This episode of the Investing Advantage Podcast examines how to calculate the worth of a real estate development project. This episode explores the seven-step process for calculating a back-of-the-envelope (BOE) analysis to evaluate a new townhouse project. Learn about key terms such as cap rate, debt cover ratio, and cash on cash return and how to use leverage to maximize returns. Receive tips on hiring consultants and understand return expectations as well as testing assumptions and understanding risk profiles. Tune in now to get the advice you need for investing in commercial real estate!   [00:00 - 07:53] Calculating Your Return on a Townhouse Development • Cap rate is the return you receive if you purchase a property all cash • Debt cover ratio is your NOI divided by principle and interest payments • Cash on cash return is based on whether or not you have leverage debt or no debt • Factors that influence cap rates include risk, future upside, and future downside • Debt to yield ratio is helpful to understand the perspective of a bank   [07:53 - 15:32] Calculating a Five-Minute Back of the Envelope for a Townhouse Development Project • Cap rate is calculated by dividing the NOI by the property value • Debt to yield is calculated by dividing the income by the debt given • The art of evaluating properties comes with experience and understanding of the market • Calculating a five minute BOE involves seven steps such as purchase price, NOI, debt, equity, free cash flow, ROI and principle paydown   [15:33 - 23:09] Understanding the Impact of Leverage on Returns • Small changes in interest rates, cap rates and rents can affect the valuation significantly • Run the numbers first before buying land to understand how much you can pay for it   [23:10 - 28:55] Taking the Next Step in Commercial Real Estate Investing • Understand return expectations and risks associated with the project • Engage a contractor, lender, commercial broker and leasing agent • Use financial calculator or app to calculate costs and revenue • Build a team of professionals who are committed to the project • Test assumptions and understand risk profile • Get clarity on cash on cash basic metrics • Understand discount rates and IRRs   You can connect with me on LinkedIn, follow me on Twitter, and watch my videos on YouTube. If you want to go even deeper into the world of commercial real estate, head over to Shane Melanson, a roadmap to investing in commercial real estate! Get my book Club Syndication - How The Wealthy Invest Their Money     LEAVE A REVIEW + help someone invest in commercial real estate with confidence by sharing this episode or clicking here to listen to our previous episodes.         Follow The Game for Real Estate Developers & Investors Podcast on all Streaming platforms. Deezer, Apple Podcasts, Google Podcasts, Spotify, or visit our YouTube Channel.       Tweetable Quotes: "There's like a science and an art. Today I'm really just focused on the science which is just the numbers. The art is evaluating the assumptions because as you'll see there's many assumptions. I'm only pointing out a few because literally this is something that takes years to really master." - Shane Melanson

Ver todos los episodios