Well fellas I’m old school. I learned from the formula below and I’m not up on the 50/2% rule but I’m eager to learn.
I want to thank you for your helping me see a new way. I know where I have been formulating wrong now.
This project is not good, for me anyway. I’ve tried many different scenarios and I can’t make it work.
Thanks again.
Gross Scheduled Income - Represents the sum of all annual rents as if the units were 100% occupied.
Effective Gross Income – Represents the vacancy and credit loss and deduct it from the gross scheduled income.
Gross Operating Income - Represents income generated from other sources (if any) such as laundry income, storage, parking etc…
A. INCOME
TOTAL RENTS X 12 = ______________________(GSI - Fully occupied total rental income)
GROSS SHEDULED INCOME
MINUS VACANCIES=________________EGI (actual, if less than full) – If full use min. 5%
EFFECTIVE GROSS INCOME
ADD____________________________________(laundry, storage, parking and vending income).
TOTAL INCOME (GOI )______________________________________________________
GROSS OPERATING INCOME
MINUS TOTAL EXPENSES __________________________________________________
NOI _______________________________________________________________________
NET OPERATING INCOME
NOI divided by .09 = VALUE
B. EXPENSES
DO NOT INCLUDE depreciation, amortization, interest expense or capital expenditures. Only include actual operating expenses
Based on a fully rented property, the seller's expenses must include a minimum 5% for Management. It doesn't matter if the seller says he operates the property at no charge. This minimum 5% must be included. Example: A fully rented property brings in a G.O.I. (Gross Operating Income) annually of $220,000 [See A4 above]. Allowing 5% for management is $11,000. The seller does not list management expense at all, so you must add $11,000 as an expense. If he shows $13,000 for management, then use his higher $13,000 number. If he shows only $7,000 for management, then add in $4,000 ( $11,000 less $7,000) to bring it up to a minimum 5%
Based on a fully rented property, the seller's expenses must include a minimum 5% for Repairs and Maintenance It doesn't matter if the seller says he operates the property at no charge. This minimum 5% must be included. Example: A fully rented property brings in a G.O.I. (Gross Operating Income) annually of $220,000 [See A4 above].. Allowing 5% for Repairs and Maintenance is $11,000. The seller does not list Repairs and Maintenance expense at all, so you must add $11,000 as an expense. If he shows $13,000 for Repairs and Maintenance, then use his higher $13,000 number. If he shows only $7,000 for Repairs and Maintenance, then add in $4,000 ( $11,000 less $7,000) showing it as a reserve of $4,000to bring it up to a minimum of 5%
Other common expense categories (based on an apartment building-will vary for other income property) Real Estate Taxes, Water and Sewer, Common area utilities, Insurance, Legal and Accounting, Advertising, Telephone, Licenses, Heat (if owner pays), Electricity (if owner pays), Cable TV, Supplies, Elevator expense, Pest control.
1. Adding all of the above expenses results in TOTAL EXPENSE
2. Total Income less Total Expense equals (N.O.I.) Net Operating Income
An example of a property valuation calculation using the Net Operating Income (N.O.I.) approach
1. Total Gross Operating Income is $220,000.
2. Total expenses are $70,000.
3. Therefore the N.O.I. is $150,000.
4. If an apartment building, divide $150,000 by .09 (9 cap) which gives a value of $1,666,666.
5. If another type of income property, divide $150,000 by .10 (10 cap) which give a value of $1,500,000.
6. Use the above valuation, less 5% to 10% as your opening offer. The above valuations will be your "target" or the maximum amount you will pay for the property. You may make an occasional exception to these calculation rules, but remember to never make the exception the rule. Sticking to the above calculation rules will mean you will rule out some properties; but also remember that if you pay too much you will not be able to get sufficient financing anyway. Most properties eliminated by the N.O.I. valuation rules usually are not priced right for an informed buyer. They are priced right for the seller and his Realtor.
TOTAL RENTS X 12 = $1,038,636_________(GSI - Fully occupied total rental income)
GROSS SHEDULED INCOME
MINUS VACANCIES = ($135,000) $903,613 EGI If full use min. 5%
EFFECTIVE GROSS INCOME
ADD___$14,497___________________________(laundry, storage, parking and vending income).
TOTAL INCOME (GOI )___$918,110_____________________________________
GROSS OPERATING INCOME
MINUS TOTAL EXPENSES $472,019____________________________________
NOI ___________$446,091___________________________________________________
NET OPERATING INCOME
NOI divided by .09 = VALUE
$446,091 DIVIDED BY .09 = $4,956,566
USING LISTING NOI - $4,680,933
ANNUAL DEBT SERVICE - $343,697
DEBT SERVICE RATIO - 1.14
We’ll move on to the next one… :D
