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In this Golden Nugget we walk through a simple example to understand 4 basic performance indicators investors look at while analyzing a Real Estate Investment Opportunity.
The four indicators we will unpack today are:
NOI = Net Operating Income
ROI = Return on Investment
CAP RATE = Equation to Determine a Property Value
CASH-ON-CASH Return = Annual timeline to return your cash investment
How do you know your numbers?
Simple example: small apartment building: 4-Unit deal
PURCHASE:
$600K
$150K per unit = $600K purchase price
$120K down payment + $480K mortgage = $600K
INCOME:
$9,000/month or $108,000/annual
$8,000.00 = 4 Units at $2,000 each
$ 600.00 = 4 Storage units at $150 each
$ 400.00 = Monthly coin op laundry
EXPENSES:
$12,480/year or $1,040/month
$2,400/year = Water
$ 480/year = Utilities
$2,400/year = Insurance
$2,400/year = Taxes
$2,400/year = Repairs
$2,400/year = Management
NOI:
(Net Operating Income)
$9,000 = INCOME Monthly
-$1,040 = EXPENSE Monthly
$7,960 = NET Before Debt Monthly
$95,520 = NET Before Debt Annual
$95,520 = NOI (Net Operating Income)
Debt Service:
(Mortgage Payment)
$120K down payment + $480K mortgage = $600K
$480K mortgage amount for the purchase
$3,847 = Mortgage/month @ 7% over 20 years
$4,113 = Net Monthly Cash Flow (after debt service)
$49,356 = Annual Cash Flow (after debt service)
FORMULAS:
NOI = (ANNUAL RENTAL INCOME - ANNUAL OPERATING COSTS) NOI = ($9,000 x 12 = $108,000 - $1,040 x 12 = $12,480) = $95,520$95,520 = NET OPERATING INCOME
ROI = (ANNUAL RENTAL INCOME - ANNUAL OPERATING COSTS) / MORTGAGE VALUEROI = ($9,000 x 12 = $108,000 - $1,040 x 12 = $12,480) / $480,00010% = Return on Investment (You are earning 10% of the mortgage per year)
CAP RATE = NET OPERATING INCOME / PURCHASE PRICE × 100%
CAP RATE = ($7,960 x 12=$95,520) / $600,000 x 100%16% CAP Rate
CASH-ON-CASH RETURN = (ANNUAL CASH FLOW / TOTAL CASH INVESTED) × 100%CASH-ON-CASH RETURN = ($49,356/$120,000) x 100% = 41%$41% Cash on Cash Return (2.5 years to return your down payment)
Get ready to sharpen your pencils and do some basic Real Estate Math on the WHY NOT? Real Estate Podcast! 🚀🏡 #WhyNotRealEstate #BrianLucier #KnowYourNumbers
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