Analyzing Income Properties for a Profitable Investment

478 Pages·2008·1.42 MB·English

by  Joseph T. Sinclair

REAL
NUMBERS
N E W E D I T I O N
Analyzing Income Properties for
a Profitable Investment
Joseph T. Sinclair
.com
RealEstateInvestmentCenter
Other Books by Joseph T. Sinclair
First edition of Real Numbers published by
Richard D. Irwin, Inc.
Eight titles covering various aspects of Internet
technology written for lay people and published
by various national publishers.
Seven titles about eBay, two in several editions,
the “Smart Way” series, most written for eBay retailers,
published by AMACOM, the publishing division
of the American Management Association.
REAL NUMBERS
Analyzing Income Properties
for a Profitable Investment
New Edition
Joseph T. Sinclair
Real Estate Investment Press
Vallejo, California
This is a new edition of the book Real Numbers originally published by Richard
D. Irwin, Inc. in 1993 and now out of print.
Real Estate Investment Press is an imprint of Caithness Multimedia Publishing,
133 Sand Dollar Drive, Vallejo, California, USA.
The printed verson of this book is available from the Real Estate Investment
Center dot Com online at http://RealEstateInvestmentCenter.com
This publication is designed to provide accurate and authoritative information
in regard to the subject matter covered. It is published and sold with the under-
standing that the publisher is not engaged in rendering legal, accounting, real
estate, or other professional service. If legal advice or other expert assistance
is required, the services of a competent professional person should be sought.
ISBN: 978-1-886907-01-0 (PDF)
ISBN: 978-1-886907-00-3 (paperback)
LCCN: 2008932397
©2009 Joseph T. Sinclair. All rights reserved.
This is the Adobe Portable Document Format (PDF) version of Real Numbers
New Edition. This version of this publication may not be reproduced, stored in
a retrieval system, or transmitted in whole or in part, in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise, with-
out the prior written consent of Joseph T. Sinclair except as provided in the fol-
lowing license. A license is hereby granted to view, copy, and distribute the
PDF version of this work, and only the PDF version. It is expressly prohibited to
print the PDF version, copy content from it, or sell it. It is further expressly pro-
hibited to change content in it, comment in it, change access to it, or otherwise
alter the PDF file, the content in it, or the file name of the PDF file. Violation of
this copyright is subject to the US Code, Title 17.
As the PDF version of Real Numbers New Edition is provided free to the public,
please respect the copyright and license.
First version 20081001
Current version 20081015
Digital signature:
To my wife Lani Jan Wallin Sinclair, my daughter Brook Jaclyn
Sinclair, and my son Thomas Frederick Jack Sinclair.

Contents
Preface ..............................................................................xxiii
Acknowledgments .............................................................xxvii
Introduction ............................................................................1
Investment Analysis .................................................................2
But Wait ! ................................................................................2
Special Book Format ..............................................................4
Standard Analysis Format .....................................................4
Confidence ..............................................................................6
The Beginning of the Book ....................................................7
Four Financial Reports ..........................................................7
Income & Expense Statement ..............................................10
The Future ............................................................................10
Pro Forma .............................................................................11
Points of View ........................................................................11
Owner-Seller and Property Manager .................................12
History ..................................................................................12
Owner’s Statement ..............................................................12
Reconstructed Statement ....................................................12
Future Performance ............................................................12
Seller’s Pro Forma ...............................................................13
VII
VIII REAL NUMBERS
Buyer-Investor and Lender .................................................13
Investor .................................................................................13
Buyer’s Pro Forma ..............................................................15
Real Estate Professional .......................................................15
The Property .........................................................................17
Shading .................................................................................18
Subjective Investor ...............................................................19
Internal Revenue Service (IRS) ...........................................20
The Book’s Point of View ....................................................20
Examples ................................................................................21
The Quest for Accuracy ........................................................23
Forecast Numbers ................................................................24
Tax .........................................................................................25
What Year? ...........................................................................26
Common Sense ....................................................................26
Summary ................................................................................27
Part I Income & Expense Statement ...................................29
1. Potential Rental Income ...................................................31
Introduction ...........................................................................32
Points of View ........................................................................32
Market Data ...........................................................................32
Apartments .............................................................................32
Rent-up ..................................................................................33
Current Rents .......................................................................34
Timing ...................................................................................35
Incentives ..............................................................................37
Offices .....................................................................................38
Every Lease ...........................................................................39
Rent Concessions ..................................................................39
Shopping Centers ..................................................................41
Other Rent ..............................................................................43
Reimbursed Expenses ............................................................43
Deposits ..................................................................................44
Lease Clauses .........................................................................45
Absorption ..............................................................................45
Small Investments .................................................................45
Summary ................................................................................46
2. Vacancy & Credit Loss .....................................................47
Vacancy ...................................................................................48
Credit Loss .............................................................................48
CONTENTS IX
Determining a Vacancy Rate ................................................49
Calculating a Percentage Vacancy...................................... 49
Rate Change ..........................................................................50
Shopping Centers .................................................................50
An Arbitrary Standard ..........................................................50
Market Vacancy ....................................................................51
Summary ................................................................................52
3. Effective Rental Income ...................................................53
4. Other Income ...................................................................55
Definition by Example ..........................................................56
Laundry .................................................................................56
Parking Spaces ......................................................................56
Convenience Store ................................................................56
Executive Suites ....................................................................57
Hotel ......................................................................................57
Other Income Category .......................................................58
Reimbursed Expenses ............................................................58
Before or After? ......................................................................58
The Standard View ..............................................................59
Another View ........................................................................59
Interest ....................................................................................61
Summary ................................................................................61
5. Gross Operating Income ..................................................63
6. Operating Expenses .........................................................65
Cases .......................................................................................66
Not Included ..........................................................................67
Annual Property Operating Data (APOD) .........................68
Real Estate Taxes ..................................................................70
Personal Property Taxes ......................................................70
Property Insurance ...............................................................71
Off-Site Management ..........................................................71
Payroll (On-Site Personnel) ................................................71
Expenses – Benefits ..............................................................72
Taxes/Workers’ Compensation ...........................................72
Repairs and Maintenance ....................................................72
Utilities ..................................................................................72
Accounting and Legal ..........................................................73
Real Estate Leasing Commissions (no longer printed) ....73
Licenses/Permits ...................................................................74
Advertising ............................................................................74
Supplies .................................................................................75
X REAL NUMBERS
Miscellaneous (no longer printed) ......................................75
Micellaneous Contract Services ..........................................75
Other Categories ..................................................................76
Percentage Estimate of Expenses .........................................76
Summary ................................................................................76
7. Net Operating Income .......................................................77
The Starting Point .................................................................78
Uses .........................................................................................79
Summary ................................................................................80
Part II Taxable Income Analysis .........................................81
8. Interest Expense ...............................................................85
Interest Only Loan ................................................................86
Principal Payment Loan .......................................................86
Amortized Loan .....................................................................87
One-Payment Loan ...............................................................88
Adjustable Rate Mortgages ...................................................89
Negative Amortization Loan ................................................90
Participation Loan .................................................................91
Irregular Payment Loan ........................................................92
Loan Analysis .........................................................................93
Amortization of Loan Points ...............................................93
Imputed Interest ...................................................................94
Prepaid Intrest ......................................................................94
Summary ................................................................................94
9. Cost Recovery ..................................................................95
Allocations ..............................................................................96
Improvements and Land .....................................................96
Personal Property .................................................................97
Depreciation ...........................................................................98
Cost Recovery for Improvements ........................................98
Cost Recovery for Personal Property ..................................98
Capital Additions and Replacements .................................98
Basis .......................................................................................98
Recapture ...............................................................................99
Amortization Items ..............................................................99
Summary ................................................................................99
10. Nonoperating Expenses ................................................101
What Expenses? ...................................................................102
Ground Lease Rent ..............................................................103