Thursday, June 25, 2020

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Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership
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Media Contact: Center for RE Studies                                                        For Immediate Release

Comprehensive Property Analysis Strategies


The IRR should reflect the degree of risk you’re willing to take. The riskier an investment, the higher the IRR. If you’re purchasing a building that has decreased in value only because of temporary market conditions, your degree of risk might be considered moderate. Conservative projections are computed using rental growth and vacancy rates, and they establish the lower limits of the IRR. IRR projections based on replacement costs determine the higher limits of the IRR. Analyzing both rates of return allows you to assess the risks versus rewards relationship of each investment.


Revenue assumptions play an important part of your analysis. In addition to the information provided by consultants, check with local rental firms. They are on top of current trends and demand. Lease agreements should be verified to actual rents for each tenant. Use rental applications to develop tenant profiles. Obtain a signed estoppel from each tenant attesting to the rent paid, occupancy dates, and deposits. Rent raises don’t always occur on the first day of the month or in the first month of the year. A careful review of rental agreements will assist in making accurate cash flow projections. Ideally, try to stagger individual rent raises throughout the year. It is less disturbing to the entire complex.

Vacancies vary in seasonal locations like college towns and resort areas. Make provisions for these fluctuations in cash flow projections.  Don’t assume income will be received evenly month-to-month and year-to-year. Projections based on research will result in a more accurate IRR.


When analyzing expenses, refer to the real estate investment inspection report. It should detail, by projected date the costs, repairs and replacements for each unit and the entire building. Using a comprehensive computer program will produce accurate operating budgets. 

Mechanical equipment such as water heaters, dishwashers, garbage disposals, and pool equipment, for example, have estimated life spans.  Major repairs and replacements on roofs, plumbing, decking, and cement should be detailed by estimated costs and the dates work is to be started and completed.

As with income, expenses do not occur evenly throughout the year.  For example, in cold climates, utility bills are higher in the winter than in the summer. With grounds and pool maintenance, it is just the opposite.

Expense figures should be compared with those published by the IREM. All sizable discrepancies must be explained.

Do not make flat rate projections. Don’t apply inflation rates across the board. Projections should be made on an item-by-item basis using the best information available. For example, if the inflation rate of 5 percent is used in one year, don’t use it again unless it applies. Actuals should be used whenever possible.


As part of the analysis, we at calstatecompanies believe that absolutely nothing beats the feel-and-touch approach. A physical inspection of the real estate investment and the neighborhood will confirm your consultant’s reports. Critical words like good, bad, best, worst, bright, dull, a lot, and a little are subjective. Make sure everyone’s singing from the same hymn book when praises to your real estate investment are being sung!

Ask yourself the following questions when evaluating the area as part of the physical inspection:

            • Would you be willing to live or at least collect the rents in
   this neighborhood?
• What’s the graffiti index?
• How does the landscaping of the other properties compare with the one    
   you’re considering?
• Is there debris in the streets?
• Are there cars on blocks?
• Is it completely off the beaten path to major shopping and
  Work centers?
• Is the community growing favorably in the direction of your real
  estate investment?
• Are transportation lines readily available?
• Are schools and recreational facilities nearby?
• What is the ratio of renter- to owner-occupied buildings?

The greater the rental population, the more transient the area be-comes and the greater possibility of it being left unkempt. The physical test will give you that personal viewpoint necessary to complete the analysis.

Even in depressed markets you should look for properties in good locations. A cardinal rule is to buy the worst property in the best location, not the best property in the worst location. Buying the poorest real estate in a good location, at least gives you the opportunity to upgrade it. Whereas, upgrading an entire neighborhood could be difficult, if not impossible. When in doubt, a drive through will help.  Contact your local real estate investment management company or real estate licensee for assistance.

ABOUT THE AUTHOR: Eugene E. Vollucci, is considered to be one of the foremost authorities on real estate taxation and investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, a real estate research organization and President of calstatecompanies. To learn more about the Center, please visit our web site at

Monday, June 15, 2020

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Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership
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Media Contact: Center for RE Studies                                                        For Immediate Release

Property Analysis Essentials

Before you start to analyze property there is one “Rule” you should know about. Only after your real estate investment is under contract, should you prepare a comprehensive analysis that calsstatecompanies discuses in this article. Don’t waste your time and money before you legally control the property.


The key figure is the internal rate of return (IRR) after taxes. By comparing this figure with the IRRs from other investments, you will be able to determine the best investment for you.

It is critical to understand why the IRR is important when analyzing real estate investments. The IRR shows the time value of money, and it reflects cash flows based on present values. Return on investments, in terms of purchasing power, might actually be less, depending on how the cost of living has changed. Knowing the IRR will help to further quantify your investment opportunities.

Your analysis should be based on two types of returns, growth rate and replacement costs. Growth rate projections are based on historical trends. An analysis performed using this rate will give you a conservative IRR. An aggressive IRR is obtained by projecting a future selling price based on future replacement costs. Use both when analyzing buildings. Knowing both will give you an edge when negotiating.

What you should be looking for is steep growth. Buy complexes below the cost of replacement. Sell them when values are at least equal to or greater than replacement costs. This is how to become wealthy!


In a down market, your strategy is to buy as far below current replacement cost as possible. To determine the current replacement cost, consult local building associations or your web site for the Marshall &Swift Valuation Service (M&SVS). M&SVS provides information on the construction costs of different types of buildings through-out the United States show how costs differ based on style for three types of buildings.  Local square footage costs can be calculated using the conversion chart applicable to each area.


The methods to analyze real estate investments depend on the availability of information. They are as follows:

• Qualified appraisers
• Comparable sales data or “comps”
• Gross multiplier approach
• Capitalization rate method
• Essentials of real estate investment analysis software
We prefer using a specially designed computer program in conjunction with input from consultants and comparable sales data. Since the final decision rests with us, we want to be absolutely certain of our sources.

Qualified Appraisers

Appraisers use three appraisal techniques to establish the current market value. They are the (1) cost, (2) income, and (3) market data approaches. The cost approach establishes market value based on what it would cost to replace a reasonable facsimile. The income approach is designed to calculate the market value based on the expected future income. And the market data approach uses information gathered from recent comparable sales to determine value.

The appraiser considers all three methods when making a final determination as to current market value.

Comparable Sales Data or “Comps”

In a weak market, it is difficult to use comparable sales data to determine market value. Sales figures may not be available or may be stale because properties aren’t moving. Prices, under these circumstances, usually have no bearing on current market conditions. At best, comparables will give an indication of trends.

A sample of comparable sales information from the CoStar Group shows how the information is presented. Local real estate boards can be of further assistance.

Gross Multiplier Approach

The gross multiplier approach is the ratio between the gross rents and the selling price. By comparing gross multiples of other properties in the same general area, a rule-of-thumb determination of market values can be made.

Capitalization Rate Method

The capitalization rate is the ratio between the net income and the selling price. This rate can also be compared to those of other buildings in the same neighborhood. Capitalization rates should be adjusted to reflect the following:

            • Liquidity:  How fast can you get your money out?
• Risk factors:  What is the degree of safety?
• Tax benefits:  How much money will you save on taxes and when?
• Ability to borrow money:  Is it easy to get loans on the real
  estate investment?
• Degree of management activity:  How much time do you have to put into          
  managing your investment?
• Expectation of appreciation:  What is the potential of this real
  estate investment?

We generally don’t purchase buildings with a capitalization rate under 8.5 percent. However, depending on the weight of these factors, we would consider a lower capitalization rate. Adverse conditions cause the capitalization rate to be adjusted higher; favorable conditions cause it to be lowered.

Essentials of Real estate investment Analysis Software

Choose a computer program that fits your needs. You should select software capable of providing the following features:

            • Projections and analysis of cash flows and tax benefits using the IREM
• Maximum forecasting flexibility
• After-tax IRR
• User friendly

A computer program that has these features makes it easier to analyze properties. If the data is accurate, your reports will supply you with the necessary facts to make the right investment decisions.

When inputting data, numerous assumptions must be made. There’s an expression that communicates the importance of inputting good data. If data submitted to computer operations came back stamped “verified,” it meant it was accepted. Reports stamped GIGO meant the opposite! GIGO stands for “garbage in garbage out.” The same applies to investment data. If the information inputted is garbage, your out put will be the same.

The computer program should be designed to give an IRR based on specific assumptions. Confer with your consultants to assist you in making these assumptions. For example, estimates of tax rates and depreciation should be made with the help of your tax advisor. When speculating on general business conditions in the area, your real estate investment manager or real estate broker should be consulted for advice. These professionals must be able to provide you with the data needed to make the right assumptions.

ABOUT THE AUTHOR: Eugene E. Vollucci, is considered to be one of the foremost authorities on real estate taxation and investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, a real estate research organization and President of calstatecompanies. To learn more about the Center, please visit our web site at

Monday, June 1, 2020

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The Cal State Companies:  Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership
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Media Contact: The Center for RE Studies                        For: Immediate Release

Why was the real estate industry blind-sided by the coronavirus and how will we know when it will end?
There has been no previous occasion for this kind of downturn of economic activity. Recessions or severe economic slowdowns are usually caused by the exchange between economic and/or financial differences during the period of expansion. According to a leading real estate research company, calstatecompanies, this time it is very different because the underlying cause of the downturn initiated from external economic and financial domain: a highly contagious new coronavirus that has been spreading fast since the beginning of the year. 
Our government has responded by aggressively curtailing economic and social activity in order to suppress the further spread of the virus as quickly as possible. Thus, we are seeing the first-ever recession by government decree – a necessary, temporary, and partial shutdown of our economy to prevent an even larger humanitarian crisis which is having a devastating effect on real estate investments.

Since the beginning of March, approximately 40 million workers have lost their job in the USA, with 18 million being laid off temporarily due to the lockdown. According to the US Bureau of Labor Statistics, most of the 18 million workers are in the lowest income brackets, with an average weekly income between $300 and $1,100. Under the assumption that this temporary unemployment lasts around one quarter, private consumption could be lowered by $150 billion, representing a GDP loss of approximately 3% for a given consumption rate of around 70% of disposable income. It is absolutely paramount for a sustainable economic recovery that the predominant majority of these job losses are temporary once the lockdown measures are lifted. Reemployment, especially in service-related sectors, will return but only gradually.

The aggressive policy support is expected to release domestic demand. Persistent pressures in the labor market and mounting external risks have driven the country’s leadership to stimulate the domestic economy. Infrastructure spending still remains the main growth stabilizer. We expect the fiscal deficit to expand meaningfully by a significant increase of percentage points of GDP rates in the near term. Credit growth is expected to firm up throughout the year, with a notable amount of funding likely to be directed into the infrastructure sector. However, the above-mentioned stimulus cannot fully offset the economic damage throughout the year.

There is agreement among economists on the need to stimulate growth once the epidemic is under control. There are concerns about longer lasting impacts that hamper the recovery (affected sectors, lack of confidence, and increase in household savings during the lockdowns). Stabilization plans will therefore gradually have to give way to growth stimulation plans.
Given the rapid and large economic and fiscal policy response and in the absence of major imbalances that would require a prolonged period of purging and modification, we expect the real estate investment markets to transition from intense near-term anguish during the virus suppression phase to a gradual healing over six to 12 months

ABOUT THE AUTHOR: Eugene E. Vollucci, is considered to be one of the foremost authorities on real estate taxation and investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, a real estate research organization and President of calstatecompanies. To learn more about the Center, please visit our web site at