What Every Real Estate Investor Needs to Know About Cash Flow...And 36 Other Key Financial Measures

Question 1

What do successful R.E. investors really buy? (Intro)

Answer 1

the true investor treats the physical property as a secondary issue. He or she is not so much interested in buying the property but in buying the property’s anticipated economic benefits—what is called the income stream.

Question 2

What are the four basic investment returns? (Intro)

Answer 2

1. Cash flow
2. Appreciation
3. Loan amortization
4. Tax Shelter

Question 3

What does the term cash flow mean?

Answer 3

Incomings and outgoings of cash, representing the operating activities of an organization. In accounting, cash flow is the difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance).

Question 4

What is the formula for cash flow? (Intro)

Answer 4

Cash In minus Cash Out = Cash Flow

*The source of the cash inflows and outflows doesn’t concern you when calculating cash flow.

Question 5

What does the term appreciation mean? (Intro)

Answer 5

The growth in value of a property over time

Question 6

What is the formula to calculate appreciation? (Intro)

Answer 6

Future resale price - Original purchase price = Appreciation

Question 7

What does the term loan amortization mean? (Intro)

Answer 7

the liquidation of this debt by the application of installment payments over time.

Question 8

What is the formula for loan amortization?

Answer 8

Debt Service (i.e., total mortgage payment) - Interest Paid = Amortization

Question 9

What does the term Annual Debt Service (ADS) mean?

Answer 9

It is the total of all the payment you’ve made in a year towards a mortgage.

Question 10

What does the term Annual Debt Service (ADS) mean?

Answer 10

It is the total of all the payments you’ve made in a year towards a mortgage, not including interest.

Question 11

What does the term Tax Shelter mean with regards to real estate?

Answer 11

An income property investment can shelter some of its own income from taxation and occasionally shelter income received from other investment sources.

Question 12

What is the loose formula used to calculate tax shelter?

Answer 12

Income - operating expenses = Net Operating expenses (NOI) - mtg interest - depreciation (cost recovery) = Taxable income

Question 13

How do you calculate allowable depreciation on a property so that you can factor that amount into your formula to get taxable income?

Answer 13

N/a

Question 14

How do you calculate mtg interest to deduct it from your taxable income?

Answer 14

N/a

Question 15

What are some of the property-related data that needs to be collected?

Answer 15

-Leases
-Tax bill
-

Question 16

What do you need to pay attention to when evaluating lease agreements/rent roll?

Answer 16

• Do the rents match what the seller is claiming he receives in gross income
• Length of leases
• If they’re options to renew the leases. If so, at what rate?

Question 17

What are some things that a tax bill will tell you about a potential investment?

Answer 17

• How much your tax bill will be for that property
• Whether or not the owner has received a tax abatement that may expire or may not apply to a new owner
• If there’s a “phase in” tax assessment on the property

Question 18

What type of legal writing should you have a lawyer put in your offers to ensure the rental income and expiration of the leases?

Answer 18

“The Seller warrants and represents that as of the date of this agreement, the leases are for such and such amounts and the expiration dates and renewal options are whatever.” Then ask the lawyer about adding, “…and that these warranties will survive the delivery of the deed.”

Question 19

What does Gross Scheduled Rent mean? Ch.2

Answer 19

It is the total annual rent value of all the units in the propt. This includes the actual rent generated by occupied units, as well as the potential rent from vacant units.

Question 20

What does vacant allowance mean? Ch.2

Answer 20

It is an estimate of the amount of potential income that will be lost due to vacancy. It is usually expressed as a percentage of the gross scheduled income.

Question 21

What does Gross Operating Income (GOI) or Effective Gross Income mean? CH.2

Answer 21

It is the gross scheduled income minus the vacancy allowance. It is the actual amount you collect

Question 22

What are operating expenses? Ch.2

Answer 22

These are any expenses necessary to keep the revenue stream flowing. This includes propt insurance, taxes, repairs, utilities, and mgt fees. Mortgage payments and depreciation are not considered operating expenses, nor are capital improvements

Question 23

What does Net Operating Income (NOI) mean? Ch.2

Answer 23

It is what’s left of your total potential income after all vacancy and expense items have been subtracted. Again, mortgage payments and capital expenditures have no impact on the NOI.

Question 24

Rule of Thumb: What do many investors like to use as a vacancy allowance range? Ch.2

Answer 24

In the absence of usable market data investors will use a 3%-6% vacancy allowance. The exception to this rule of thumb is in the case of a newly built project that is being leased for the first time. Vacancy during the initial lease-up period can be much higher. A a property whose actual vacancy history is close to zero has probably been rented at less than market rates. In other words, if you don’t experience some vacancy, you’re just not charging enough.

Question 25

What is the formula for calculating period interest?

Answer 25

(FV/PV)(1/N)– 1