Understanding the real estate investing terms and formulas is extremely helpful (if not crucial) for brokers, agents and investors who want to service or acquire real estate investment properties.
This is not always the case, though. During my thirty-year experience as an investment real estate specialist I often encountered far too many that had no idea, and it showed – both in their performance and success rate.
As a result, I felt it needful to list what I deem are the top 20 real estate investing terms and formulas worth understanding categorized as either primary or secondary. The primary terms and formulas are the very least you should know, and the secondary terms takes it a step further for those of you who are seriously planning to become more actively engaged with real estate investing.
1. Gross Scheduled Income (GSI)
The annual rental income a property would generate if 100% of all space were rented and all rents collected. GSI does not regard vacancy or credit losses, and instead, would include a reasonable market rent for those units that might be vacant at the time of a real estate analysis.
Annual Current Rental Income
+ Annual Market Rental Income for Vacant Units
= Gross Scheduled Income
2. Gross Operating Income (GOI)
This is gross scheduled income less vacancy and credit loss, plus income derived from other sources such as coin-operated laundry facilities. Consider GOI as the amount of rental income the real estate investor actually collects to service the rental property.
Gross Scheduled Income
– Vacancy and Credit Loss
+ Other Income
= Gross Operating Income
3. Operating Expenses
These include those costs associated with keeping a property operational and in service such as property taxes, insurance, utilities, and routine maintenance; but should not be mistaken to also include payments made for mortgages, capital expenditures or income taxes.
4. Net Operating Income (NOI)
This is a property’s income after being reduced by vacancy and credit loss and all operating expenses. NOI is one of the most important calculations to any real estate investment because it represents the income stream that subsequently determines the property’s market value – that is, the price a real estate investor is willing to pay for that income stream.
Gross Operating Income
– Operating Expenses
= Net Operating Income
5. Cash Flow Before Tax (CFBT)
This is the number of dollars a property generates in a given year after all cash outflows are subtracted from cash inflows but in turn still subject to the real estate investor’s income tax liability. Tembusu Grand