Technical Definitions - Crunching Numbers

[Zach Bair]

Hello. 

I am new to real estate and wanting to crunch some numbers, but am finding that definitions vary from blog to blog. Please see below and clarify, if possible. Thanks.

A) Net Operating Income = income produced minus expenses. What is included in expenses???

  1) It does OR does not include mortgage

  2) It does OR does not include property taxes

  3) It does OR does not include "subjective monthly cost" (i.e. estimated; vacancy, repairs, capital expenditures)   

*I have read that it does not include mortgage, taxes and/or capital expenditures. How do you calculate? I'm pretty sure all expenses are included except the mortgage/interest payment...

B) 2% Rule = rent should be 2% of purchase price. 

=>Do they mean the "new" purchase price (i.e. ARV/Market value) or the price I paid (purchase price + plus closing cost + loan fee + rehab cost)?

*This is a quick tool for rental properties and I assume that you should just keep it to the basics listed above AND NOT try to factor in holding coast associated with the rehab. Do you agree? I think just rent divided by ARV is the simplest way to address this.

C) Capitalization Rate = Net Operating Income divided by "purchase price" / "Market Value".
-I have seen the term market value and purchase price. I think the term "purchase price" refers to the market value and not what the investor paid for it, correct? 

=> Basically this revolves around question A & B. NOI expenses = everything but the mortgage & purchase price is the market value. Since this is a yearly assessment tool, would you ever factor in holding cost if you anticipate a rehab taking a significant amount of time???

Thanks for any help you give. 

Zach