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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
1992 $1,316 $205 $1,111 -$270 -$307 -10.5%
1993 $6,600 $1,731 $4,869 -$491 $332 11.4%
1994 $6,600 $1,867 $4,733 -$388 $554 19.0%
1995 $6,600 $1,892 $4,708 -$484 $262 9.0%
1996 $6,900 $2,053 $4,847 -$531 $94 3.2%
1997 $6,900 $2,581 $4,319 -$533 $32 1.1%
1998 $6,957 $2,192 $4,765 -$268 $656 22.5%
1999 $7,094 $3,510 $3,584 -$567 $43 1.5%
2000 $7,026 $2,029 $4,997 -$136 $1,109 38.0%
2001 $7,365 $2,318 $5,047 -$85 $1,196 41.0%
2002 $8,059 $2,291 $5,768 -$18 $1,320 45.2%
2003 $7,735 $4,013 $3,722 -$522 -$27 -0.9%
2004 $8,785 $3,062 $5,723 $224 $1,836 62.9%
2005 $8,704 $4,140 $4,564 -$54 $1,060 36.3%
2006 $8,575 $3,848 $4,727 $45 $1,252 42.9%
2007 $10,145 $4,007 $6,138 $501 $2,354 80.6%
2008 $8,834 $7,510 $1,324 -$786 -$1,031 -35.3%
Total $124,195 $49,249 $74,946 -$4,363 $10,736 367.6%

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:

Year Amount
1992 -$3,228
1993 $332
1994 $554
1995 $262
1996 $94
1997 $32
1998 $656
1999 $43
2000 $1,109
2001 $1,196
2002 $1,320
2003 -$27
2004 $1,836
2005 $1,060
2006 $1,252
2007 $2,354
2008 $67,306
IRR 27%

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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Joe Manausa is a real estate blogger, a real estate investor and the Broker and Co-Owner of Joe Manausa Real Estate. He can be reached via e-mail through the Tallahassee Real Estate Website or catch his latest writings on the Tallahassee Florida Real Estate Blog , or by calling (850) 386-2001.

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Discussion

#1 By Joe Manausa at 7/11/2017 3:48 AM

Thanks Tony. It's funny, but most people who hold real estate long-term forget to "see how good" they are doing, because they are getting cash flow and seeing long-term value growth. This just puts a number on it.

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