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Investment Basics Sheet
| So, you are thinking of perhaps doing some sort of Real Estate Investment? TERRIFIC! I've always believed in “Work Smart, NOT Hard!” Whether it is a commercial or residential property, let's begin with the essentials! Below are a few very common terms that you need to know... |
| Gross Income = [O ther Income (late fees, etc.)] + [Gross Rent – vacancy] |
| Gross Rent = Annual Gross Rental Income from all prospective units/apartments. |
| Net Operating Income (N.O.I) = Gross Income - All Expenses (overhead, etc.) |
| Cash Flow = [N.O.I - debt charge] |
| Cap Rate = % Yield of your Investment [N.O.I / Sales Price] |
| Let's go through a very simple example and see what we call a $ MART Investment: |
| SALES PRICE: $200 000Income : |
| Gross Rent: ($600/unit) X (10 units) X (12 mths) = $72 000 |
| Vacancy: 10% of Gross Rent = ($7 200) |
| Other Income: Late Fees = $500 |
| Laundry = $500 |
| Total = $1 000 |
| Total Gross Income = $65,800 |
| Expenses |
| Taxes $ 1 933 |
| Utilities $10 600 |
| Pest Control $ 360 |
| Advertising $ 1 200 |
| Repairs $ 2 000 |
| Legal $ 300 |
| Insurance $ 1 000 |
| Management $ 5 300 |
| Lawn Maintenance $ 1 200 |
| OTHER $ 2 000 |
| Total Expenses = $25,893 (39%) |
| **Total expenses usually run in the norm 35-50% of gross income is perfectly fine! |
| Net Operating Income (N.O.I)= $39 817 |
| Cap Rate [(N.O.I) / (Sales Price)] = 19.0% |
| Certainly this example would be an AMAZING investment! With today's society, and |
| lending institutions it becomes very wise investing in real estate mainly because you don't have to pay for the Sales Price upfront and take a loan at a substantially lower rate (8-10%). Therefore, I believe that anything that has a capitalization rate 10%+ is good. You would seriously have to take into account that you will find in well established neighbourhoods (? demand), cap rates above 10% are difficult to find and may create complications if you are loaning the money. Now if we take into account that you have found yourself a mortgage with your down payment let's complete the above example in the following scenario: |
| You are borrowing $162,000 at 12% interest for 20 years we get: |
| Debt Service : $1 783.76 X 12 months = $21 405.12 |
| Cash Flow: $39 817 - $21 405 = $18 411 ($1 534 /month) |
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