How To Analyze An Income Producing Property

| Posted: 17-06-2008 | Comments: 0 | Views: 28 | Rating: (54)

(?)

I often evaluate properties for investment purposes for myself and for clients, and I have found that many people have no starting point for evaluating income producing properties. Having done so for years, I have learned, discovered, and compiled some great models that can be learned by anyone.

Today, let's take a look at a model that I refer to as the Real Estate Stack. This is the most basic of measurement models which allows an investor to take an investment and convert it to a mathematical model so that it can be compared with all other investment opportunities.

Too often, I see "wanna-be" investors wanting to go look at properties. Personally, I never like to go look at investment properties until I've already seen the numbers' potential. If the numbers are not super attractive, then looking at the property is not only a waste of time, but it also brings in the opportunity for faulty decision making through emotional attachment. I would hate to "fall in love" with a property where the numbers cannot work out as well as another property.

So, on to the Real Estate Stack. This is the most basic of mathematical modeling which allows the investor to determine the Net Operating Income (NOI) of a property. All the key terms in the model are explained below:

Gross Potential Income (GPI)

The Gross Potential Income of a property is simply the "best case scenario" of what it can generate in rent. If a property can rent for $900-$1,000 per month for rent, the the GPI would be $1,000 x 12 = $12,000 per year.

Vacancy and Collection Losses (V/C)

Vacancy is the measurement of time, expressed in percentage of the year, that you would expect the property to not have a tenant. Every property will have periods of vacancy due to change-over in tenants plus market cycles that make it harder to find tenants.

Collection losses, much like vacancy in that no income is occurring, is when non-paying tenants are in the property and either need to be motivated or evicted. This too is expressed as a percentage figure annually.

The key to Vacancy and Collection Losses is that you can compare different types of properties in different market cycles. Perhaps a home in the higher price range will have longer occupying tenants, thus a lower vacancy, whereas a property in a student area can be expected to turn nearly every year, resulting in a higher vacancy. Using the correct figures for vacancy allows us to compare these two properties and determine which one is the better buy.

Effective Gross Income (EGI)

Effective Gross Income is the amount of revenue we anticipate receiving annually while owning the property. This is not the "best case scenario," rather it is the "realistic case scenario."

Operating Expenses (OE)

Operating Expenses are those things that the property owner must pay for while owning the property. Such expenses might include property taxes, hazard insurance, maintenance fees, management fees, homeowners association expenses, utilities, and reserves for replacements (roofs, HVAC systems, etc.).

Net Operating Income (NOI)

The NOI is the amount of money that would go to any investor after receiving all income and paying all expenses, with the exception of payments on loans and income taxes. The NOI is important because it makes all real estate investments that are purchased for cash flow equivalent.
Annual Debt Service (ADS)

This is the total of mortgage payments for the year. The annual debt service includes the principal and interest portion of the payment for all twelve months.

Cash Flow Before Taxes (CFBT)

Cash Flow Before Taxes is the amount of money realized by the investor for the year, whether positive or negative, before income taxes are considered.

The Real Estate Stack
PGI
- v/c
= EGI
- OE
= NOI
- ADS
=CFAT

So there is the simple Real Estate Stack. Try it out. Use it with several properties to find out which ones will be better investments. If you adhere to the math, the money will follow!

Rate this Article:

Current: 5 / 5 stars - 1 vote(s).

Article Tags: Real Estate, Real-estate, Income-producing-properties

Article Source: http://www.articlesbase.com/real-estate-articles/how-to-analyze-an-income-producing-property-452446.html

Print article

Send to friend

Publish this Article

Author feedback

About the Author:
Joe Manausa is a real estate investor and the Broker and Co-Owner of Century 21 First Realty. He can be reached via e-mail through the Tallahassee Real Estate Website or on the Tallahassee Florida Real Estate Blog , or by calling (850) 386-2001.

Submitting articles has become one of the most popular means of generating quality backlinks and targeted traffic to your website. Join us today - It's Free!

Article Comments

Add new Comment

Teach Your Realtor How To Sell Your House!
By: Mike Payne | 07/05/2007 | Real Estate

How You Can Choose A Great Realtor
By: Craig Chambers | 28/08/2007 | Non-Fiction

The Best Reasons to Invest in Romania
By: Chris Nolen | 06/07/2007 | Real Estate

Why You Should Consider Owner Financing When Selling Your Home
By: Joe Manausa | 18/06/2008 | Real Estate

Great Beach Destination in Sydney
By: Jizmack Baraceros | 26/08/2008 | Destinations

Ways to Stop Foreclosure
By: Marina Clark | 26/05/2008 | Real Estate

Sell and Buy your Properties, and Get All Real Estate Resources
By: MAHI Infobase | 06/01/2007 | Real Estate

Stop Pushing The American Dream - Some
By: Mike Payne | 22/05/2007 | Real Estate

Got a Question? Ask.

Ask the community a question about this article:

Frequently Asked Questions

Where can I find copies of leases entered into by ...
By: Michael | 11-09-2008
Where can I find copies of leases entered into by The City of New York for governmental purposes?

Who holds the mortgage?
By: nancy | 09-09-2008
1974 Littleton Road,Monroe,N.H.what bank or mortgage company holds the mortgage?what is their phone# and address?Please let me know.my e-mail is...vankleefgrammy@aol.com

Where to begin?
By: norm | 09-09-2008
Where can I obtain settlement papers from a house sold in virginia beach in 2003?

Delinquency interview
By: freddyj | 09-09-2008
What is a Delinquency interview for real estate?

Who built the homes in the Indian Palms Country ...
By: Makeupjunkie78 | 08-09-2008
Who built the homes in the Indian Palms Country Club? Located in Indio California

Real estate
By: lilcat97 | 08-09-2008
how to buy section 8 housing for resale

Q&A Powered by:

Latest Real Estate Articles

The R.E.I. Revolution On The Internet
By: Damian Lanfranchi | 06/10/2008
Understand it and thrive. Ignore it, get left behind. I want to make sure that you truly grasp how the internet is revolutionizing the Real Estate investing world. It's absolutely critical to the success of your business. It's something that a lot of the Real Estate investors and gurus are missing the boat on when it comes to their real estate investing website.

Cyprus Property is Hot! But is it Getting Too Crowded?
By: Steven Clarke | 06/10/2008
The recent interest in Cyprus property has initiated a housing boom on the island. It doesn't matter where you go on the island, you can often hear the sound of construction in the background. Developers are scooping up land at an alarming rate trying to keep pace with the growing...

Dubai Property Strong Fiscal Growth
By: Editor-123 | 06/10/2008
Fiscal growth in Dubai is progressing by leaps and bounds and the real estate market is the major attraction of this place. In Dubai, you can find an endless list of buyers investing in real estate properties that are pocket friendly.

Different Kinds of Apartments and Flats – How to Find One That Suits You
By: aena18 | 06/10/2008
To have a beautiful home is everyone’s dream but in this 21st century to have your own home is not that much easy because now everything is available in high price rate. In this expensive world now, most of the people prefer apartments and flats as their home. Apartments have lots of advantages like there are lots of variety apartments are available in beautiful locations with affordable price rate.

Flower Mound Apartments
By: Alice Shown | 06/10/2008
If you are looking for an apartment as rent or you want to purchase a Flower Mound Apartment. Purchase Flower Mound Apartments in a planned manner. Consider the different factors. Do not take a decision without a planning.

Cedar Hill Apartments
By: Alice Shown | 06/10/2008
Cedar Hill is situated in a suburban area. Highways 169, 7, 394 and 494 can be easily assessed from the place. The building offers all types of facilities and services that can give you a comfortable stay.

The Inner Workings of Interest Rates for Owner Builder Loans
By: Chris Esposito | 06/10/2008
A good owner builder construction loan will have only one closing to cover the land purchase, construction phase, and conversion to your permanent financing. Therefore, the owner builder loan will have two sets of interest rates: one while you build, and one rate for when you move into your new home. Every owner builder should understand the inner workings of these rates when planning to build.

Information of Real Estate
By: rehan | 06/10/2008
Zammen-zaidad and propertycafeteria is a very nice and well portal and all the facilaties related to real esatate and property.

More from Joe Manausa

Why You Should Consider Owner Financing When Selling Your Home
By: Joe Manausa | 18/06/2008 | Real Estate
I received so much feedback on The Creative Cure For Selling Your Home article that I decided to follow it up with a "how and why" to consider a Purchase Money Mortgage when selling your home. So what is a Purchase Money Mortgage? Sometimes a buyer wants to buy a home and...

How Home Values Are Determined
By: Joe Manausa | 17/06/2008 | Real Estate
I thought I might provide some insight on How Home Values Are Determined. Everyone who owns a home typically likes particular aspects of that home. But these likes and dislikes have less to do with value that you might think, so let me give you some value-thoughts to chew on: * Value...

Real Estate Short Sales
By: Joe Manausa | 17/06/2008 | Real Estate
It's all the talk among the real estate blogs. Have you heard? I had not written an article on real estate short sales because there is so much out there already. I decided to get up early this morning and see if anybody had written anything that would explain this process...

Creative Financing Skills Can Sell Your Home
By: Joe Manausa | 17/06/2008 | Real Estate
We are helping somebody sell a home in Tallahassee who is considering an offer from a Buyer that includes a lease-purchase provision. A lease-purchase in Tallahassee is an agreement where the Buyer and Seller agree to a sale on the home and then the Buyer rents the home from the...

Article Categories

Article Marketing

Article Notepad

Stop Duplicate Content

Term Papers

Need Help?

Sign up for our email newsletter

Receive updates, enter your email below

Use of this web site constitutes acceptance of the Terms Of Use and Privacy Policy | User published content is licensed under a Creative Commons License.
Copyright © 2005-2008 Free Articles by ArticlesBase.com, All rights reserved. (0.34, 17)

How To Analyze An Income Producing Property

Article Comments

Related Articles

Got a Question? Ask.

Latest Real Estate Articles

More from Joe Manausa

Need Help?

Site Links

Webmasters

Business Info

Sign up for our email newsletter