Real Estate Investment Analysis
Last week, I wrote a blog about a great investment my brother Mike purchased in 1991 in Richview Park. If you did not get a chance to check it out, I would recommend you click here to read about Richview Park townhomes as the lead-in to this real estate investment analysis. He has since provided me all of his operating data since the day that he purchased his townhouse in Richview Park.
As a quick summary, we have seen property values grow in Richview Park over the past 17 years, though prices have softened in the past two years. The following graph shows all arms-length transactions in Richview Park through July 2009.
Richview Park Townhome Analysis
The following table shows information gathered by my brother over 18 years he has owned the property. In order to simplify the Richview Park analysis, we used mid-year convention on expenses allocation. Additionally, we assumed that he bought it for investment, though he lived in it the first year, thus we measured cash flows from the time he "placed it into operation" as an investment.
The following terms are used in the table:
- EBITDA - represents Earnings Before Interest, Taxes, Depreciation & Amortization (cash flow)
- Taxes - Federal Income Taxes
- CFAT - Cash Flow After Tax (Income Tax)
- Cash Flow ROI (Current year's cash flow Return on Investment)
|Year||Income||Expenses||EBITDA||Taxes||CFAT||Cash Flow ROI|
Measuring Internal Rate Of Return (IRR) In Real Estate Analysis
The final step is to put all of our information together to calculate an Internal Rate of Return for the real estate investment in Richview Park. To do this, we must add what he paid as his down payment and closings costs (acquisition costs) as well as his proceeds had he sold it at the end of last year. Both of these were added to generate the following table of information:
Thus far, Mike has seen a 27% Internal Rate of Return, after tax! I suspect this is performing better than most of his retirement funds/stock market funds (but I haven't asked him). Remember, this is after the taxes have been taken, he has seen an annual rate of return of 27%! Not too bad compared to some of the other market performances I've read about. We always knew Mike was the smart one in the family!
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