Valarie hit it out of the park. You need a good manager and also need to screen well. Myself, I like Section 8, you actually know your getting a check every month. Most important of all IMO is NOI...
Net Operating Income or NOI is equal to a property's yearly gross income less operating expenses. Gross income includes both rental income and other income such as parking fees, laundry and vending receipts, etc. All income associated with a property. Operating expenses are costs incurred during the operation and maintenance of a property. They include repairs and maintenance, insurance, management fees, utilities, supplies, property taxes, etc. The following are not operating expenses: principal and interest, capital expenditures, depreciation, income taxes, and amortization of loan points. Net operating income is calculated like this.
Income
Gross Rents Possible 100,000
Other Income 3,000
Potential Gross Income 103,000
Less vacancy Amount 2,000
Effective Gross Income 101,000
Less Operating Expenses 31,000
Net Operating Income 70,000
Net operating income or NOI is used in two very important real estate ratios. It is an essential ingredient in the Capitalization Rate (Cap Rate) calculation that is used to estimate the value of income producing properties. Lets assume we have a market capitalization rate of 10 for the type of property we are considering purchasing. A market cap rate is calculated by evaluating the financial data from current sales of similar income producing properties in a given market place. We are evaluating a similar income property that is currently for sale with a net operating income of $50,000. We would estimate the value of this property like this.
Net Operating Income 50,000
Estimated Value = ------------------------------ = ------------ = 500,000
Capitalization Rate .10
Another important ratio that is used to evaluate income producing properties is the Debt Coverage Ratio or DCR. The NOI is a key ingredient in this important ratio also. Lenders and investors use the debt coverage ratio to measure a property's ability to pay it's operating expenses and mortgage payments. A debt coverage ratio of 1 is breakeven. Most lenders require minimum of 1.1 to 1.3 to be considered for a commercial loan. From a a bank's perspective, the larger the debt coverage ratio, the better. Debt coverage ratio is calculated like this.
Net Operating Income 50,000
Debt Coverage Ratio = ------------------------------- = ---------- = 1.25
Debt Service 40,000
Debt service is the total of all interest and principal paid on a loan in a given year. It is equal to the mortgage payment times 12 or the mortgage payments times 12 if you have multiple loans on a property.
SORRY: I can't get the formulas to show correctly. However, fill in the blanks with the info above and below the divisable line!
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Jul 02 '09, 10:22 AM
