The annual debt service includes the principal and interest portion of the payment for all twelve months.Ĭash Flow Before Taxes is the amount of money realized by the investor for the year, whether positive or negative, before income taxes are considered. This is the total of mortgage payments for the year. The NOI is important because it makes all real estate investments that are purchased for cash flow equivalent. The NOI is the amount of money that would go to any investor after receiving all income and paying all expenses, with the exception of payments on loans and income taxes. Such expenses might include property taxes, hazard insurance, maintenance fees, management fees, homeowners association expenses, utilities, and reserves for replacements (roofs, HVAC systems, etc.). Operating Expenses are those things that the property owner must pay for while owning the property. This is not the "best case scenario," rather it is the "realistic case scenario." Using the correct figures for vacancy allows us to compare these two properties and determine which one is the better buy.Įffective Gross Income is the amount of revenue we anticipate receiving annually while owning the property. Perhaps a home in the higher price range will have longer occupying tenants, thus a lower vacancy, whereas a property in a student area can be expected to turn nearly every year, resulting in a higher vacancy. The key to Vacancy and Collection Losses is that you can compare different types of properties in different market cycles. This too is expressed as a percentage figure annually.
#Real stacks of money on bed plus#
Every property will have periods of vacancy due to change-over in tenants plus market cycles that make it harder to find tenants.Ĭollection losses, much like vacancy in that no income is occurring, is when non-paying tenants are in the property and either need to be motivated or evicted. Vacancy is the measurement of time, expressed in percentage of the year, that you would expect the property to not have a tenant. If a property can rent for $900-$1,000 per month for rent, the the PGI would be $1,000 x 12 = $12,000 per year. The Potential Gross Income of a property is simply the "best case scenario" of what it can generate in rent. All the key terms in the model are explained below: This is the most basic of mathematical modeling which allows the investor to determine the Net Operating Income (NOI) of a property. I would hate to "fall in love" with a property where the numbers cannot work out as well as another property.
If the numbers are not super attractive, then looking at the property is not only a waste of time, but it also brings in the opportunity for faulty decision making through emotional attachment. Personally, I never like to go look at investment properties until I've already seen the numbers potential. Too often, I see "wanna-be" investors wanting to go look at properties. This is the most basic of measurement models which allows an investor to take an investment and convert it to a mathematical model so that it can be compared with all other investment opportunities. Today, let's take a look at a model that I refer to as the Real Estate Stack. Having done so for years, we have learned, discovered, and compiled some great models that can be learned by anyone. We often evaluate properties for investment purposes here at the Tallahassee Florida Real Estate Blog.
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