Evaluation Spreadsheet

[Frank Apap]

As part of the research into getting my feet wet with real estate investing a put together a little spreadsheet to evaluate potential pieces of property. The spreadsheet makes some assumptions but given my lack of experience I would REALLY appreciate a review of it.

Thanks!

http://spreadsheets.google.com/ccc?key=0AutHSb37bMqUdFpRVlkzNklxTTFNNDRyeFB4UkNvZXc&hl=en

[Jon Holdman]

IMHO, no. This is often done in commercial deals and is called a "total return". But that principle paydown is 1) quite small, and 2) not usable. After two years you've paid down just under $7000 of your $288K loan. After five you've paid down $20K.

Now, if you're going to sell, then you will want to use the loan balance in computing your net cash after the sale. However, when evaluating a sale price, you need to make some assumption about the sale price. That assumption will have FAR, FAR more error in it than your principle paydown. IMHO, the best guess for the sales price is the purchase price. But if you want to be optimistic and assume 3% appreciation, your sale price is $417K, a gain of $57K. If you assume -3%, your sales price is $209K, a $51K loss.

If you're looking toward the future sales situation, you need to also consider depreciation. Depreciation gives you a deduction as you go along. You may or may not be able to use that as an offset to other taxes. If you don't it carries forward as a passive loss. When you sell, though, you have to pay tax on all the depreciation that you took or could have taken. You can use that loss to offset the taxes.

When I first started, like you, I made some very complex spreadsheets. You have to make so many assumptions that the end result is nothing more than a guess. So, computing an ROI that includes a sale five years from now is sheer speculation. If you're buying rentals, buy them for current cash flow. If you make money when you sell, its gravy.

The only realistic use of such a spreadsheet is as a scenario planning tool. Use it to ask "if this happens (i.e., 3% appreciation, 10% depreciation, etc.)" what are our results. Identify a series of possible scenarios and evaluate your deal in all of them. If it makes an adequate return in most of them, it might be a deal. If it only makes an adequate return in very specific circumstances, it's probably not a keeper.