Calculating return on real property. (evaluation) Don Cooley.
The Real Estate Analyzer, as its name does not imply, is a user-friendly program--so user-friendly that you can begin to use the program almost without referring to the manual.
When I received Real Estate Analyzer for review, I sat down and skimmed the manual to get a general feeling for the program and how it approached real estate investment analysis. It appeared to be a straightforward approach, so I put the manual down and booted the program. structure
The program comes on one disk that is not copy-protected. Howard Software Services say that they will allow you to make one copy for backup purposes and to make additional copies in case of damage to the previous copy. They say that they do this to eliminate the cost and time delay in obtaining backup copies. They then warn about copyright violations and ask you to show the same consideration by not abusing the privilege of copying. They will replace in original, damaged disk for a $15 service charge.
I think this is an excellent method of handling this problem. Certainly they have the customer's best interest at heart, and they are willing to rely on the integrity of their customers. I wish more software developers would take this attitude.
Since this type of package must change every time the tax laws change, an update service is a must. Howardsoft will update all registered owners of the software for a fee--currently $50.
The program starts with a menu that gives you a choice of performing a new analysis, generating reports from the old data on file, changing the disk defaults, preparing new storage disks, or deleting unwanted files. The analysis
The program steps you through the gathering of the information needed to do the analysis. This is done by sections which include general information, loan information, depreciation, income, expenses, inflation factors, tax rates, and selling costs.
All of the information can be recalled from a previous file stored on the disk, if you have done an analysis on the property before. Each section of the program starts by asking you if you want to change any of the information. If you do, it steps you through each question giving you a chance to verify or change each item. Then, at the end of each section, it again allows you a chance to review and change each item. Otherwise, you can move on to the next section.
General information includes year of purchase, purchase price, date of analysis, current market value, past loan reduction, and past cash flow. The last two items are important only when you are analyzing a property you currently own.
Loan information lets you enter up to ten loans that can be fully amortized, amortized with a balloon payment, interest only, or any other type of loan for which you can specify the principle and interest payments on a year-by-year basis. This last option is particularly useful in our current economic situation. It lets you choose the best of the many different financing plans being offered by banks and other lending institutions.
You may use up to ten different depreciation items. Each item has its own life, recapture rule, and type of depreciation, including the new Accelerated Cost Recovery System of the 1981 Economic Recovery Act.
The section on income allows you to enter up to 50 leases with the beginning and ending year of each lease and the scheduled monthly income. It also allows you to enter a percent of the scheduled income for a vacancy factor.
The main flaw I found in the program is in the expense section, which differs from commonly accepted practice. Usually expenses are expressed from commonly accepted practice. Usually expenses are expressed as a percentage of scheduled income. Every analysis I have seen, as well as the accepted methods of the National association of Realtors, uses this method. The real Estate Analyzer however, expresses the operating expenses as a percentage of the market value of the property. The only saving grace is that you can input the dollar amount for each expense and the program will figure the percentage for you.
However, when you have worked with percentages as a factor of the income, it is very disconcerting to change your thinking to accommodate a computer program. All real estate agents who work in investment properties know the average percentage of income for investment properties and can do an analysis based on these averages. For this reason, I think that the program is best suited to someone other than a professional real estate agent who specializes in investment properties.
One of the big pluses of the program is that it allows you to express, separately, inflation factors for the property value, operation expenses, rental income, and property taxes. These factors, many times, are different, and it is very handy to be able to enter them separately.
Another unique feature is that you can enter a money rate for any interest you receive on cash generated or a charge against any debt incurred by a negative cash flow. Then you can input anticipated tax rates for both ordinary income and capital gains tax. Finally, you enter the selling costs of the property. The Report
You can do a report from files on the disk or from the results of the new input. It can be printed in a report year-by-year for up to ten years. The report includes the following: pre-tax cash flow; after-tax cash flow; total return on investment (ROI); total internal rate of return (IRR); equity ROI; equity IRR; return on equity; conventional IRR; and financial management rate of return (FMRR).
The program provides several parameters to ensure compatibility between the software and the printer. You can set the margins, characters per line, and lines per page. You can initialize the printer to print in compressed mode, empha-sized type, double strike, or other modes if your printer has these capabilities.
You can format the report to have a title page and to print the background information and the assumptions for the analysis. You may also choose to print a heading at the top of each page and a separate page for each of the reports. The finished product is a very attractive report. documentation
The documentation includes an attractive, three-ring, 7" x 9", padded binder. The documentation is well written and easy to follow. However, I found myself having to page through the manual to find some answers because there is no index. An index certainly would make life much easier. The section on definitions of real estate investment terms is quite adequate.
In addition, there is a section on understanding investment analysis. Here the author attempts to give a short description of the different analyses performed, along with the formulas used to arrive at the results. Reference books are listed for those who want more details. This section is well done and provides an idea of what the different returns are all about. For the experienced person, it is a good short review. For the inexperienced, it is an adequate introduction.
The last section shows sample print-outs of the reports. These have been done with a dot-matrix printer, then reduced to half-size, making them very difficult to read.
Also included with the program is a demonstration on disk. Although I did not go through the demo first, I later wished I had--it would have saved some time Suggestions for Improvement
Everything is figured on a full year basis. If you were purchasing a property in the middle of a year, the program would not give you figures for the few remaining months. Although this is not a serious limitation, it would have been nice to be able to calculate partial years.
In the ROI analysis, the program shows the taxes on gains as a part of sales expense. Although ther isn't any question that the tax on the capital gains is a cost, it is not normally included as an expense of the sale.
Although the program must calculate the principle and interest on an amortized loan, it does not provide the monthly payment. It would help if the program would report the payment at the time the loan information is given and in the printed assumptions.
One of the problems in listing the rental income is that the program asks for the leases on the property. In the process, it asks for the ending date of the lease. If the lease has fewer than 10 months to go, the amount is dropped from the reports at the end of the lease term. There is no provision to include another lease when the current one expires.
In addition, the Real Estate Analyzer calculates the inflation factor for the total income each year, even though you may not have a cost of living increase built into the lease. A better way to handle this would have been to ask for the rentable square footage and the average rent per square foot. This would then give you a gross scheduled income to which you could apply the vacancy factor. If you used existing leases at the beginning and the building was not fully occupied at that time, you could be applying a vacancy factor to a building that was partially vacant.
With a full understanding of the limitations above, I suggest that this program would be very useful to someone who wants an estimate of return on property that is presently owned or being considered for purchase. It certainly would allow you to compare different properties and their returns prior to purchase. In the hands of a real estate agent, if would help show a client what he could expect as a return on his investment.
Both the Apple and IBM packages are identical in their operation and the reports they produce.
Products: Howard Software Services Real Estate Analyzer (computer program)