Categories of Properties with Big Profit Potential

This is an excerpt from the book Real Estate Investing for Double-Digit Returns by Petros S. Sivitanides, Ph.D.

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Real Estate Investment Mathematics!
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Internal Rate of Return(IRR)
The 3 Formulas for Modified IRR (MIRR)/Financial Management Rate of Return (FMRR)
Potential Gross Income Multiplier (PGIM)
Potential Gross Income
Effective Gross Income Multiplier
Effective Gross Income
Net Income Multiplier
Net Operating Income
Overall Capitalization Rate/Income Return
Capitalization Factor
Band-of-Investment Formula for Estimating a Market/Required Capitalization Rate
Theoretical-Approach Formula for Estimating a Market/Required Capitalization Rate
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Total Return
Return on Total Capital (ROR)
Return on Equity (ROE)/Cash-on-Cash Return/Equity Dividend Rate
Before Tax Equity Cash Flow (BTECF)
Equity Investment
Loan Amount
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Mortgage Constant
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Taxable Income
One-Period IRR
Income Tax Payment in Association with Income Producing Property
Capital Gains
Formula for Cash Flow for Last Period of Analysis
Future Resale Price
Annual Rental Income of Occupied Multi-Tenant Property
Multi-Period Lease Rate Growth Formula with Intertemporally Variable CPI Forecast
Multi-period Lease Rate Growth Formula with Constant CPI Forecast
Present Value (PV)
Net Present Value (NPV)
Profitability Index
And more….

In general, we can distinguish four categories of properties with big profit potential (see Figure 3):

A) Properties with prospects for robust property-income and value increases, which can be classified in three sub-categories:

A.1. Properties about to experience significant rental income and/or value increases due to strong economic growth of the metropolitan market within which they are located, or other favorable changes in broader macroeconomic forces. I will refer to this category as “properties with market-driven value-increase potential.”

Figure 3 – Categories of Properties with Big Profit Potential

A.2. Properties about to experience strong rental income and/or value increases due to significant improvements in their locational advantages expected to occur as a result of significant developments in their surrounding area or the broader urban area within which they are located. I will refer to this category as “properties with development-driven value-increase potential.”

A.3. Properties that, due to mismanagement, are currently earning an income well below their true potential, given the advantages of their immediate and broader location. I will refer to these properties as “mismanaged properties.”

B) Properties that can be bought considerably below market value, which are referred to hereafter as “bargain properties”.

¹This is an excerpt from the book Real Estate Investing for Double-Digit Returns by Petros S. Sivitanides, Ph.D.

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