Real estate investing requires an understanding and proficiency of at least a handful of financial measures and formulas, otherwise investment opportunities cant be evaluated correctly, and investment money can be lost.
So to help you better understand real estate investing, Ive assembled a list of twenty-one measures and formulas used by investors. Some formulas are omitted because they require a financial calculator or investment real estate software to compute.
1. Gross Scheduled Income (GSI) This represents the propertys total annual income, as if all the space was occupied and all the rent collected. It includes the actual rent generated by occupied units, as well as potential rent from vacant units.
Example: $46,800
2. Vacancy & Credit Loss This is potential rental income lost due to unoccupied units or nonpayment of rent by tenants.
Example: $46,800 x .05 = $2,340
3. Gross Operating Income (GOI) This is the gross operating income, less vacancy and credit loss, plus income derived from other sources such as coin-operated laundry facilities.
Example: $46,800 2,340 + 720 = $45,180
4. Operating Expenses These are the expenses needed to keep a property in service and its revenue stream flowing. This includes such things as property taxes, utilities, and routine maintenance, but does not include loan payments, income taxes, or cost recovery.
Example: $18,525
5. Net Operating Income (NOI) Net operating income is one of the most important measures because it represents a return on the purchase price of the property and, in short, expresses an objective measure of a propertys income stream. It is the gross operating income, less the operating expenses.
Example: $45,180 18,525 = $26,655
6. Cash Flow before Taxes (CFBT) Cash flow before taxes is net operating income, less debt service and capital expenditures, plus earned interest. It represents the annual cash available before consideration of income taxes.
Example: $26,655 19,114 = $7,541
7. Taxable Income or Loss This is the net operating income, less mortgage interest, real property and capital additions depreciation, amortized loan points and closing costs, plus interest earned on property bank accounts or mortgage escrow accounts. Taxable income may be negative as well as positive. If negative, it can shelter your other earnings and actually result in a negative tax liability and higher cash flow after taxes.