Episode 7 Real Estate by the Numbers Flashcards
Net worth = Total value of assets – Total value of liabilities
Assets are resources owned or controlled by you or your business that can be measured in dollars and will provide some future value.
Liquid assets are assets that are easily turned into cash, such as stocks, bonds, and—of course—actual cash.
Appreciating assets are assets that tend to increase in value over time. Depreciating assets are assets that tend to decrease in value over time.
Liabilities are legal debts and obligations that reduce future financial value.
The Personal Financial Statement (PFS) Equation: Net Worth = Assets – Liabilities
Savings rate = Monthly income – Monthly expenses
Investable Assets = Liquid Assets – (3 × Monthly Expenses
The balance sheet is a snapshot in time of everything your business owns, everything it owes, and the difference between those two numbers (which is the total value of the business).
Owner equity is the total value of the company to the owners.
The Balance Sheet Equation: Assets = Liabilities + Owner equity
The income statement (also known as the profit and loss statement) is a breakdown of revenue, expenses, and total profitability for a business or investment over a defined period of time.
Income is a general term referring to the money flowing into a business or investment. Sometimes you will see income referred to as “revenue” or “sales” instead.
Cost of goods sold (COGS), also called cost of sales, is the direct cost to produce the goods and services sold by a company.
Gross profit is the amount of income a company makes after subtracting the costs associated with making and selling its products and services from its total revenue. Gross profit = Income – Cost of goods sold
Operating expenses are the costs incurred in the normal operations of the business.
Operating income is the amount of profit a company makes after subtracting both gross profit and operating expenses from revenue. Operating income = Gross profit – Operating expenses
Net income is the amount of profit a company makes after subtracting cost of goods sold, operating expenses, taxes, and interest payments from the total revenue. Net income = Operating income – Taxes – Interest
Profit margin is the ratio of the profit a business generates to the amount of revenue brought in. The more money a business keeps in profit, the higher its profit margins. Profit margin = Profits ÷ Revenue
Gross profit margin is the ratio of the amount of gross profit a business generates to the amount of revenue brought in. This ratio indicates how efficiently the company is producing their products compared to their competitors.
-Gross profit margin = Gross profit ÷ Revenue
Operating profit margin is the ratio of the amount of operating income a business generates to the amount of revenue brought in. This ratio indicates how efficiently the company is operating, including both product creation and management.
-Operating profit margin = Operating income ÷ Revenue
Net profit margin is the ratio of the amount of net income a business generates to the amount of revenue brought in. This ratio indicates how efficiently the company is operating overall.
-Net profit margin = Net income ÷ Revenue
Gross operating income (GOI) GOI = Gross potential rent – Rent loss + Other income
Gross potential rent Gross potential rent = Number of units × Market rent × 12
Operating expenses (in real estate) are expenses associated with the basic functions and operations of the property, such as insurance, repairs and maintenance, and taxes.
Net operating income (NOI) is the gross operating income of a property minus operating expenses. NOI = Gross operating income – Operating expenses
Cash flow is the amount of pre-tax cash a property generates. It is equal to the net operating income minus debt service and capital expenses. Cash flow = NOI – Debt service – Capital expenses
Interest is the periodic payment against money that is borrowed or lent.
Simple interest Interest = Principal × Interest rate
Total interest Total interest = Principal × Interest rate × Number of years #31: Interest rate Interest rate = Interest ÷ Principal
Compound interest Compound interest = (Principal × (1 + Interest rate) Periods) – Principal
Expected value EV = (E1 × P1) + (E2 × P2) + … + (EN × PN)
Where:
-E = The expected financial result of the outcome, and
-P = The probability of the outcome.
Time value of money (TVM) is the concept that money in hand today is worth more than money in hand at some future time.
Future value formula FV = PV × (1 + i) n
Discount rate is the rate of return used to discount future value (or future cash flows) back to their present value.
Present Value formula PV = FV ÷ (1 + i) n
Discounted cash flow (DCF) gives you the present value of an entire stream of income.
-DCF = (CF1 ÷ (1 + i)1) + (CF2 ÷ (1 + i)2) + … + (CFx ÷ (1 + i)x)
where CF is each of the future cash flows, and i is the discount rate.
Net present value (NPV) compares the current value of all future cash flows generated by a project while considering the initial capital investment in order to determine whether the investment will be profitable.
Internal rate of return (IRR) is the discount rate that makes NPV = 0 for an investment; IRR is the compounded return of that investment.
Taxable income Taxable income = NOI – Mortgage interest – Depreciation – Amortization
Depreciation is a tax adjustment that accounts for the declining condition of a physical property. It allows real estate investors to delay a portion of their income taxes for a given property until that property is sold.
Amortization refers to tax deductions against loan expenses that are taken over a period of time, as opposed to all at once.
Basis (or “cost basis”) is the starting point for the tax liability associated with selling a property. It is generally defined as the purchase price plus any closing costs.
Adjusted basis is the end point for the tax liability associated with selling a property. It adjusts the “basis” by accounting for capital expenditures, sales costs, and depreciation.
Adjusted basis formula Adjusted basis = Purchase price + Purchase costs + Capital expenditures + Selling costs – Depreciation
Taxable gain/Loss at sale Taxable gain/Loss at sale = Sale price – Adjusted basis
Cash flow before taxes Cash flow before taxes = NOI – Debt service – Capital expenses + Loan additions
Cash flow after taxes Cash flow after taxes = Cash flow before taxes – Income tax
