Tutorial

REAP - The Real Estate Analysis Processor

The REAP icon

The REAP app for Android makes real estateĀ investment cash flow analysis simple.

  • Provides easy and accurate cash flow analyses for real estate investments.
    • Uses the discounted cash flow model in its equations
  • Saves any number of data sets into a database.
  • Able to emails entries to yourself or whoever you choose.
  • Emails will contain an attachment file that can be read by any spreadsheet application, and will contain all calculated and input values.
  • Nearly all input values can be modified while observing changes to the calculated values and graphs.









Front screen with relevant apps highlighted

Getting started

Let's get into discussing some of the aspects of the investment quantitative analysis.

You will want to have positive cash flow from year one. This simply means that the yearly balance of all income and expenses is positive.

For example, you may be paying $1000 for your monthly mortgage payment, $2000 for yearly property tax, $1200 for yearly insurance, and $1000 for yearly general expenses. If the after tax cash flow is positive, then there will be no need to front any more money once the rent starts rolling in. Using REAP, you will be able to determine expected after tax cash flows for each year.

In addition to cash flow, you will also want to know whether the net result of the investment is an increase in wealth, in present-day dollars. That is the meaning of the Net Present Value term. It takes all the future values and brings them to the present day using your required rate of return (RRR). The RRR you determine is based on multiple factors and is a consideration in its own right, but it is essentially the average yearly return you wish to receive on the investment. If, after entering your RRR, the Net Present Value is greater than 0, you have met your expected return, and then some. If it is 0, you have precisely met your required return. If less than 0, you are making somewhat less that your RRR.

Finally, there are other conventionally discussed value quantifiers, such as Modified Internal Rate of Return (MIRR), Net Operating Income (NOI), and Cap Rate (purchase price and current price). These are all calculated by REAP and displayed as a graph. In particular, MIRR represents the average return on the investment, and thus indicates the "bang for the buck".

For the example I will step through here, I downloaded a copy of the Redfin app. Redfin provides excellent details on real estate investments, which we will use as inputs to the REAP application. If you have not had a chance to check out their website, I would recommend it. Also, obtain a copy of the REAP app. For the sake of convenience I put both these apps on my home screen, as seen here, but they may be placed anywhere in your system and function just as well.

While Redfin is my first choice app for real estate data, realize that you can obtain similar data from several other sources. Zillow, Trulia, or Realtor.com would also be good sources, among others.



find a potential investment property using any technique

Review the details

There are a number of considerations in looking for a property. For example, is the neighborhood on the upswing? Are there future plans which could have an affect on home prices? Are there any developer tax incentives or problem locations nearby? Part of the analysis is to have a expectation for the future. In order to do that, you have to know as much as possible about the local and regional area.

Key quantitative characteristics of property

Get the numbers

Once you have found a good candidate for investment, look for the relevant data. Assuming you are purchasing this as an investment and therefore plan to rent it out (the purpose of the REAP analysis), you will want to find such things as the cost to buy the property, yearly taxes, association dues (if any), yearly municipal fees (if any), and hopefully enough information for you to get a general sense of its value and what rent you could get.

Front screen with relevant apps highlighted

Start REAP'n

In order to have an analysis right away, enter values for the expected purchase price (This is the total amount you will pay, not merely the loan amount) and the loan interest rate you expect. Touch the mortgage type bar and select what type of mortgage you think will be appropriate (You can change all these values later). Click on the "Rental?" checkbox and enter a value for the expected monthly rent in the first year. After that is done, click GO. You will be brought to the analysis results page.

The graph page

Review the initial values

The results page allows you to do several things: review the inputs and calculated values, change the year calculated, and change input values . On this page you may view all the values which are calculated and input, and see certain values graphed. Notice you may press the tabs above the graph to view different financial projections, and you may click on the names of values, such as "Calculated Cap Rate", to be presented with a relevant help text.

help text

graph page with console open

Change some numbers

To get a feel for what can be done on this page, start by clicking on the menu button and then on Configure Graph Page. On the resulting screen, click All Buttons On and Graph Visibility should be checked on. Use the back button to return to the Graph Page. All values, including input and output values, will show. Pull up the tab at the bottom of the screen to access the console.

The console has two slider bars - one controls the year that is calculated, the other controls the current value. The year is fairly self explanatory. For however many years are being calculated, the year slider can be pulled to view all the values for that year. The value slider adjusts the current value (the middle field) for the property shown. In the example shown on this page, the values range between $600 and $1800, and the current value is $1200.

The value in question is the expected monthly estimated rent payments for the first year. You may adjust the value along that range. You may also click on any of the values and modify them directly. The minimum value must be below the current value, and the maximum must be above the current value. You may change the current value to any number and the min and max will adjust to be above and below by 50%. If you click the Reset button, it will adjust the value slider to the center of its range.

value selector dialog

Select the input

You can change the value to be nearly any of the inputs that are possible. The only things you cannot change from this screen are the street address, city, state, comments, or loan term. Those must be modified from other pages, which we will get to shortly. To change values, simply click on the bar describing the value and select a new property. The current value for that property will be set as the current value field, and new minimum and maximum values will be set. You may then modify it as before.

Data entry selector page

Edit Data Values

From the Graph page, click on the menu button and select Edit Data Values. The screen shown here will be presented. You may select any button in any order, and enter / modify values as you see fit.

Loan values

Edit the loan values

Let's start by working on the loan values. Here, we can see that the loan rate is 4%, the purchase price is $159,000, and the PMI (Private Mortgage Insurance) is $100. The PMI value is the monthly cost of PMI if the loan is greater than 80% of the total value. This amount will change depending on the lender's terms, but $100 is not atypical.

You can see it is set as a fixed-rate 30 year loan. The application currently only supports fixed-rate loans.

If you provide a value greater than 0 for Extra Years to Calculate, REAP will calculate that many years past the end of the mortgage period. You can use this to determine, for example, the resultant values at the 30th year of an investment for a 15 year loan versus a 30 year loan. The 15 year loan will need 15 more years of calculation. It is possible to calculate up to 99 extra years.

calculator

The button labeled "Set down payment by PMI" will set the down payment field to be 20% of the total purchase price. This is necessary to avoid PMI payments. You may also set the down payment manually to any value you wish. This may be a good time to mention the calculator icon at the bottom. You may press that to access the calculator app at any time. Just click the Back button afterwards to return to REAP.

The input Closing Costs are those costs which are incurred at the time of closing, unrelated to the down payment. For example, any costs related to home inspection, points, title fees, surveys, lending fees, or other payments which do not get applied to the principal, belong here.

Address and comments values

Edit the address values and comments

After entering values for the loan, click on the Back button and go to Address and comments. Here, you may enter text values to identify the property and enter comments which you will find helpful later on. The comments field can handle up to 4000 characters, and gets saved along with all the other inputs when you click the save button in the Menu. To clarify: when you click the Save Current button in the menu, it saves all the current input values on all the pages, not just the one you are on.

Saved locations menu item

Financial environment values

Edit the financial environment values

The financial environment page relates to your expectations of the future. For example, do you believe inflation will continue to be 3% for the next 30 years? Do you feel optimistic about real estate values in your area? Then you might enter 4% or 5% for the real estate appreciation rate. If you are pessimistic, you may enter 2%. Note that setting a value less than inflation means, to the simulator, that the value of the property will actually decrease over the course of time. If you believe the value will stay constant relative to current dollar value, then you may set the real estate appreciation rate to the inflation rate.

Sale values

Edit the sale values

The inputs in this section are for that eventual point in ownership of an investment when you decide to sell it. It is not for the initial purchase. The inputs here are a bit abstract, but not too difficult. The Input General Sale Expenses are the expenses you might incur, such as fixing up the property, paying for a survey, a home inspection, or whatever else you think of. The one (possibly) tricky part is that this is in present value dollars. The value here is as though you were paying it today. REAP will determine its future value and apply it during the investment liquidation calculations (also known as After Tax Equity Reversion)

The Input Selling Broker Rate is simply the percentage of the selling price which the selling broker will charge. If you plan to sell the investment without paying a broker, set this to 0.

Rental values

Edit the rental values

The rental values are as follows: The Estimated Rent Payments you already entered at the beginning of the app. You can choose to change them here if you wish. Home insurance is the expected amount you will spend on general yearly insurance for the property. Vacancy and Credit Loss relates to your expectations about how often the unit will remain unrented or if the tenant does not send their rent, on a yearly basis. For example, 1/12 = 8.3%, which would imply that you expect to have one unpaid month each year. A conservative default would be 3% to 5%.

The Input Fix-up Costs are those expenses you expect at or very near the beginning of ownership, in order to bring the investment up to a rentable state. The simulation operates on the assumption that this expense occurs on the first day of ownership. As long as the expense is generally close to the beginning (within the first year), the assumption is correct. If you plan to spend a great deal of money on fix up several years in, it may be better to split up that cost over years and use that in the Yearly General Expenses, which we will now describe.

Valuation is your estimation of the value of the investment at the time of purchase but after any renovations. For example, you might see a fixer-upper at $100k, and you put $40k into it, and then consider its value to be $200k. That last number is what you should enter for Valuation. If you leave Valuation at 0, then REAP will assume that the value of the investment is the total purchase price plus the fix-up costs. Entering a Valuation gives more fine-tuned control.

Input Yearly General Expenses refer to things such as general miscellaneous repairs and saving up for big ticket items such as new HVAC, new roof, and so on, yearly. This is also a good place to put association dues. For example, if the investment had association dues of $100, and you expected to spend about $800 a year on miscellaneous expenses, and you were planning to set aside $400 a year for future big-ticket expenses, then the yearly General Expenses should be 12 x $100 + $800 + $400 = $2400.

The Required Rate of Return was mentioned back at the beginning of this document as something you have to determine as an expectation for the return you are looking for on the property. It is a tricky number to determine accurately, and I am not going to try suggesting what it should be. Do some research on your own (and let us know what you find out!).

Months until rent starts is a value for how many months after purchasing the property pass without rent. It would not be unexpected that a property will be purchased and then renovated for several months, and during that time there is no rent coming in. Or maybe it just takes several months to get the first renter in for some other reason.

Tax values

Edit the tax values

The tax values include the following: the Marginal Tax Rate, which is the investor's tax rate on their last dollars. This sounds complex (Tax law is), so here is another explanation. In US taxes, citizens are taxed at varying brackets. The following (total fabrication) illustrates the concept. Between $0 and $10k, the tax rate on that money is 10%. From $10k to $30k, the tax rate on that money is 20%, and so on. The tax rate on the final amount is the marginal tax rate. It is a shortcut for determining what the tax will be on the additional income from the investment after you pay tax on the rest of your earnings.

Input Building Value is used to determine depreciation, which, in this simulation, is always the building value divided by 27.5 - straight line depreciation.

Input Property Tax is the yearly tax assessed by the local jurisdiction on the value of the property. Municipal Fees are extra fees such as special fees which may be listed with the yearly taxes but are not necessarily related to the valuation of the property.

Return to the Graph Page

At this point, all your base values are entered. Use the back button to get to the graph page. There, view the calculated outputs and use the console to modify the numbers to suit your needs. Use the Save button on the menu to save anytime - it will ask whether you want to add a new entry or update the current entry.

Now you know how to use REAP. If you have any comments, we would like to get your feedback. Contact us at renaissance.nomad (at) gmail dot com.