First off what does APR and APY represent? APR is the acronym for “Annual Percentage Rate” which is the interest rate for a year without compounding. While APY is the acronym for “Annual Percentage Yield” for the same interest rate but compounded over a year. Even with the same APR, the APY can vary depending on the compounding frequency. The compound rate can happen monthly, weekly, or like the American Express Savings Account, daily. Most savings accounts, like American Express Personal Savings, uses the Daily Balance Method to calculate the interest daily.

You can calculate the APY from the APR and the compound frequency with the following formula:

where *r *is the APR and *n* is the number of times the balance is compounded in a year.

Formulas are nice and all, but I would like to actually break down how the interest is calculated. Using the daily compound rate as an example, the daily rate is computed by dividing the APR by 365 for 365 days in a year. Then at the end of each day the daily interest rate is used with the current day’s balance to calculate the interest for that day.

That means with interest compounded daily, there is always an incentive to get that check into the savings account as soon as possible. So go deposit those checks you got lying around because you’re losing interest!

]]>“*Up to 78% Off Speed-Reading Workshop*”

I was always interested in taking a speed-reading class. But speed reading classes are expensive, over $200.

So when I saw Groupon was offering 78% coupon for a Speed Reading course you can bet your ass-*ets* that it caught my attention. With this coupon, a 1-day seminar priced at $254 is available for a cheap discount of $55!

Skeptical as I always am, I began to question the value of the course. For one, how much can I learn in a day. I find it hard to believe that after a 1-day seminar my reading efficiency will shoot through the roof.

Second, does speed reading work on more difficult to read books? I can imagine ripping through easy-to-read books like Harry Potter or Twilight, but how effective is it when reading more thought-provoking books and heavy-duty, put-me-to-sleep textbooks?

Thus, I did a quick search on Yelp. In addition, I binged the course and found a review on the TeachingTree. Both sites gave the program a rating of 4 out of 5. In both sites the reviews from people who attended the 2-day course wished that the course was condensed into 1-day. Those who attended the 1-day course still said they obtained outstanding results. Maybe the 1-day is worth it…

There are at least 2 hours ’til the Groupon expires… will need to decide soon.

Update: I gave in and bought one!

]]>I happened to come across the following interactive tutorials by Prof. Samuel L. Baker of University of South Carolina: Internal Rate of Return and The Perils of Internal Rate of Return. I wanted to understand what was IRR, how it is used, and the pitfalls of IRR.

After reading the above articles, I understood that IRR is useful for comparing investments and determining which one is more profitable. However, it has its pitfalls.

- A higher IRR is appropriate for comparing investments that have their costs first, their positive incomes later and similar initial costs.
- IRR does not take into consideration different risks.
*An investment with lower IRR but less risk may be a better investment.* - The Net Present Value and IRR can contradict each other in choosing which investment as more profitable.
- The discount rate can change with economic conditions. Thus there is an element of uncertainty with IRR.

Using the IRR, we can compare RE investments to less riskier investments such as the bank and bonds. This allows us to determine whether the single project is worth investing.

]]>Why would you want to derive your own CAP rate? Because the CAP rate is the most popular way to gauge the worth of an income property.

*Property Value = NOI/CAP*

Thus, the property value is directly affected by the NOI and the CAP. After verifying the NOI, you can use “your” CAP rate to determine the maximum price you are willing to pay for the property.

Alcorn states that although the CAP rate is the most popular tool for evaluating properties, it is also the most misused.

Reasons:

- Most people compare properties to the market CAP. However, the market CAP rate is what the market is willing to pay for the property — the market is not always correct (i.e. the recent real estate bubble).
- The CAP rate is the “projected return for one year as if the property were bought with all cash”. Thus, CAP does not take financing into consideration.

The second reason is the more important reason why you want to calculate your own CAP rate. Different investors have different financial situations. Investors with better credit are able to achieve lower interest rates. Other investors with higher cash reserves can put in a larger down payment. Both larger down payments and lower interest rates provide smaller mortgage payments which allow for better cashflow. Thus for some investors the property is a deal, for other investors the property is not.

To calculate your desired CAP rate you need to know the terms of financing available to you and the return you want on your investment.

Here is the formula (for more detailed description go to Alcorn’s website):

*Derived CAP Rate = (LTV debt ratio x mortgage constant) + (LTV equity ratio x equity constant)*

After calculating your desired CAP rate you need to calculate the NOI. When calculating the NOI, you can tweak the numbers to reflect the way you will own and manage the property. “No two investors will own and operate a property the same way.”

Next calculate your max offer for the Property:

Alcorn’s example:

*Using a loan for $10,000 to calculate the loan constant:*

*ADS = $894.72*

*Loan constant = 894.72/10000 = 0.0895*

*Equity constant = 0.20*

*Derived CAP rate = 0.75 x 0.0895 + 0.25 x 0.20 = 0.1171*

*Property Value = $125,000/0.1171 = $1,067,464*

*So your maximum offer for an income property with NOI of $125,000 is $1,067,464.*

The derived Property Value is a starting point. Many other factors influence the value of the property:

- Deferred maintenance
- Security of the income stream (strength of the tenants and length of the leases)
- Comparables in the area
- Market conditions

As the risk increases so does the investor’s required ROE or COC. I will write another blog post determining how to calculate your desired COC based on risk.

]]>The most commons sources of financing were summarized in one article :

- Banks or Traditional lenders
- Sellers (Vendor Take Back Financing, VTB)
- Secondary lenders
- Equity Lenders
- Private Lenders

I would also like to add “Investors” to the list. Although you split profits, I would still count it as a type of financing. Julie Broad and Dave Peniuk of Rev N You made a point that it is a good idea to always ask the seller for VTB financing. Although it is usually a higher rate, it does not show up on your credit. Therefore allowing you to gain financing from the bank for another property.

Julie Broad and Dave Peniuk of Rev N You wrote in another article that you should only consider coming up with a down payment on a property using 3 ways:

- Your own savings
- Equity in your home
- A partner with cash.

For my first purchase, I will probably go though traditional lending, paying for the down payment with my savings. However, even if I have enough savings for a second down payment for another home, because of my low income it will be difficult for me to get an additional loan. Of course, I currently do not have equity in a home. So in the future, I will surely be looking for investors to partner with in future purchases.

]]>