Real Estate Finance Flashcards
What is the formula for taxable income?
Taxable income = NOI - Mortgage Interest - Depreciation - Amortization
What IRS form indicates the amount of interest paid for the year?
IRS Form 1098
What are the three measurements of profit margin, and what does each metric measure?
- Gross Profit Margin measures how efficiently a company is producing their products compared to their competitors
- Operating Profit Margin measures how efficeintly a company’s operations are
- Net Profit Margin measures a company’s overall efficiency
What is the difference between COGS and OPEX (in real estate)?
COGS are expenses incurred by a business to produce the product or service that the business provides. For example, a flipping business could incure COGS from renovation labor costs and rehab materials.
Operating expenses are expenses associated with the basic functions of operations of the property, such as insurance, repairs, and maintenance, and taxes
What are the five examples of rent loss?
Vacancy, concessions, loss to lease, bad debt, model units
What is the formula for Gross Operating Income (GOI) in real estate
GOI = Gross Potential Rent - Rent Loss + Other Income
Other income could be things like parking space income, washer/dryer income, etc
What is the formula for gross potential rent?
Gross potential rent = number of units x market rent x 12
What is the formula for Net Operating Income (real estate)
NOI = gross operating income - operating expenses
What is the formula for Cash Flow (real estate)
Cash flow = NOI - Debt Service - Capital Expenditures
Debt service is typically the regular P&I payment to the lender (usually a mortgage pmt)
What is the formula for Total (simple) Interest
Total Interest = Principal x Interest rate x Number of years
Interest = $10k x 0.05 x 2.5 = $1,250
What is the Rule of 72
Number of years to double = 72 / Rate of return
What is the Future value Formula
FV = PV x (1 + i) ^n
The NOI equation omits which two major expense categories (in addition to taxes)?
Captial expenses and debt service
What is the difference between simple interest and compounding interest?
With simple interest, profits are removed from the investment. Compound interest means you are reinvesting your interest (profits) back into your investment.
What is the key to making good decisions using expected value?
Having accurate probabilities for each outcome
What input does net present value consider that discounted cash flow does not?
NPV factors the initial capital investment into the calculation; DCF analysis does not
What is a simple way to describe what IRR measures
IRR is a the time-weighted compound annual growth rate of an investment
What is the relationship between IRR and NPV
IRR is the discount rate that makes NPV = 0
What is the formula for taxable income?
taxable income = NOI - mortgage interest - depreciation - amortization
What are the two most common measurements of profit for real estate investors?
NOI and Cash Flow
What is the formula for NOI?
Gross Operating Income - Operating Expenses
What is ROI and what is the formula?
ROI is the same as interest rate.
ROI = (Ending value - Starting value) / Starting Value
ROI does not take time into consideration. For example, if you have an investment that earns 20% ROI after one year, and you have a second investment that also earns 20% ROI after three years, the first investment will be more valuable
What is Annualized ROI and the formula for it?
Annualized ROI = ROI / Years Held
Annualizing ROI means that regardless of the actual length of the investment, we calculate what the average ROI would be for each year of the investment
What is the major limitation of the ROI equation?
It doesn’t factor in TVM
