year two to re-seal the parking lot, install an automatic sprinkler system and re-carpet 20% of the apartments? How much money will you need in year three to buy new refrigerators and stoves for 25% of the units and re-carpet 20%?

Each of these expenditures needs to be determined and then discounted to the date of purchase so that you will know how much money you will need to carry out your investment plan. The point in answering the question "How much in?" is to fully grasp what the investment may require financially. This is the amount against which your returns must be measured.

Determining "How much out?" is the process of assessing the annual cash flows and the net proceeds upon sale. In combination, these sums are applied against the initial investment to ascertain returns.

The annual cash flows, usually measured before tax, are calculated as follows:

The formula for ascertaining the before tax net proceeds upon sale is simply the Sale Value less the Costs of Sale and Loan Repayment.

Investment analysis then considers the net sale proceeds, the total annual cash flows during the ownership period and the investment earnings on these cash flows (all being discounted back to the date of purchase so as to account for the investment term) as the Internal Rate of Return or IRR.

The answer to the third question, "When?" is vital to the development of an IRR because of the phenomenon usually referred to as the "time value of money" and the resultant

discounting process used to assess it. The problem in investments with a term longer than one year is that the value of a dollar today is greater than the value of a dollar received next year and much greater than the value of a dollar received ten years hence. This is true because a dollar in hand today may be invested and a year later be worth $1.05, $1.20 or more.

In the early days of my investment career the proper analysis of an investment was such a laborious, time consuming process that people simply didn't do it... investors relied on "gut feel" and "down and dirty" calculations such as the GRM.

Today, however, computers and electronic calculators have made possible the thorough and relatively quick analysis of investment properties. Surprisingly, many investors continue to rely on superficial and primitive methods of analysis.

There is far more to profitable investing than striving to buy low and hoping to sell high. Frankly, it is ludicrous to acquire a building in Phoenix or Toledo or Shreveport simply because, "The GRM was half what I can get in Boulder, and 60% of Longmont or Westminster!"

The GRM is simply not the point. Instead, focus on how to make the most money (more is better than less) in the least time (sooner is better than later) with the least risk (certain is better than maybe).

So, my answer to the original Why should I buy multi-family buildings in Boulder Country at a 9 or 10 GRM when I can still buy a building in (Anycity), (Anystate) at a 6 or 7 GRM?" is that it is both impossible and imprudent to make a valid decision based on this information.

Buying or selling investment properties without a financial analysis is like , buying a used car based on kicking the tires, slamming the door and driving it around the block. -

MIKE HESSE, CCIM, CPM
Real Estate & Investment Specialist
DIRECT - 720.581.2222
online at www.MikeHesse.com
email Mike@MikeHesse.com