What Every Real Estate Investor Needs to Know About Cash Flow...And 36 Other Key Financial Measures Flashcards
(25 cards)
What do successful R.E. investors really buy? (Intro)
the true investor treats the physical property as a secondary issue. He or she is not so much interested in buying the property but in buying the property’s anticipated economic benefits—what is called the income stream.
What are the four basic investment returns? (Intro)
- Cash flow
- Appreciation
- Loan amortization
- Tax Shelter
What does the term cash flow mean?
Incomings and outgoings of cash, representing the operating activities of an organization. In accounting, cash flow is the difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance).
What is the formula for cash flow? (Intro)
Cash In minus Cash Out = Cash Flow
*The source of the cash inflows and outflows doesn’t concern you when calculating cash flow.
What does the term appreciation mean? (Intro)
The growth in value of a property over time
What is the formula to calculate appreciation? (Intro)
Future resale price - Original purchase price = Appreciation
What does the term loan amortization mean? (Intro)
the liquidation of this debt by the application of installment payments over time.
What is the formula for loan amortization?
Debt Service (i.e., total mortgage payment) - Interest Paid = Amortization
What does the term Annual Debt Service (ADS) mean?
It is the total of all the payment you’ve made in a year towards a mortgage.
What does the term Annual Debt Service (ADS) mean?
It is the total of all the payments you’ve made in a year towards a mortgage, not including interest.
What does the term Tax Shelter mean with regards to real estate?
An income property investment can shelter some of its own income from taxation and occasionally shelter income received from other investment sources.
What is the loose formula used to calculate tax shelter?
Income - operating expenses = Net Operating expenses (NOI) - mtg interest - depreciation (cost recovery) = Taxable income
How do you calculate allowable depreciation on a property so that you can factor that amount into your formula to get taxable income?
N/a
How do you calculate mtg interest to deduct it from your taxable income?
N/a
What are some of the property-related data that needs to be collected?
-Leases
-Tax bill
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What do you need to pay attention to when evaluating lease agreements/rent roll?
- Do the rents match what the seller is claiming he receives in gross income
- Length of leases
- If they’re options to renew the leases. If so, at what rate?
What are some things that a tax bill will tell you about a potential investment?
- How much your tax bill will be for that property
- Whether or not the owner has received a tax abatement that may expire or may not apply to a new owner
- If there’s a “phase in” tax assessment on the property
What type of legal writing should you have a lawyer put in your offers to ensure the rental income and expiration of the leases?
“The Seller warrants and represents that as of the date of this agreement, the leases are for such and such amounts and the expiration dates and renewal options are whatever.” Then ask the lawyer about adding, “…and that these warranties will survive the delivery of the deed.”
What does Gross Scheduled Rent mean? Ch.2
It is the total annual rent value of all the units in the propt. This includes the actual rent generated by occupied units, as well as the potential rent from vacant units.
What does vacant allowance mean? Ch.2
It is an estimate of the amount of potential income that will be lost due to vacancy. It is usually expressed as a percentage of the gross scheduled income.
What does Gross Operating Income (GOI) or Effective Gross Income mean? CH.2
It is the gross scheduled income minus the vacancy allowance. It is the actual amount you collect
What are operating expenses? Ch.2
These are any expenses necessary to keep the revenue stream flowing. This includes propt insurance, taxes, repairs, utilities, and mgt fees. Mortgage payments and depreciation are not considered operating expenses, nor are capital improvements
What does Net Operating Income (NOI) mean? Ch.2
It is what’s left of your total potential income after all vacancy and expense items have been subtracted. Again, mortgage payments and capital expenditures have no impact on the NOI.
Rule of Thumb: What do many investors like to use as a vacancy allowance range? Ch.2
In the absence of usable market data investors will use a 3%-6% vacancy allowance. The exception to this rule of thumb is in the case of a newly built project that is being leased for the first time. Vacancy during the initial lease-up period can be much higher. A a property whose actual vacancy history is close to zero has probably been rented at less than market rates. In other words, if you don’t experience some vacancy, you’re just not charging enough.
