Financial Calculations

I frequently get questions on basic calculations of investment property profitably so I put together this article. I choose an actual client's property and performed the two classic calculations of profitability: NOI and Cash/Cash. In addition, I calculated the two numbers I use and for single family properties. While I have never seen anyone else these calculations, they seem very realistic to me in that they communicate what I will see based on my bank account; I can't pay bills with theory. The table of calculations are shown below:

Walking through the above tables:

1. These are the basic numbers for the property.
2. The loan terms and monthly payment.
3. Reoccurring costs including typical insurance, typical association fees , and a reasonable maintenance provision resulting in a monthly reoccurring cost of $233/mo. Note that this does not include the debt service.
4. Acquisition cost includes a typical closing cost of 3% and a typical rehab cost of $3,000. Note that in almost all cases, I've included the closing costs in the purchase price; the seller paid the closing costs. In this example, the buyer paid closing costs were cover except for about $500 which would reduce the acquisition cost to $32,500.
5. Monthly expenses include the debt service and the reoccurring costs. Monthly income consists of the monthly rent minus the property management fee. Monthly income minus the monthly expenses equals $225/mo. However, this is not the taxable income which we will calculate in the next step.
6. Taxable income is the income (rent) minus all expenses (including depreciation) resulting in a net loss of $131/mo. (For more information on depreciation see this page or the IRS document for details.) So, while you have a positive cash flow of $225/mo ($2,700/yr) but a taxable loss of -$133/mo or $1,596/yr. The taxable loss of $1,596/yr shields other income; the amount is dependent on your income tax rate. If you have a 30% tax rate, the additional shielded is 30% x $1,596/yr = $478.
7. Net Operating Income (NOI) is defined as income minus operating expenses (but not debt service which always seemed odd to me).
8. Cash on Cash is defined as (Gross Yearly Income) / (Operating Expenses), not including debt service or $14,400/$152,350 = 9.45%.
9. Real Return is my own calculation and (to me) more accurately reflects what is happening. I look at the first year and year 2 through "n" years.

Note that none of the above includes any reference to appreciation. I will cover the impact of appreciation in a future article.

Contact me if you are considering buying or selling Las Vegas real estate. You will be glad you did.

...Eric

Eric Fernwood
RE/MAX CENTRAL
8400 W. Sahara Ave
Las Vegas NV 89117
Email: EricFernwood@gmail.com
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