Investor Information

The Four Basic Returns In Real Estate

Cash Flow

Appreciation

Loan Amortization

Tax Shelter

Cash Flow

All that really matters is how much cash came in and how much cash went out.
Cash in minus cash out equals cash flow.

Appreciation

Not all properties generate a meaningful cash flow.  For those that don’t, the next most important of the four basic returns is appreciation.
Future re-sale price minus original purchase price equals appreciation.

Loan Amortization

Amortization is the liquidation of the debt by the application of installment payments over time.
Debt Service (ie. Total mortgage payments) less Interest Paid equals Amortization.

Tax Shelter

An income-property investment can shelter some of  it’s own income from taxation, and sometimes shelter income received from other investment sources as well.
Income less Operating Expenses equals Net Operating Income.
Then
Net Operating Income less Mortgage Interest less Depreciation (cost recovery) equals Taxable Income.

When looking at an income property the first and for-most question is:
“How much is an income property really worth”?

Whether you’re a buyer, seller, or mortgage lender, one of the most important questions you need to answer is “What is this property really worth”?  Single family homes are worth what a buyer is willing to pay, with emotion often being a factor.  Income-producing property is different!  Value is determined by the numbers!

Do Your Homework!
Data Needed To Make An Investment Decision!

Property-Related Data.
You need to know as much as you can about income and expenses, and you need to know if the information is accurate.

• Ask to see the leases.
• Look at the property tax bill.
• Spot check utility bills.  

Ask to see “the appropriate sections” of the seller’s tax return.  Have your realtor recite the representations about leases and the schedule of rent income in the offer to purchase. ie “The seller warrant’s & represents that as of the date of this agreement, the leases are for such amount and the renewal and expiration dates are whatever.”

Market-Related Data.

Investigate Comparables

• Price per square foot.
• Gross Rent Multiplier.
• Remember this, your buying an income stream.
• Look for comparable date regarding lease rates and operating expense data. 

Annual Property Operating Data
“Buyer Beware”

In the absence of usable market data, many investors like to use a vacancy allowance in the range of 3% to 6%.
Gross Scheduled Income less Vacancy Allowance (3%) equals Gross Operating Income (GOI) less Operating Expenses equal Net Operating Expenses.  (NOI)

How to breakdown how operating are spent:  (ie $2000 fuel oil, $200 electricity “common area”, $200 Water & Sewer, $250 Repairs, $3000 Property Taxes and $1000 on Insurances.)