$2.00 real estate DQ5B
Discuss the major factors governing the relative profitability of a real estate investment.
Preview: ... ored more fully in subsequent chapters. CHAPTER OUTLINE A. Ratio Analysis 1. Ratios are widely employed to gauge the reasonableness of relationships between various measures of value and performance. They include income multipliers and financial ratios . 2. Income Multipliers express the relationship between price and either gross or net income. They do not serve as ample tools of analysis in isolation, but can play a valuable role as preliminary filters. Multiplier analysis permits obviously unacceptable opportunities to be weeded out swiftly and inexpensively. To use multiplier analysis as a filter, first determine the relationship prevailing in the market area of interest for properties comparable to that being investigated. Then automatically reject all opportunities with multipliers which exceed this benchmark figure. Opportunities passing the preliminary screening test are subjected to further analysis. a. Gross income multipliers , also often referred to as gross rent multipliers , reflect the relationship between a property's price and its potential or effective gross income. The effective gross income multiplier in Example 13.1 is: Multiplier = Market Price/Effective Gross Income = $100,000/$25,000 = 4 b. Net income multipliers are calculated in the same fashion. They differ only in that net income is employed as a divisor instead of gross income. Because substantial research may be necessary to determine the appropriate measure of net operating income, gross income multiplier analysis is generally the more useful profitability measure. In Example 13.1, the net income multiplier is: Multiplier = Price/Net Operating Income = $100,000 / $12,000 = 8.33 3. Financial ratio analysis is frequently employed to facilitate inter-property comparisons. Commonly encountered examples include the operating ratio , the break-even ratio , and the debt coverage ratio . a. The operating ratio is the percentage of gross income consumed by operating expenses. It will be lower for relatively more efficient properties. However, the operating ratio can be misleading because it reflects in part the efficiency of management as we ...
The full tutorial is about 1538 words long .