Yield (Part 2) Internal Rate of Return
Measures of return such as gross rent multiplier, capitalization rate and cash-on-cash consider only the yield from incremental cash flows during the period of ownership of a property. After the first period of ownership they are no longer valid; because some of the original investment has either been received or more money has been added to the investment. These measures also overlook the value of the property. At any time during the ownership of a property, the owner has the option of selling the property and receiving a profit or loss thereon.
In the stock market, one can check the prices on a moment-to-moment basis and know the value of the stock. Real estate is not so simple. Even with an appraisal we may never be sure of the value. In order to evaluate an investment fully, projections must me made using some method concerning both income and eventual sale price. These projections are made using a mixture of science and magic. As both of the arts are inexact at best, I will leave that discussion for a day when I’ve had a few shots of tequila.
What is important is that investors do make projections in order to determine probable future yield. These projections are used to determine the internal rate of return on a property. In determining the internal rate of return the cash flows are projected and accumulated at regular intervals. The standard interval is one year. These cash flows are numbered. The initial cash flow, which is the investment amount (price) of the investment, is numbered “0” and it must be a negative number. The other cash flows are numbered consecutively. They can be positive or negative numbers. The last cash flow will include the proceeds from the sale of the hypothetical sale of the property.
The calculation of internal rate of return or “IRR” can be made using several calculators or spreadsheet programs. An email to me requesting an excel analysis template will get a useful little program for doing this calculation. What the IRR actually measures is the rate at which all cash flows discounted back to period “0” would equal “0”. If this is making your head hurt, stop reading. You can just use the template. This is done through a process called iteration. The calculator or spreadsheet “guesses” at a number and does the calculations. It adjusts the number based on whether it is too high or too low and tries again until it finds the right number.
In the next post the problems of IRR will be discussed.
David Segrest is a REALTOR in Charlotte, NC
David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
Serving the world in the Carolinas, Serving the Carolinas in the World
Thursday, June 28, 2007
Wednesday, June 27, 2007
Yield (Part 1)
Yield (Part 1)
There are various ways that investors measure yield. The oldest and simplest is probably the “gross rent multiplier”. This method, while very unsophisticated, is great for comparing properties that are almost alike. The purchase price is divided by the annual rent. The investor determines that the property will return the purchase price in a certain number of years. Expenses are not taken into consideration.
A similar but more sophisticated method is the “capitalization rate” or “cap rate”. In this method the net operating income is divided by the purchase price. The percentage returned is called the “capitalization rate”. The net operating income is the income from the property minus the operating expenses. Operating expenses are the expenses that are involved with the operation of the property as a rental. The mortgage payment or debt service is not considered as an operating expense. In a pure net lease the tenant pays all of the expenses. In this case the “gross rent multiplier” is as good as the “capitalization rate”. The advantage of capitalization rate is its nearly universal use and its understanding by most investors. In a property with expenses, the “capitalization rate” is superior to the gross rent multiplier.
The two methods above measure the return on the property. They do not take into consideration the investment itself. Leverage is often an important tool in any investment. To consider the return on the investment the “cash-on-cash” method is sometimes used. In this method, the cash invested is divided by the annual projected cash flow of the investment. This percentage allows comparison of two different types of property or different amounts of leverage used.
All of the methods above measure the return on an investment. None of them measure the return of the investment. To do this the sale value of the investment after a period of time has to be considered. Also there are frequently negative or uneven cash flows during the holding period. To account for these things the “Internal Rate of Return” is used. The next blog will address the “Internal Rate of Return”.
David Segrest is a REALTOR in Charlotte, NC
David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
Serving the world in the Carolinas, Serving the Carolinas in the World
There are various ways that investors measure yield. The oldest and simplest is probably the “gross rent multiplier”. This method, while very unsophisticated, is great for comparing properties that are almost alike. The purchase price is divided by the annual rent. The investor determines that the property will return the purchase price in a certain number of years. Expenses are not taken into consideration.
A similar but more sophisticated method is the “capitalization rate” or “cap rate”. In this method the net operating income is divided by the purchase price. The percentage returned is called the “capitalization rate”. The net operating income is the income from the property minus the operating expenses. Operating expenses are the expenses that are involved with the operation of the property as a rental. The mortgage payment or debt service is not considered as an operating expense. In a pure net lease the tenant pays all of the expenses. In this case the “gross rent multiplier” is as good as the “capitalization rate”. The advantage of capitalization rate is its nearly universal use and its understanding by most investors. In a property with expenses, the “capitalization rate” is superior to the gross rent multiplier.
The two methods above measure the return on the property. They do not take into consideration the investment itself. Leverage is often an important tool in any investment. To consider the return on the investment the “cash-on-cash” method is sometimes used. In this method, the cash invested is divided by the annual projected cash flow of the investment. This percentage allows comparison of two different types of property or different amounts of leverage used.
All of the methods above measure the return on an investment. None of them measure the return of the investment. To do this the sale value of the investment after a period of time has to be considered. Also there are frequently negative or uneven cash flows during the holding period. To account for these things the “Internal Rate of Return” is used. The next blog will address the “Internal Rate of Return”.
David Segrest is a REALTOR in Charlotte, NC
David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
Serving the world in the Carolinas, Serving the Carolinas in the World
Tuesday, June 26, 2007
Investing in International Real Estate
Investing in International Real Estate
There are several reasons why people invest in international real estate. One of the primary principles of investment is that “Capital flows to the highest yield with the lowest risk”. We see this principle at work in the reasons for cross border real estate investing. Some people invest to avoid risk in their home country. This may be economic, political or social risk. This money is usually called “flight capital” People living in a risky environment want to keep their money safe so they invest in another country.
Some people just do not want to put all of their eggs in one basket. These people are always looking for secure investments in other countries. When events cause problems or currency exchange rates are not advantageous these investors can draw income from the investments that are producing well and leave their other investments intact until conditions improve.
Currency trends are also a major reason for investing abroad. The trends between most of Latin America and the United States generally favor investments in the USA by Latins. The trends between the United States and the European Union have generally favored investments in Europe by people from the USA.
Currency trends can be tracked by way of the website http://www.oanda.com . Just find the two currencies that are to be compared and put today’s date in the window. After getting this exchange rate, enter past dates at regular increments to track the trends. Rates usually fluctuate in both directions over the short term. On a period of several years a trend will normally manifest in one direction. The trend will allow computation of projections in yield based on currency trends.
Investors project yields using various methods. In international transactions these yields have to be adjusted for currency fluctuations and country risk as well as the normal property considerations. My next post will discuss the methods of projecting yield and adjusting projections for risk.
David Segrest is a REALTOR in Charlotte, NC
David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
Serving the world in the Carolinas, Serving the Carolinas in the World
There are several reasons why people invest in international real estate. One of the primary principles of investment is that “Capital flows to the highest yield with the lowest risk”. We see this principle at work in the reasons for cross border real estate investing. Some people invest to avoid risk in their home country. This may be economic, political or social risk. This money is usually called “flight capital” People living in a risky environment want to keep their money safe so they invest in another country.
Some people just do not want to put all of their eggs in one basket. These people are always looking for secure investments in other countries. When events cause problems or currency exchange rates are not advantageous these investors can draw income from the investments that are producing well and leave their other investments intact until conditions improve.
Currency trends are also a major reason for investing abroad. The trends between most of Latin America and the United States generally favor investments in the USA by Latins. The trends between the United States and the European Union have generally favored investments in Europe by people from the USA.
Currency trends can be tracked by way of the website http://www.oanda.com . Just find the two currencies that are to be compared and put today’s date in the window. After getting this exchange rate, enter past dates at regular increments to track the trends. Rates usually fluctuate in both directions over the short term. On a period of several years a trend will normally manifest in one direction. The trend will allow computation of projections in yield based on currency trends.
Investors project yields using various methods. In international transactions these yields have to be adjusted for currency fluctuations and country risk as well as the normal property considerations. My next post will discuss the methods of projecting yield and adjusting projections for risk.
David Segrest is a REALTOR in Charlotte, NC
David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
Serving the world in the Carolinas, Serving the Carolinas in the World
Monday, June 25, 2007
Retire Abroad
Retire Abroad
Some people retire abroad simply because another country has “caught their fancy”. Other people retire because what may be a barely sufficient income in their home country can let them live in luxury in another country. Depending on conditions in the home country, the real estate in another country may or may not be a bargain. There are many issues to consider.
Sometimes the cost of servants is really cheap. One may be able to have a housekeeper and a gardener for about the same price as one would pay for the homeowners dues in a condo. Be very careful about employment requirements in other countries. In some countries the cost of discharging a worker can be a years salary or more. Some places require that an employer provide pensions or other benefits. Having servants is not an optional item in countries where a property cannot be left unattended. There are many places where this is the case.
Receiving retirement income can also be a problem in some cases. One should be absolutely sure that their retirement income will continue if they expatriate. The mechanisms for receiving the payments should be examined carefully as well. Provisions must also be made for medical care. When figuring the comparative costs of living in one place or another be sure to consider travel to visit children, parents or other relatives.
Taxes are always a major consideration when living abroad. Will taxes be payable in more than one country? Is there a tax treaty between the countries? Many countries offer special incentives to retirees. The retirees are beneficial to the economy because they add contributions to the local cash flow without taking a job from a local person.
These are only a few of the considerations one needs to make when expatriating. A carefully planned move can greatly improve one’s lifestyle. A poorly planned adventure can possibly have the opposite effect.
David Segrest is a REALTOR in Charlotte, NC
David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
Serving the world in the Carolinas, Serving the Carolinas in the World
Some people retire abroad simply because another country has “caught their fancy”. Other people retire because what may be a barely sufficient income in their home country can let them live in luxury in another country. Depending on conditions in the home country, the real estate in another country may or may not be a bargain. There are many issues to consider.
Sometimes the cost of servants is really cheap. One may be able to have a housekeeper and a gardener for about the same price as one would pay for the homeowners dues in a condo. Be very careful about employment requirements in other countries. In some countries the cost of discharging a worker can be a years salary or more. Some places require that an employer provide pensions or other benefits. Having servants is not an optional item in countries where a property cannot be left unattended. There are many places where this is the case.
Receiving retirement income can also be a problem in some cases. One should be absolutely sure that their retirement income will continue if they expatriate. The mechanisms for receiving the payments should be examined carefully as well. Provisions must also be made for medical care. When figuring the comparative costs of living in one place or another be sure to consider travel to visit children, parents or other relatives.
Taxes are always a major consideration when living abroad. Will taxes be payable in more than one country? Is there a tax treaty between the countries? Many countries offer special incentives to retirees. The retirees are beneficial to the economy because they add contributions to the local cash flow without taking a job from a local person.
These are only a few of the considerations one needs to make when expatriating. A carefully planned move can greatly improve one’s lifestyle. A poorly planned adventure can possibly have the opposite effect.
David Segrest is a REALTOR in Charlotte, NC
David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
Serving the world in the Carolinas, Serving the Carolinas in the World
Saturday, June 23, 2007
Owning a Vacation Home Abroad
Owning a Vacation Home Abroad
What is your dream? Snow covered mountains, blue ocean waters, huge game fish or hunting trophies, golf, other recreational activities. All of these are good reasons to buy or lease a home abroad. Sometimes the real estate in exotic locations is even less expensive than similar properties at home. Sometimes the potential for appreciation is greater. Sometimes the location itself can just not be duplicated anywhere else in the world. Occasionally a vacation home may serve the purpose of a retirement home later.
Whatever the purpose for buying, there are multiple issues to consider. Ownership and user requirements and systems are different in almost every country. In some countries one can own the improvements and not the land. In some countries it is necessary to form an artificial entity or trust of some type to take title to the property. In many areas it will be necessary to have someone occupy the house when the owner is absent. If the home will be rented when the owner is not using it, a manager will be needed. Tax considerations get more complicated when national borders are crossed. It is always an excellent idea to use a competent local professional when purchasing or renting a property abroad.
Finding a competent professional is not as easy as it might seem. In many countries, real estate practitioners are not licensed or regulated in any way. An incompetent or unscrupulous agent can be worse than no agent at all. How can one find a good agent in another country?
David Segrest is a REALTOR in Charlotte, NC
David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
Serving the world in the Carolinas, Serving the Carolinas in the World
What is your dream? Snow covered mountains, blue ocean waters, huge game fish or hunting trophies, golf, other recreational activities. All of these are good reasons to buy or lease a home abroad. Sometimes the real estate in exotic locations is even less expensive than similar properties at home. Sometimes the potential for appreciation is greater. Sometimes the location itself can just not be duplicated anywhere else in the world. Occasionally a vacation home may serve the purpose of a retirement home later.
Whatever the purpose for buying, there are multiple issues to consider. Ownership and user requirements and systems are different in almost every country. In some countries one can own the improvements and not the land. In some countries it is necessary to form an artificial entity or trust of some type to take title to the property. In many areas it will be necessary to have someone occupy the house when the owner is absent. If the home will be rented when the owner is not using it, a manager will be needed. Tax considerations get more complicated when national borders are crossed. It is always an excellent idea to use a competent local professional when purchasing or renting a property abroad.
Finding a competent professional is not as easy as it might seem. In many countries, real estate practitioners are not licensed or regulated in any way. An incompetent or unscrupulous agent can be worse than no agent at all. How can one find a good agent in another country?
David Segrest is a REALTOR in Charlotte, NC
David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
Serving the world in the Carolinas, Serving the Carolinas in the World
Wednesday, June 20, 2007
What and Why?
International Real Estate
What & Why?
More and more individuals, investors and real estate agents are getting interested in international real estate. What is it? Why should one participate?
Whenever a person or organization from one country participates in a real estate transaction in another country this is an international real estate transaction. There are many reasons to participate.
For individuals the transaction could be as simple as buying or renting a vacation home. Often retirees find that the income that gives them a modest retirement in their home country will allow them to live at a much higher level abroad. Investors try to diversify their risk and take advantage of currency trends. Often when political or economic conditions become uncomfortable in a home country, it can be advantageous to move ones assets to another country. Real estate is a natural asset for long-term placement of assets. Real estate agents are looking to take advantage of their contacts and make more commissions. This business also offers tax deductions for international travel.
David Segrest is a REALTOR in Charlotte, NC
David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
Serving the world in the Carolinas, Serving the Carolinas in the World
What & Why?
More and more individuals, investors and real estate agents are getting interested in international real estate. What is it? Why should one participate?
Whenever a person or organization from one country participates in a real estate transaction in another country this is an international real estate transaction. There are many reasons to participate.
For individuals the transaction could be as simple as buying or renting a vacation home. Often retirees find that the income that gives them a modest retirement in their home country will allow them to live at a much higher level abroad. Investors try to diversify their risk and take advantage of currency trends. Often when political or economic conditions become uncomfortable in a home country, it can be advantageous to move ones assets to another country. Real estate is a natural asset for long-term placement of assets. Real estate agents are looking to take advantage of their contacts and make more commissions. This business also offers tax deductions for international travel.
David Segrest is a REALTOR in Charlotte, NC
David S. Segrest, CIPS, CCIM, TRC, CEA
david@segrestrealty.com
http://www.segrestrealty.com
Serving the world in the Carolinas, Serving the Carolinas in the World
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