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Potential Gross Income is the total annual income that a
property produces at its 100% potential, before any expense
is deducted or loss incurred. |
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- Effective
Gross Income ( EGI ) |
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|
Effective Gross Income = (Potential Gross Income) - (Vacancy
& Collection Loss) + (Other Income) |
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- Net
Operating Income ( NOI ) |
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| The
Net Operating Income is obtained by subtracting total
operating expenses (as well as any other additional expenses
involved in the operation of the property) from the
Effective Gross Income "EGI". |
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- Operating
Expenses |
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Operating Expenses are all expenses necessary to operate and
maintain an income property. |
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- Fixed
Operating Expenses |
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Expenses that remain "fixed" regardless of the operation of
the property. Ex: Real Estate Taxes, Insurance. |
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- Variable
Operating Expenses |
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Expenses that vary depending on the operation of the
property. Ex: Maintenance, Utilities, Management. |
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- Reserves
for Replacement |
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| A
portion of the income set aside to replace components of the
property at the end of their useful lives. Reserves for
replacement expenses are usually not a cash expense. |
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-
Depreciation |
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| For
appraisal purposes, depreciation is described as a loss of
value for any reason. |
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-
Capitalization Rate ( Cap. Rate ) / Direct Capitalization |
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| The
Capitalization Rate is used to analyze the relationship
between the Estimated Value of a property and the Estimated
Net Operating Income "NOI". The Capitalization Rate
"Cap. Rate" is equal to the "NOI" divided by the "Property
Value"; for example: Value=100,000, NOI=10,000,
therefore; Cap.Rate= 10,000/100,000= 10%.
In Direct Capitalization you divide the "NOI" by an overall
capitalization rate. |
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- Lender's
IRR ( Internal Rate of Return) |
|
| The
Lender's IRR (Internal Rate of Return) is based on the
initial loan amount (adjusted for any "points"), Total
annual payments, and loan payoff (adjusted for "lender's
participation" and pre-payments penalties). The
Lender's IRR will give you an uniform estimate of how much a
loan is costing you. Because the Lender's IRR is
adjusted for discount points, participation, and
pre-payments; it makes it easier to compare loan options. |
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- Loan to
Value Ratio |
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| The
Loan to Value Ratio (L/V) is the relationship between the
amount borrowed and the appraised value (or purchase price)
of a property. The L/V Rario is used to measure the
financial risk associated with lending and borrowing money. |
|
- Debt
Service Coverage Ratio |
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| The
Debt Service Coverage Ratio is used to measure the amount of
cash flow remaining after the annual debt service has been
paid. The higher the D.C. Ratio is, the more likely it is
that the investor will have adequate income to cover the
debt service. |
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- Operating
Expenses Ratio |
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| The
Operating Expense Ratio is used to determine the percentage
of effective gross income that is consumated by operating
expenses. The O.E. Ratio is often used to judge how likely
an investor will be able to make mortgage payments. |
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- Cash
Breakeven Ratio |
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| The
Cash Breakeven Ratio provides lenders and investors with a
measure of all cash charges against potential gross income.
The lower the C.B. Ratio the greater the cash return to the
investor. |
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- Margin of
Safety |
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| The
Margin of Safety between cash receipts and cash
disbursements is the difference between 1.00 and the cash
breakeven ratio. |
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- Investor's
Pre-tax Equity Dividend Ratio ( EDR ) |
|
| The
Pre-Tax Equity Dividend Rate (also called "Cash an Cash"
return) relates the amount of before-tax cash remaining
after debt service to the investor's equity.
The Pre-Tax EDR is an important and widely used ratio in
real estate investment analysis because it is an indication
of the return to an investor on his or her cash investment
in a project. |
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- Investor's
After-tax Equity Dividend Ratio ( EDR ) |
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| The
After-Tax Equity Dividend Rate relates the amount of
after-tax cash remaining after debt service to the
investor's equity. |
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- Yield to
Investor |
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| The
Yield To Investor is calculated as the relationship between
the Net Operating Income (NOI) minus Interest Expense and
the Amount of Equity. The Yield can be used to calculate the
effect of leverage. |
