How can I determine if a property is a good investment? (Valuate® tool)

RPR has partnered with Valuate® to offer an analysis tool that allows you to evaluate a property to see if it is a good investment. Multiple scenarios can be run and shared, allowing you and your client to change the variables and analyze different potential outcomes. Valuate® helps you and your client understand the risks and returns of a purchase. The Valuate® tool is available on the Property Summary of both commercial and residential properties.

  • Determine if a property should be kept as a long term hold or flipped.

  • Analyze the purchase and renovation of a multi-family property.

  • Examine the possibility of a land development project.

Although Valuate® is provided as a free benefit to RPR users, RPR is not responsible for information or conclusions that may be reached using the tool. Also note that RPR passes through to Valuate® only the data needed to perform this analysis.

Step-by-Step Instructions

Click on the tabs below to see step-by-step instructions.

Step 1

Access on the Property Summary

On the Property Summary of either a residential or commercial property, find the Valuate logo (in the right panel), then click the Analyze Property button.

Continue

Next, click the Continue button

Step 2

Enter Inputs

1

– Choose Flip or Long-Term Hold, then choose Quick Load or Detail Load  (orange color indicates which option is selected).

2

– If you chose Quick Load (most popular choice):

  • Enter a value for Year 1 Effective Gross Revenue (annual potential rental income, plus any other annual income, minus any annual vacancy loss).
  • Enter a value for Year 1 Operating Expenses and Reserves (total of operating expenses, taxes, capital reserve contributions, etc).

– If you chose Detail Load, paste your monthly unlevered cash flow projections in the box provided.

– Change any other variables or leave the default values and make changes later in the analysis.

3

Click the Submit button.

Step 3

– Change the variables in blue to explore different scenarios.

– Click the Share tab to get a link that you can include in an email to your client

– Select the File tab to start a new file, save a scenario, compare files, or export a file.

– To delete a file, hover your cursor over Welcome your name, then click Manage Files. Select the trashcan next to the file you would like to delete.

Home tab (Unlevered Analysis)

Each link below represents a section found in the Home tab. Click on the links to see definitions relevant to each section.

Cash Flow Before Debt Service = Net Operating Income – Total Leasing & Capital Costs

Cap Rate = the % yield by which the NOI is divided to determine property Gross Valuation for sale. For example, a $1MM NOI divided by an 8% cap rate equals a $12.5MM property value.

Gross Valuation = current year’s Net Operating Income / current year’s Cap Rate

Unlevered Income Return = current year’s Net Operating Income / Cumulative Capital Costs

Unlevered Cash Return = current year’s Operating Net Cash Flow / Cumulative Capital Costs

Unlevered IRR = Internal Rate of Return, on an all-cash purchase basis, assuming sale at the end of the current year, where the IRR is measured using monthly cash flows

Unlevered Cash Flow = net cash flow assuming an all-cash purchase of the property (i.e., no use of debt financing)

Operating Cash Flow = Unlevered Cash Flow – Disposition Net Proceeds

Occupancy = current property occupancy %. This variable does not drive anything in the application, it is just informational and for presentation purposes

Purchase Price = negotiated property purchase price, exclusive of any transaction costs. Changing the Purchase Price here will override the Purchase Price input on the Purchase/Sale tab, and vice versa.

Year 1 NOI = the Net Operating Income in the first year of property ownership.

Year 1 Cap Rate = the Year 1 NOI yield on the Purchase Price, expressed as a %.

Holding period = the length the property is held from acquisition through sale. Changing the Holding period here will override the Holding period input on the Cash Flows and Purchase/Sale tabs, and vice versa.

Sale Capitalization Rate = the rate by which the Sale Year or Forward Year NOI is divided to calculate the Gross Valuation (sale price) of the property. Changing the value here will override the Sale Cap Rate input on the Purchase/Sale tab, and vice versa.

Sale Capitalization NOI = the NOI off of which the sale year Gross Valuation is calculated. Choices are Sale Year, or Forward Year (the year after the year in which the sale occurs). Changing the input here will override the input for Sale Capitalization NOI on the Purchase/Sale tab, and vice versa.

Equity Multiple = the number of times the transaction returns the original equity investment, assuming an all-cash purchase of the property (i.e., no use of debt financing). A 1.0x Equity Multiple is breakeven (no profit). Anything less than 1.0x means equity investment was lost. Anything above 1.0x means that all capital invested was returned, and profit was achieved as well.

NPV = Net Present Value of unlevered transaction cash flows, calculated using monthly cash flows, at the ANNUAL discount rate input made.

The annual discount rate is the rate at which future cash flows are discounted to their Present Value before being added to the negative Time 0 investment amount, (the result of which is the Net Present Value). The higher the discount rate used, the more aggressively that future cash flows will be discounted. A positive NPV (i.e., any value greater than $0) represents an investment that creates value as measured in today’s dollars. The higher the positive NPV value, the more value that is perceived as being created. A negative NPV (i.e., any value less than $0) represents an investment that destroys value as measured in today’s dollars. You do not want to proceed with any investment that shows a negative NPV.

% NCF From Residual = % of total transaction Net Cash Flow (as of the end of the transaction) that comes from the sale of the asset (vs. the operation of the asset)

Levered Analysis tab

Each link below represents a section found in the Levered Analysis tab. Click on the links to see definitions relevant to each section.

Annual Cash on Cash Return = current year’s net cash flow to equity / initial cash invested at acquisition

Year 1 Debt Yield = Year 1 NOI / Loan Principal Amount at funding

Year 1 DSCR = Year 1 NOI / Year 1 Debt Service Amount

IRR = Internal Rate of Return: the average annual rate of return on equity as measured after the point of exiting the transaction. IRR takes into account the size and timing of all investment, operating and sale cash flows. Valuate measures IRR using monthly periodic cash flows. Annual-based measurement of IRR will differ slightly from monthly-based measurement.

Uses of Funds captures only amounts required at the point of acquisition. Sources of Funds includes any operating and/or financing deficit (shortfall) amounts, all of which are funded monthly, as needed, by Equity pro-rata to the original equity contribution percentages at acquisition

Cash Flow tab

Each link below represents a section found in the Cash Flow tab. Click on the links to see definitions relevant to each section. 

Fiscal Year 1 Begins = the day after Time 0 (the point of closing on the acquisition), when operation of the asset begins.

Holding period = the length the property is held from acquisition through sale. Changing the Holding period here will override the Holding period input on the Dashboard and Purchase/Sale tabs and vice versa.

Asset Management Fee – treated as a negative monthly cash flow to the project. Can be sized either by: a) % of Purchase Price (with an optional annual growth factor), or b) % of Effective Gross Revenue

Regardless of the sizing method, if there is/are a month or months in which EGR is negative (deficit), the AM Fee will be reduced to zero in that/those period(s).

Year on Year Growth = annual growth of Asset Management Fee if the AM Fee is calculated as a % of Purchase Price.

Purchase/Sale tab

Each link below represents a section found in the Purchase/Sale tab. Click on the links to see definitions relevant to each section.

Fiscal Year 1 Begins = the day after Time 0, when operation of the asset begins. Time 0 is the point of acquisition. Changing the inputs here will override the Fiscal Year 1 Begins input on the Cash Flows tab, and vice versa.

Purchase Price = negotiated property purchase price, exclusive of any transaction costs. Changing the Purchase Price here will override the Purchase Price input on the Dashboard, and vice versa.

Capital Reserve = capital amounts, if any, escrowed at point of acquisition for capital projects past Year 1

Renovation Budget = amount identified, if anything, which will be spent towards property renovation after closing

Closing Costs = anything that does not fit into the other input fields related to closing

Year 1 Capital = capital amount, if anything, escrowed at point of acquisition for capital projects to occur during Year 1 of holding period

Due Diligence = acquisition costs related to study of the property prior to closing (legal, environmental, other consultants, etc.)

Acquisition Fee = Fee amount paid to Sponsor at point of acquisition

Broker Fee = Debt and/or equity broker fee(s) paid at point of acquisition

Recording Fees/Misc. = Fees paid at closing to jurisdiction for updating of land records

Transfer Tax = Tax paid at closing to jurisdiction for transfer of title

Total Leveraged Uses of Funds = total acquisition costs including any Loan Fee

Holding period = the length the property is held from acquisition through sale. Changing the Holding period here will override the Holding period input on the Dashboard and Cash Flows tabs, and vice versa.

Sale Capitalization NOI = the NOI off of which the sale year Gross Valuation is calculated. Choices are Sale Year, or Forward Year (the year after the year in which the sale occurs). Changing the input here will override the input for Sale Capitalization NOI on the Dashboard, and vice versa.

Sale Capitalization Rate = the rate by which the Sale Year or Forward Year NOI is divided to calculate the Gross Valuation (sale price) of the property. Changing the value here will override the Sale Cap Rate input on the Dashboard, and vice versa.

Net Sales Proceeds = Gross Valuation – Selling Costs

Sources of Funds tab

Each link below represents a section found in the Sources of Funds tab. Click on the links to see definitions relevant to each section.

Interest Rate = Annual nominal interest rate for the loan. Changing the input here will override the Interest Rate input on the Dashboard, and vice versa.

Loan to Value Percentage = Loan Size at funding  / Total Unleveraged Uses of Funds

Total Unleveraged Uses of Funds = total acquisition costs excluding any Loan Fee

Amortizing = whether cumulative debt service payments include repayment of loan principal or not

Term = maximum allowable length of loan from funding to final repayment

Amortization Term = assuming it is an amortizing loan, the period over which the loan principal is repaid

Interest-only Period = assuming it is an amortizing loan, the period over which the loan principal is repaid

Fees = cash payment made to the lender at loan closing to refund their underwriting costs and unlock the loan proceeds

Year 1 Debt Yield = Year 1 NOI / Loan Principal Amount at funding

Year 1 DSCR = Year 1 Debt Service Coverage Ratio (Year 1 NOI / Year 1 Debt Service payment) if Year 1 is amortizing, and if Year 1 is Interest-only

Loan To Value Test Section
Annual NOI = Year 1 NOI

Capitalization Rate = the Year 1 Cap Rate

Gross Valuation = Annual NOI / Capitalization Rate

Maximum Loan to Value = maximum likely loan to value transaction could achieve

Maximum Loan Proceeds = Gross Valuation * Maximum Loan to Value

Debt Service Coverage Ratio Test Section

Annual NOI = Year 1 NOI

Minimum Debt Service Coverage Ratio = likely minimum required DSCR by lender for this transaction

Maximum Allowable Debt Service = Annual NOI / Minimum Debt Service Coverage Ratio

Maximum Loan Proceeds = present value of loan given Maximum Allowable Debt Service (paid monthly) and given loan amortization characteristics

Residual equity requirement = Total equity needed for the transaction including for any deficit amounts

Preferred return (Pro-Rata) = Monthly compounding, cumulative preferred return paid to both Sponsor and Third Party Investor, parri passu (simultaneously, and pro-rata), after which invested capital will be returned

Residual Cash Flow Splitting = After any preferred return is paid, and after capital is returned, the method by which remaining profit cash flows are partitioned: either a Single Residual Split (such as 50/50), or a Multi-Tier Waterfall (such as 80/20 up to a 15% Third Party Investor IRR, then 70/30 up to a 20% Third Party Investor IRR, then 60/40 thereafter)

Tier = a range of investment performance, as measured by the Third Party Investor’s IRR

Sponsor equity = Sponsor share of cash flows related to their cash equity investment in the transaction at all tiers (remains constant)

Sponsor promote = Sponsor share of cash flows related to their promoted interest (aka carried interest) that is above and beyond the share of cash flows related to the Sponsor equity (likely grows from tier to tier, and is 0% by definition for the first tier if that tier is the Preferred return)

Third Party Investor equity = Third Party Investor share of cash flows at each tier (will decrease from their share of investment by the Sponsor promote amount in each tier)

 

Preferred return (Pro-Rata) = Monthly compounding, cumulative preferred return paid to both Sponsor and Equity Partner, parri passu (simultaneously, and pro-rata), after which invested capital will be returned

Residual Cash Flow Splitting = After any preferred return is paid, and after capital is returned, the method by which remaining profit cash flows are partitioned: either a Single Residual Split (such as 50/50), or a Multi-Tier Waterfall (such as 80/20 up to a 15% Equity Partner IRR, then 70/30 up to a 20% Equity Partner Investor IRR, then 60/40 thereafter)

Tier = a range of investment performance, as measured by the Equity Partner’s IRR

Sponsor equity = Sponsor share of cash flows related to their cash equity investment in the transaction at all tiers (remains constant)

Sponsor promote = Sponsor share of cash flows related to their promoted interest (aka carried interest) that is above and beyond the share of cash flows related to the Sponsor equity (likely grows from tier to tier, and is 0% by definition for the first tier if that tier is the Preferred return)

Equity Partner equity = Equity Partner share of cash flows at each tier (will decrease from their share of investment by the Sponsor promote amount in each tier)

Frequently Asked Questions

Click on the links below

You can edit any of the variables in blue.

Click the Share tab to get a link that you can include in an email to your client.

You are unable to open a shared link sent to an email address that is affiliated with your RPR/Valuate® account. Try emailing the link to a different email address, then open the email in Incognito mode.

To delete a file, hover your cursor over Welcome your name, then click Manage Files. Select the trashcan next to the file you would like to delete.

Select the File tab, then choose Export.

Note: If you change the Property Name, all scenario files created from the original will be renamed also.

– Click on the Property Name in the header, where the tabs are located.

Enter a new name in the Property Name field, then click the Update button.

For non-Flip and non-Back of the Envelope analyses, Valuate will auto-calculate 11 years’ worth of cash flows upon a file being created, regardless of the Holding Period that you select.

The Year 1 Cap Rate is calculated off of the user’s inputs for the Purchase Price and for the components of Year 1 NOI, based on this formula: Cap Rate = NOI / Purchase Price.

The Year 2+ Sale Cap Rates is calculated by adding a 0.25% increment to the prior year’s Cap Rate. To change any of the values for Year 2 through Sale Year-1, double click on the input field for the desired year and input a new value. Note that changing any one year will not cause a ripple effect in the subsequent year values i.e., the subsequent year values will not recalculate upon editing any year.

The Sale Year Cap Rate is initially set to be 0.25% higher than that for the year prior to the year of sale. The Forward Year Cap Rate is always set to be equal to the Sale Year Cap Rate.

For example, if you create a new file that has a Year 1 Cap Rate of 8.00% the subsequent year cap rates will auto-calculate upon file creation. 

  • Year 2 – 8.25%
  • Year 3 – 8.50%
  • Year 4 – 8.75%
  • Year 5 – 9.00%
  • Year 6 – 9.25%
  • Year 7 – 9.50%
  • Year 8 – 9.75%
  • Year 9 – 10.00%

Need Help?

If you need additional assistance, contact RPR Member Support at (877) 977-7576 or open a Live Chat from any page of the website.

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