4 5 6
Interest paid 633,889 619,855 604,655 588,194 570,367 551,060
Principal paid 169,093 183,128 198,327 214,789 232,616 251,923
Total Debt Service 802,982 802,982 802,982 802,982 802,982 802,982
Mortgage Balance 7,830,907 7,647,779 7,449,451 7,234,663 7,002,047 6,750,124
8,000,000 $
12
20
8.00%
For Maegen's Manor, a mortgage for $8 million is expected (based on roughly 70% LTV). Terms are 20 years with monthly amortization and an annual
interest rate of 8%. Inputs below calculate the annual debt service, portions due to interest and principal, and the mortgage balance for each year of the
Monthly Debt Service:
Annual Debt Service:
Annual Debt Service (ADS): $803,000 (rounded)
7 8 9 10
0 0 0 0
0 0 0 0
0 0 0 0
0 0 0 0
66,915.21 $
802,982.47 $
Before-Tax Cash Flow (BTCF) (Chapter 9)
The next step in projecting an annual operating statement is to deduct the annual debt service (ADS) from NOI for all years of the anticipated holding period.
Note that all of the cells below contain formulas and changes should ONLY be made on the Intro, Expenses, and Mortgage worksheets.
No inputs on this worksheet.
Table 9.5 Projected Before-Tax Cash Flows from Operations
1 2 3 4 5
Potential Gross Rent 2,346,100 2,463,400 2,586,600 2,677,100 2,770,800
Vacancy Allowance 176,000 98,500 103,500 160,600 166,200
2,170,100 2,364,900 2,483,100 2,516,500 2,604,600
Other Income 102,000 111,200 116,700 118,300 122,400
Effective Gross Income 2,272,100 2,476,100 2,599,800 2,634,800 2,727,000
Operating Expenses
Management Fee 113,600 123,800 130,000 131,700 136,400
Salary Expense 204,000 211,100 218,500 226,100 234,000
Utilities 109,000 112,800 116,700 120,800 125,000
Insurance 36,700 38,000 39,300 40,700 42,100
Supplies 21,700 22,500 23,300 24,100 24,900
Advertising 33,100 34,300 35,500 36,700 38,000
Maintenance & repairs 188,300 194,900 201,700 208,800 216,100
Property Taxes 300,000 300,000 300,000 375,000 375,000
Total Expenses 1,006,400 1,037,400 1,065,000 1,163,900 1,191,500
Net Operating Income 1,265,700 1,438,700 1,534,800 1,470,900 1,535,500
Debt Service 803,000 803,000 803,000 803,000 803,000
Before-Tax Cash Flow 462,700 635,700 731,800 667,900 732,500
The next step in projecting an annual operating statement is to deduct the annual debt service (ADS) from NOI for all years of the anticipated holding period.
Note that all of the cells below contain formulas and changes should ONLY be made on the Intro, Expenses, and Mortgage worksheets.
6 7 8 9 10
2,867,800 0 0 0 0
172,100 0 0 0 0
2,695,700 0 0 0 0
126,700 0 0 0 0
2,822,400 0 0 0 0
141,100 0 0 0 0
242,200 0 0 0 0
129,400 0 0 0 0
43,600 0 0 0 0
25,800 0 0 0 0
39,300 0 0 0 0
223,700 0 0 0 0
375,000 0 0 0 0
1,220,100 0 0 0 0
1,602,300 0 0 0 0
803,000 0 0 0 0
799,300 0 0 0 0
Income Tax Issues (Chapter 10)
The next step in projecting an annual operating statement is to calculate taxes from operations for all years of the anticipated holding period. Again, changes
should ONLY be made on the Intro, Expenses, and Mortgage worksheets and in the yellow boxes below.
Marginal Tax Rate: 40% Input Input Cost
Depreciable Basis Recovery Period
Calcs for depreciation expense: /
Tax Calculations 1 2 3 4 5
Net Operating Income 1,265,700 1,438,700 1,534,800 1,470,900 1,535,500
- Interest Expense 633,900 619,900 604,700 588,200 570,400
- Depreciation 324,100 338,200 338,200 338,200 338,200
Taxable Income (Loss) 307,700 480,600 591,900 544,500 626,900
x Marginal tax rate 0.40 0.40 0.40 0.40 0.40
Income taxes 123,100 192,200 236,800 217,800 250,800
Table 10.2 Projected After-Tax Cash Flows from Operations (table is condensed - click Format / Row / Unhide to expand)
1 2 3 4 5
Potential Gross Rent 2,346,100 2,463,400 2,586,600 2,677,100 2,770,800
Vacancy Allowance 176,000 98,500 103,500 160,600 166,200
2,170,100 2,364,900 2,483,100 2,516,500 2,604,600
Other Income 102,000 111,200 116,700 118,300 122,400
Effective Gross Income 2,272,100 2,476,100 2,599,800 2,634,800 2,727,000
- Operating Expenses 1,006,400 1,037,400 1,065,000 1,163,900 1,191,500
Net Operating Income 1,265,700 1,438,700 1,534,800 1,470,900 1,535,500
- Debt Service 803,000 803,000 803,000 803,000 803,000
Before-Tax Cash Flow 462,700 635,700 731,800 667,900 732,500
- Income Taxes 123,100 192,200 236,800 217,800 250,800
After-Tax Cash Flow 339,600 443,500 495,000 450,100 481,700
9,300,000 27.5
The next step in projecting an annual operating statement is to calculate taxes from operations for all years of the anticipated holding period. Again, changes
should ONLY be made on the Intro, Expenses, and Mortgage worksheets and in the yellow boxes below. Input in yellow cells only.
Depreciation IRS Mid-month
Recovery Period Deduction Convention*
=
* applies to first and last year
6 7 8 9 10
1,602,300 0 0 0 0
551,100 0 0 0 0
324,100 0 0 0 0
727,100 0 0 0 0
0.40 0.40 0.40 0.40 0.40
290,800 0 0 0 0
(table is condensed - click Format / Row / Unhide to expand)
6 7 8 9 10
2,867,800 0 0 0 0
172,100 0 0 0 0
2,695,700 0 0 0 0
126,700 0 0 0 0
2,822,400 0 0 0 0
1,220,100 0 0 0 0
1,602,300 0 0 0 0
803,000 0 0 0 0
799,300 0 0 0 0
290,800 0 0 0 0
508,500 0 0 0 0
338,200 $ 324,100 $
Property Disposition (Chapter 11)
At some point in the future, a real estate investor may want to sell the property. Indeed, the analyst must estimate a future selling price to use valuation
methods such as NPV and IRR. Inputs below (yellow boxes only) are for both the purchase and sales prices, their associated costs, and tax rates.
Input in yellow cells only.
Purchase price: 11,444,500 Selling price: 17,800,000 Table 11.2 Estimated Income Tax Consequences
Transaction costs: 150,000 Selling costs: 890,000
Selling Price
Tax rate on capital gains: 20% - Adjusted Basis (from Table 11.1)
Tax rate on depreciation recapture: 25% Gain on Disposal
- Gain from depreciation recapture
Long-Term Capital Gain
Anticipated holding period: 6
Tax on depreciation recapture
Mortgage balance: 6,750,124 $ Tax on capital gain
(from Table 9.6) Total Tax Liability on Sale
Table 11.1 Estimate of Investor's Adjusted Tax Basis Table 11.3 Estimate of After-Tax Equity Reversion
Purchase Price 11,444,500 $ Selling Price
+ Transaction Costs 150,000 $ - Selling Costs
Initial Tax Basis 11,594,500 $ Net Sales Proceeds
- Cumulative Depreciation 2,001,000 $ - Mortgage Balance
Adjusted Basis Prior to Sale 9,593,500 $ Before-tax Equity Reversion
+ Selling Costs 890,000 $ - Taxes due on sale
Adjusted Basis at Time of Sale 10,483,500 $ After-Tax Equity Reversion
At some point in the future, a real estate investor may want to sell the property. Indeed, the analyst must estimate a future selling price to use valuation
methods such as NPV and IRR. Inputs below (yellow boxes only) are for both the purchase and sales prices, their associated costs, and tax rates.
Table 11.2 Estimated Income Tax Consequences
17,800,000 $
- Adjusted Basis (from Table 11.1) 10,483,500 $
7,316,500 $
- Gain from depreciation recapture 2,001,000 $
Long-Term Capital Gain 5,315,500 $
Tax on depreciation recapture 500,300 $
1,063,100 $
Total Tax Liability on Sale 1,563,400 $
Table 11.3 Estimate of After-Tax Equity Reversion
17,800,000 $
890,000 $
16,910,000 $
6,750,100 $
Before-tax Equity Reversion 10,159,900 $
1,563,400 $
After-Tax Equity Reversion 8,596,500 $
Ratio Analysis - Value (Chapter 12)
Ratios are widely used to gauge the reasonableness of relationships between various measures of value and performance.
Income multipliers express the relationship between market value and operating income. These multipliers can also be
used to estimate market value. Input in yellow cells only.
Income Multipliers
Gross Rent Multiplier: Market Price Gross Rents
11,444,500 / 2,346,100 =
Gross Income Multiplier: Market Price EGI
11,444,500 / 2,272,100 =
Net Income Multilier: Market Price NOI
11,444,500 / 1,265,700 =
Using Multipliers to Estimate Market Value
Gross Rent Multiplier Method: Gross Rents Input GRM
2,346,100 x 5.00 =
Gross Income Multiplier Method: EGI Input GIM
2,272,100 x 5.00
Net income Multilier Method: NOI Input NIM
1,265,700 x 9.00 =
Ratios are widely used to gauge the reasonableness of relationships between various measures of value and performance.
Income multipliers express the relationship between market value and operating income. These multipliers can also be
4.88
5.04
9.04
11,730,500 $
11,360,500 $
11,391,300 $
Ratio Analysis - Financial & Profitability (Chapter 12)
As shown in the text, ratio analysis also includes measures of financing ability (operating ratio, breakeven ratio, debt coverage
ratio, and loan-to-value ratio), and profitability (cap rate and equity dividend rate). Input in yellow cells only.
Financial Ratios
Operating Ratio: OE EGI
1,006,400 / 2,272,100
Break-even Ratio: (OE + ADS) EGI
1,809,400 / 2,272,100
Debt Coverage Ratio: NOI ADS
1,265,700 / 803,000
Loan-to-value (LTV) Ratio: Mortgage Market Price
8,000,000 / 11,444,500
Profitability Measures
Capitalization Rate: NOI Market Price
1,265,700 / 11,444,500
Using Cap Rate to Estimate Market Value: NOI Input cap rate
1,265,700 / 10.00%
Equity Dividend Rate: BTCF Initial Equity
(before-tax) 462,700 / 3,594,500
Equity Dividend Rate: ATCF Initial Equity
(after-tax) 339,600 / 3,594,500
As shown in the text, ratio analysis also includes measures of financing ability (operating ratio, breakeven ratio, debt coverage
Input in yellow cells only.
= 44%
= 80%
= 1.58
= 70%
= 11.06%
= 12,657,000 $
= 12.87%
= 9.45%
Discounted Cash Flow (DCF) Analysis (Chapter 13)
As discussed in the text, an internal rate of return (IRR) is the discount rate that will exactly equate the present value of a projected stream of cash flows
with an initial equity investment. Alternatively, subtracting a initial equity investment from the present value of projected cash flows (discounted at a given
discount rate) yields net present value (NPV). No inputs on this worksheet.
Anticipated holding period: 6 Selling Price:
- Selling Costs:
Purchase price: Net Sales Proceeds:
Transaction costs: - Mortgage Balance:
Initial Investment Basis: Before-tax Equity Reversion:
Mortgage: - Taxes due on sale:
Initial Equity: After-Tax Equity Reversion:
0 1 2 3 4 5 6 7 8 9 10
BTCF: 462,700 635,700 731,800 667,900 732,500 799,300 0 0 0 0
BTER: 0 0 0 0 0 10,159,900 0 0 0 0
Total: (3,594,500) 462,700 635,700 731,800 667,900 732,500 10,959,200 0 0 0 0
Before-tax IRR: 31.31%
0 1 2 3 4 5 6 7 8 9 10
ATCF: 339,600 443,500 495,000 450,100 481,700 508,500 0 0 0 0
ATER: 0 0 0 0 0 8,596,500 0 0 0 0
Total: (3,594,500) 339,600 443,500 495,000 450,100 481,700 9,105,000 0 0 0 0
After-tax IRR: 24.60%
11,594,500
17,800,000
890,000
16,910,000
6,750,100
10,159,900
11,444,500
150,000
1,563,400
8,596,500
8,000,000
3,594,500
Risk-Adjustment Methods (Chapter 16) Assumptions:
As discussed in the text, several different methods are Anticipated holding period: 6 Selling Price:
available to assess the risk inherent in any real estate - Selling Costs:
investment. This worksheet contains formulas to help Purchase price: Net Proceeds:
illustrate the methods. Input in yellow cells only. Transaction costs: - Mortgage Balance:
Initial Investment Basis: Before-tax Reversion:
Mortgage: - Taxes due on sale:
Initial Equity: After-Tax Reversion:
Payback Period
0 1 2 3 4 5 6 7 8 9 10
ATCF: 339,600 443,500 495,000 450,100 481,700 508,500 0 0 0 0
ATER: 0 0 0 0 0 8,596,500 0 0 0 0
Total: 3,594,500 339,600 443,500 495,000 450,100 481,700 9,105,000 0 0 0 0
Cummulative: 3,594,500 3,254,900 2,811,400 2,316,400 1,866,300 1,384,600 7,720,400 0 0 0 0
Initial Calc: 1 2 3 4 5 - - - -
Payback Period: 5.06 years
Sensitivity Analysis
Discount rate: 10.00% PV of Equity Note: discount rate applies to the calculations below as well.
Variation in NOI % change in Equity Value
Equity Value with - 10 % variation expected with + 10 % variation
Input % variation: 10.00% 5.61% 6,411,888 6,793,214 7,174,541
Variation in Sales Price with - 10 % variation expected with + 10 % variation
Input % variation: 10.00% 14.05% 5,838,689 6,793,214 7,747,740
Calculations for Sensitivity Analysis DO NOT CHANGE !!
Calcs for change in NOI:
After-Tax Cash Flow 415,570 529,770 587,080 538,390 573,850 604,630 0 0 0 0
After-tax Equity Reversion 0 0 0 0 0 8,596,500 0 0 0 0
Total Cash Flow 415,570 529,770 587,080 538,390 573,850 9,201,130 0 0 0 0
3,594,500
6,793,214 $
11,594,500
11,444,500
150,000
8,000,000
10,159,900
1,563,400
8,596,500
17,800,000
890,000
16,910,000
6,750,100
Change in Equity Value: 7,174,541 - 6,793,214 = 381,326
Calcs for change in Sales Price:
After-Tax Cash Flow 339,600 443,500 495,000 450,100 481,700 508,500 0 0 0 0
After-tax Equity Reversion 0 0 0 0 0 10,287,500 0 0 0 0
Total Cash Flow 339,600 443,500 495,000 450,100 481,700 10,796,000 0 0 0 0
Change in Equity Value: 7,747,740 - 6,793,214 = 954,525