All Forum Posts by: Account Closed
Account Closed has started 2 posts and replied 12 times.
Ok Thanks Stephen. I heard at a tax/real estate asset planning conference, and from researching, that a solo 401K was a better option because you didn't need to have a custodian like in a self directed. But I think I'll give them a call. Can't hurt. Knowledge is power.
Has anyone use their solo 401k for real estate investment outside of REITs? I've been talking to Schwab and Fidelity( for hours) about opening a solo 401k and they both said that it's impossible to use a solo 401k for the purpose of real estate investment outside of things like REITs. I'm self employed and currently have 401ks and IRAs at a financial institution.
Post: I've done a rental analysis and have a question about the NOI
- Posts 12
- Votes 2
Quote from @Account Closed:
Quote from @Account Closed:
Quote from @Account Closed:
Quote from @Bill B.:
No. I said NOI made it easier to compare businesses. Because the financing will be different for just about every business.
Real estate financing on the other hand will be almost identical for the same property type. (Which most investors stick to.)
When comparing real estate investments some people want cashflow some people want ROI, (even if ROE is more important) almost nobody in the 1-4 SFR market cares about NOI. That's more useful in medium to large multifamily. Where again. The financing costs can vary wildly.
@Account Closed so for cash flow I've been calculating my rental income minus everything I take out each month, mortgage if financed, (including PMI, property taxes and insurance), HOA if any, management fees, and everything for my reserve fund(vacancies, maintenance , Capex,. ROI I've been calculating it by assuming it will be financed. So for my total out of pocket I use my down payment, closing costs, rehab costs, attorney fees, points (depending on deal structor) realtor fees(depending on how the deal is structured), inspections(depending on how deal is structured), etc. Any cash that I have to physically take out of my bank before and at closing. For my ROI I then take my annual cash flow/total all in cost. That's how I've been doing it.
Here is an example for how you calculate cash flow and return on investment:
First, you should calculate the NOI: NOI= Gross income - (taxes, interest, reserve deposits repairs, maintenance, landscaping, management fees, your utilities...) NOI does not include mortgage payments and Cap-ex. Cap-ex refers to big, one-off expenses that you pay from time-to-time. In tax terms, Cap-ex is referred to as "improvements" and are added to your tax basis and not your "expenses".
Second, you calculate cashflow simply by subtracting your mortgage payments from your NOI.
Third, you calculate the ROI by dividing the net gain or loss by the total amount you have invested. A monthly ROI = NOI/cash you invested . For example, you buy a property for $100k cash with no mortgage and the monthly NOI is $5k/month.Your ROI = 5000/100000 = 5%. If you borrow 80000k, your ROI would be 5000.20000=25%. Disclaimer: I might be wrong. To me, ROI has no meaning until after I sell the investment. For example, I hold the same property for 5 years and sold it for $125k. ROI would be (5x5000+125000)/amount invested. Scenario 1 with no debt: ROI=(5x5000+125000)/100000=150%. If you borrow $80k, ROI=(5*5000+125000)/20000=750%. Again, I might be wrong because this math is way off from your actual ROI because it doesn't factor in the costs of the sale, which includes cost recovery, capital gains, realtor fees and a bunch of other stuff. I use the internal rate of return (IRR), which is a better, but not exact, measure of your profit than the ROI model I described.
That said, I don't really think about ROI as described above so I might be totally off and this is a good time for someone to correct me.
@Account Closed wow, what great information and insight. Can't thank you enough.
Post: I've done a rental analysis and have a question about the NOI
- Posts 12
- Votes 2
Quote from @Barry Ruby:
Quote from @Account Closed:
Quote from @Barry Ruby:
@Roger Hector Roger, Cap Ex is not included as part of Op Ex.
NOI is calculated by deducting physical and financial vacancies, all applicable annual expenses including management fees from gross potential income, which includes all rental income (which assumes 100% rental space rented 100% for the entire year) plus all other income.
The value of an income producing asset is determined by capitalizing its NOI.
Capitalization is accomplished by dividing NOI by an assumed or stated Capitalization Rate (Cap Rate).
The Cap Rate represents the cash on cash return realized by a Buyer (investor) that paid all cash to purchase the property's NOI (also known as Net Before Debt).
Please let me know if you have any questions or would you like me to send a short Excel worksheet to more fully explain the above.
Hope this helps
@Barry Ruby yes absolutely, send whatever you think can help my education. I love learning and I'm learning a ton here on this thread. So let me ask you this, things that I set money aside for, like CapEx, repairs, and maintenance are not calculated in the deduction portion of the equation in calculating NOI because it's just my "saving for a rainy day" so that I have those funds set aside if I do need to repair/replace something? Also when you say "financial vacancy " do you mean actual vacancy that occurs when you don't have rental income from a tenent occupying the rental or are you saying it includes the planning for unexpected vacancy, the 5% taken out of rental income for the rainy day scenario?
I mispoke and should have more accurately said "Economic" rather than Financial vacancy.
Physical Vacancy happens when a rental unit(s) are available for occupancy and are not rented and producing income. Economic Vacancy occurs when a tenant(s) fails to pay any or some of its rent, promotions, rent discounts/incentives, and or giving a manager "free rent" as part of his/her compensation.
If you send me your email address, I'll send an Excel pro forma to you that analyzes a Single Family Buy, Fix and Hold project.
@Barry Ruby thanks for taking the time out to educate me. It's greatly appreciated. For some reason it won't let me put my email here but it's a gmail account Carioca Investment Group without any spaces between each word. Thanks again
Post: I've done a rental analysis and have a question about the NOI
- Posts 12
- Votes 2
Quote from @David M.:
@Account Closed
So, after all of this, have you figured out the discrepancy with the calculator program as you asked about in your OP?
@David M. I have. I've been including ALL of my expenses like vacancy, maintenance, Capex, and mortgage in calculating my NOI. But I've learned that the deduction from gross anticipated income are those things that I would have if I paid cash(property taxes, insurance, management, HOA if any. And not mortgage, PMI, reserve allotments(vacancies, maintenance, Capex )
Post: I've done a rental analysis and have a question about the NOI
- Posts 12
- Votes 2
Quote from @Account Closed:
Quote from @Bill B.:
No. I said NOI made it easier to compare businesses. Because the financing will be different for just about every business.
Real estate financing on the other hand will be almost identical for the same property type. (Which most investors stick to.)
When comparing real estate investments some people want cashflow some people want ROI, (even if ROE is more important) almost nobody in the 1-4 SFR market cares about NOI. That's more useful in medium to large multifamily. Where again. The financing costs can vary wildly.
@Account Closed so for cash flow I've been calculating my rental income minus everything I take out each month, mortgage if financed, (including PMI, property taxes and insurance), HOA if any, management fees, and everything for my reserve fund(vacancies, maintenance , Capex,. ROI I've been calculating it by assuming it will be financed. So for my total out of pocket I use my down payment, closing costs, rehab costs, attorney fees, points (depending on deal structor) realtor fees(depending on how the deal is structured), inspections(depending on how deal is structured), etc. Any cash that I have to physically take out of my bank before and at closing. For my ROI I then take my annual cash flow/total all in cost. That's how I've been doing it.
Post: I've done a rental analysis and have a question about the NOI
- Posts 12
- Votes 2
Quote from @Barry Ruby:
@Roger Hector Roger, Cap Ex is not included as part of Op Ex.
NOI is calculated by deducting physical and financial vacancies, all applicable annual expenses including management fees from gross potential income, which includes all rental income (which assumes 100% rental space rented 100% for the entire year) plus all other income.
The value of an income producing asset is determined by capitalizing its NOI.
Capitalization is accomplished by dividing NOI by an assumed or stated Capitalization Rate (Cap Rate).
The Cap Rate represents the cash on cash return realized by a Buyer (investor) that paid all cash to purchase the property's NOI (also known as Net Before Debt).
Please let me know if you have any questions or would you like me to send a short Excel worksheet to more fully explain the above.
Hope this helps
@Barry Ruby yes absolutely, send whatever you think can help my education. I love learning and I'm learning a ton here on this thread. So let me ask you this, things that I set money aside for, like CapEx, repairs, and maintenance are not calculated in the deduction portion of the equation in calculating NOI because it's just my "saving for a rainy day" so that I have those funds set aside if I do need to repair/replace something? Also when you say "financial vacancy " do you mean actual vacancy that occurs when you don't have rental income from a tenent occupying the rental or are you saying it includes the planning for unexpected vacancy, the 5% taken out of rental income for the rainy day scenario?
Post: I've done a rental analysis and have a question about the NOI
- Posts 12
- Votes 2
Perfect!!!! I really do appreciate the help @Bill B. and @Account Closed All makes more sense now.
Post: I've done a rental analysis and have a question about the NOI
- Posts 12
- Votes 2
Quote from @Account Closed:
Quote from @Bill B.:
I was going to say I have $50 that says you included the entire mortgage payment as an expense…it’s not. You need to replace the mortgage payment in your income minus expense calculation with just the interest and taxes, nearly 1/3rd of your payment will be towards principle, which is not an expense.
But then I re-read your post. For some reason you're trying to figure out NOI? Is there a new guru in town? You're the second or third person to ask about NOI on rental properties this week. NOI has no business in real estate calculations. Net OPERATING income, means the income if you purchased the BUSINESS for cash. So it's easier to compare the business without the financing clouding the comparison.
So…delete NOI from your real estate dictionary/language. But the answer to your question is neither the principle nor the interest count in NOI. So it means nothing if you plan to borrow money.
The confusion might center around the difference between NOI and cash flow. NOI is calculated by subtracting all expenses from the gross income. Debt, i.e., mortgage payments, are NOT considered an expense. Cash flow is the amount of money you put in your pocket and is calculated by subtracting your debt payments from the NOI.
Granted, if one does not take out a loan, NOI equals cash flow. However, if you take out a loan, your cash flow is ALWAYS less than the NOI. It's incomprehensible how one could say NOI "has no business in real estate calculations". I don't think there is anyone on the planet--correction: any OTHER person on the planet--who would buy a property without calculating the NOI.
You indicated that, "it’s easier to compare the business without the financing clouding the comparison". Here, you are saying that it's easier to compare businesses based on their NOIs rather than their cash flows. In other words, NOI is an essential parameter in your real estate calculations.
Thanks @Account Closed too.I didn't know that NOI does not include the mortgage payment. Am I correct in saying that NOI does however include the taxes and insurance as expenses along with HOA, vacancy, Capex,etc.?
Post: I've done a rental analysis and have a question about the NOI
- Posts 12
- Votes 2