7 Real Estate Investment Basics Free Online FlashCards

What is potential gross income?

Potential gross income is the rent and other income a property would earn if fully occupied and all amounts were collected.

How is net operating income calculated?

Net operating income (NOI) is effective gross income minus operating expenses.

How should major improvements be treated in an operating-cost estimate?

Major improvements and replacement of long-lived building components are generally treated separately from routine operating costs, but investors should still budget for them.

What does a property's cap rate measure?

The capitalization rate is annual NOI divided by property price: $\text{cap rate}=\frac{\text{annual NOI}}{\text{property price}}$. It estimates the unleveraged operating return at the current price.

How does the income approach estimate property value?

The income approach estimates value as stabilized NOI divided by the cap rate: $\text{value}=\frac{\text{stabilized NOI}}{\text{cap rate}}$. The estimate depends on the quality of both assumptions.

How is debt-service coverage commonly calculated?

Debt-service coverage is commonly calculated as NOI divided by annual debt service: $\text{DSCR}=\frac{\text{NOI}}{\text{annual debt service}}$.

What assumptions should a property investment stress test?

Recalculate the plan with less favorable assumptions, such as lower rents or occupancy, higher expenses or interest costs, and a lower resale value.

How does liquidity generally differ between traded and non-traded REITs?

Publicly traded REITs can generally be bought and sold on an exchange. Non-traded REITs may be less liquid and harder to value.

How do you calculate effective gross income?

Effective gross income equals potential gross income minus expected vacancy and credit losses, plus other income.

Which costs are excluded from NOI?

NOI is calculated before mortgage payments, income taxes, and depreciation. Mortgage principal and interest are financing costs, not operating expenses.

How do you calculate cash flow after debt service?

Cash flow after debt service is NOI minus mortgage payments: $\text{cash flow}=\text{NOI}-\text{mortgage payments}$. It is before income taxes and separately budgeted capital costs.

How is cash-on-cash return calculated?

Cash-on-cash return is annual pre-tax cash flow divided by cash invested: $\text{cash-on-cash return}=\frac{\text{annual pre-tax cash flow}}{\text{cash invested}}$.