REAL ESTATE

Real estate investing requires an understanding and proficiency of at least a handful of financial measures and formulas, otherwise investment opportunities can't be evaluated correctly, and investment money can be lost.

So to help you better understand real estate investing, I've assembled a list of twenty-one measures and formulas used in real estate investing. Some formulas are omitted because they are complex and would require a financial calculator or real estate investment software to compute.

1. Gross Scheduled Income (GSI)
This is the total annual income of the property as if all the space were 100% rented and all 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 costs associated with keeping a property in service and revenue flowing. This includes property taxes, insurance, utilities, and routine maintenance but does not include debt service, income taxes, or depreciation.

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 property's 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.

Example: $1,492

8. Tax Liability (Savings)
This is what you must pay (or save) in taxes. It's calculated by multiplying the taxable income or loss by the investor's tax bracket.

Example: $1,492 x .28 = $418

9. Cash Flow after Taxes (CFAT)
This is the amount of spendable cash generated from the property after consideration for taxes. In brief, it's the bottom line, and is calculated by subtracting the tax liability from cash flow before taxes