Advertised Rental Income

[Preston Brown]

Hey BP! Quick question I'm hoping you can help me understand. 

When looking at properties for sale, I often see something like "Rental income = $1,200". Is this number usually talking about after expenses and mortgage or before the bills are paid? I'm pretty sure any number listed is not accurate either way until I see the actual bills from the property.

I appreciate any insight to help me inderstand what I am not seeing.

[Roy N.]

@Preston Brown

When a vendor, or her/his agent, are advertising a property for sale, rest assured they will paint the rosiest picture possible.

If they are advertising Rental Income of $1200.00, it would be safe to assume they are talking about "scheduled rent" - the income they would receive if the property were 100% full, 100% of the time at the posted rent rate(s) with no economic vacancy {tenants not paying, evictions, etc.} or loss to lease {move in incentives such as 1-month free rent}.   

Occasionally, you may find an ancillary income stream {parking, laundry} included in that number to boost it even further.

In reality, your effective gross revenue will be the scheduled rent minus vacancy. It will be from this effective Gross Revenue that you will deduct the operating expenses (property taxes, utilities, maintenance {but not capital improvement}, landscaping & snow removal, garbage collection, pest control, etc.) to arrive at your Net Operating Income (NOI).

From your NOI, you would pay your debt service and any reserve contributions for future Capital Expenditures (the big-ticket items which are capitalized with the property: new roof, HVAC replacement, etc.). Whatever is left over is your Cash-Flow Before Taxes (CFBT) or, alternatively, your free cash-flow.