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Real Estate Investing - Key Terms and Formulas, Part 1

In this article, Real Estate Investing - Key Terms and Formulas, Part 1, we list and explain ten key real estate investing terms with formulas.

1. Gross Scheduled Income (GSI) Gross scheduled income is the total annual income of the property as if all the space were rented and all rent collected. It does not regard possible vacancy or credit losses. In fact, GSI would include a reasonable rent for those units that might be vacant.

2. Gross Operating Income (GOI) Gross operating income equals the annual gross scheduled income (GSI) less vacancy and credit loss plus income derived from other sources such as coin-operated laundry facilities. Consider it as the amount you actually collect.

3. Operating Expenses Operating expenses include those costs associated with keeping a property in service. These costs would be for property taxes, insurance, utilities, and routine maintenance, for instance, but not for debt service, income taxes, or depreciation.

4. Net Operating Income (NOI) Net operating income is on an annual basis and is calculated by subtracting operating expenses from gross operating income (GOI).

5. Cash Flow Before Tax (CFBT) Cash flow is simply net operating income (NOI) less debt service. In this case, cash flow before tax measures the annual cash available before consideration of income taxes.

6. Real Property Depreciation (Cost Recovery) The amortized deductible amount attributable to improvements according to its useful life as specified in the tax code. This is calculated by first determining what portion of the investment are buildings (land is not depreciable) and then amortizing that amount over 27.5 years for property classified as residential or 39.0 years for property classified as nonresidential (commercial).

7. Taxable Income Taxable income is the amount on which you must pay Federal income tax. It is calculated by taking net operating income (NOI) less mortgage interest, real property and any capital additions depreciation, loan points and closing costs, and then adding any interest earned on property bank accounts or mortgage escrow accounts.

8. Cash Flow After Tax (CFAT) The amount of spendable cash made from the investment. It is calculated as cash flow before tax (CFBT) minus taxable income.

9. Gross Rent Multiplier (GRM) A simple method you can use to estimate the market value of an income property. The calculation is GRM = Price / Gross Scheduled Income. Conversely, if you know the GRM for other properties in your area, you can determine market value for a specific property: Value = Gross Scheduled Income x GRM.

10. Capitalization Rate (Cap Rate) A popular return used by real estate investors that measures the ratio between net operating income (NOI) and property value. The calculation is Cap Rate = Net Operating Income / Value (price). You can also transpose the formula to solve for other variables. Value = Net Operating Income / Capitalization Rate, and Net Operating Income = Value x Capitalization Rate.

ProAPOD® Real Estate Investment Software makes calculations for all these financial measures and returns and posts them in each appropriate report automatically as you enter the property data. Recalculations are made instantly when you change your data.

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