1. Scheduled Gross Income [SGI]
This is the total income a property could generate if all units were rented. Add all the income on units that are rented and are not rented and you'll get your scheduled gross income. (Note: You can also factor in other income, such as soda machines, coin laundry, etc., but not for this example)
8 units x $700 per unit = $5,600 per month
$5,600 per month x 12 months = $67,200 per year SGI
2. Effective Gross Income [EGI]
EGI is the Scheduled Gross Income minus your vacancy rate. If a history of vacancies is available to you, I'd recommend calculating the past 3 years to come up with an average . If you don’t have a rental history, use 5% of SGI as a rule of thumb. (Note: you can also add in additional sources of income including soda machines, coin laundry, etc. For this example, I’ve left it out.)
$67,200 SGI - 5% = $63,840 EGI
3. Net Operating Income [NOI]
This is the remaining income after all operating expenses have been paid, including property tax, insurance, utilities, maintenance and management. Operating expenses don't include the mortgage.
$63,840 EGI - ($3,000 taxes + $1,800 insurance + $3,600 utilities + $4,800 maintenance) =
$50,640 NOI
4. Net Cash Flow
The net cash flow remaining after the mortgage payment is deducted from NOI.
$50,640 NOI - (2,577.21 mo. x 12 mos.) $30,926.52 per year = $19.713.48 Net Cash Flow
5. CAP Rate
CAP = NOI / Sales Price or Net Income = Sales Price x Cap Rate
CAP Rates are good for comparing the rate of return on properties within a particular geographical market. CAP Rates don’t take into consideration the mortgage, appreciation or depreciation, or market conditions, and are focused on one year. The higher the CAP Rate, the better.
$50,640 NOI ÷ $500,000 sales price = 10.12% CAP Rate
6. Cash on Cash Return
Cash on Cash Return is a form of ROI. Sometimes the two are used synonymously.
So for the above example:
Net Cash Flow / Initial Investment = Cash on Cash Return
$19,713.48 / 100,000 = .1971 or 19.71% Cash on Cash Return
* the initial investment includes down payment and closing costs.
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