Chapter 18 Flashcards
How do we get to NOI?
Potential gross income (PGI) − Vacancy & collection loss (VC) = Effective gross income (EGI) − Operating expenses (OE) − Capital expenditures (CAPX) = Net operating income (NOI)
How to we get to EGI?
Potential gross income (PGI)
− Vacancy & collection loss (VC)
= Effective gross income (EGI)
If EGI is $200K and Operating expenses: 40% of EGI, Capital expenditures: 5% of EGI, what is NOI?
200 - 80 - 10 = $110K NOI
What’s the leveraged version of NOI?
Before Tax Cash Flow (BTCF) = NOI - Debt service (PMT)
Debt service
The annualized payments towards a loan
What’s another name for BTCF?
Leveraged operating cash flow
How do you solve for equity?
Purchase price - net loan proceeds (NLP).
NLP = Loan amt - loan costs.
Purchase price = $500K
Loan amount = $200K with two discount points.
What is the equity you have upon purchase?
$500K - $196K = $304K in equity. As you pay your loan back, your equity goes up!
Why do we use BTCF instead of after-tax? What tax are we referring to?
The tax referred to is income tax! This is because income taxes are dependent on state of residence and income class and can differ between investors.
Cap rates differ by ________ , ________ ______ , and _______
Markets; property types; property class (quality of property)
A higher risk will lead to a (higher/lower) cap rate. Why?
Higher. Because the property is risky, CF is risky. This means that you will pay less for the property relative to the CF you expect (bc they aren’t as guaranteed!)
A higher quality property will lead to a (higher/lower) cap rate. Why?
It is the flip-side of risk. A higher quality property –> higher quality tenants –> more foreseeable EGI. Additionally, operating expenses are more consistent bc the building isn’t falling apart –> easier to predict NOI.
What does cap rate fail to distinguish between that EDR does?
Equity and debt!
BTER is the levered equivalent of ________ ?
NSP
GSP (gross sales proceeds) - SC (sales costs) = NSP (net sales proceeds) - RLB (remaining loan balance) = BTER (before tax equity ratio)
Equity Dividend Rate (EDR) is the levered equivalent of ________ ?
Cap rate.
EDR = BTCF / Equity
Cap Rate = NOI / Acquisition price
Which rate, ratio, or multiplier is the “cash-on-cash” rate, or what Curtis calls the “checking acct. rate?” Why does it have this name?
Equity Dividend Rate (EDR). Curtis says “checking account rate” because this is actually what the investor will receive after loan payments, etc.
If I put $100K down on a $500K house, my NOI is $10K and my debt service is $5K, what are my cap rate and EDR? Hint: BTCF
Cap rate =$10K/ $500K = 2%
EDR = (10K-5K)/$100K = 5%
Although the property will only generate 2% returns, I will be earning 5% on my $100K investment.
Net Income Multiplier (NIM)
Reciprocal of cap rate. Acquisition cost/NOI. Rarely used because it’s basically just cap rate.
Effective Gross Income Multiplier (EGIM) and when is it used?
Acquisition cost / EGI. Used to compare similar properties with very similar expenses. This ratio doesn’t take expenses into account!
Operating Expense Ratio (OER)
OE / EGI. Used to determine differences in operating expenses between comparable properties. Could be a concern or opportunity!
Which rate, ratio, or multiplier is the nominal investor’s dividend?
BTCF. It’s the residual cash flow after debts are paid.
Debt Coverage Ratio (DCR)
NOI / Debt service. This determines the “cushion” a commercial investment has to pay back its debt.
You are borrowing from Bonybones Lending and have found two properties. A has a DCR of 1.2 and B has a DCR of 1.6. Which option do you take?
I take B because the cushion is greater to pay back debt!
BTCF vs. BTER
BTCF: NOI - debt service, this is the “investor’s dividend” or the cash-on-cash rate.
BTER: This is the terminal cash flow at the end of the holding period upon sale.
PVin (levered and unlevered)
Levered: BTCF (all yrs) + BTER, discounted to present value. This is the money the investor takes home.
Unlevered: NOI + NSP. This doesn’t take debt or remaining loan balance into account.
BTCF = ? if we don’t borrow any money
NOI
