Let’s Get Back To The Basics

With apologies to Waylon Jennings & Willie Nelson, it’s time for me to get back to the basics of my real estate love.  Real estate investing.   Now, while I won’t be discussing Luckenback, Texas,  I will be discussing my home town area of Kansas City.

How Do I Know If The Rental Property I’m Buying Will Be Profitable?

Real estate investing in Kansas City is not very complicated.  It can be treacherous to those that don’t heed to common sense.  But it’s not too complicated.  In a nutshell here is the basic formula for determining whether or not a rental property you are considering will be profitable or not;

Income (projected)
–   Expenses (projected)
=  Cash flow (positive or negative)

There!  That’s it!

Income can take on many variables.  There is income from rent, laundry, parking, late fees, etc.

Expenses can take on many more variables.  There is, of course, the mortgage.  There are also insurance, property management, maintenance, upkeep, legal and “future” expenses.  (That is by no means a complete list of expenses.)

Learning how to project income and expenses is where the rubber meets the road.  And once you know what the Net Operating Income of a property is you can then set a value.

Not sure how to determine and then work from Net Operating Income?  Stay tuned.

2 Comments

Filed under Real Estate Investing, Uncategorized

2 responses to “Let’s Get Back To The Basics

  1. Pat

    All below is based on annual rate

    Gross Scheduled Income (GSI) is Annual Possible Rent

    Gross Operating Income (GO)
    Vacancy Rate (VR)
    GO = GSI – VR

    Operating Expenses (OE)
    Taxes (based on price you pay)
    Insurance
    Utilities
    Garbage
    Management (.9%)
    Repairs/Maintenance (10%)
    Lawn/Snow
    Other

    Net Operating Income — NOI
    NOI = GOI – VR – OE

    Annual Debt Service = Annual Interest

    Cash Flow Before Taxes (CFBT)
    CFBT = NOI – Annual Interest

    Cap Rate = Net Operating Income (NOI) of a property and dividing it by the price

    An alternitive to find the Cap Rate for a building in need of repair can be determined by taking the NOI divided by taking the asking price plus projected repair costs. This allows compairing apples to oranges, by first converting the orange to an apple. Any property in disrepair must first be brought up to like-new (or market) condition, and that expense is factored into the cost of aquisition. The NOI is determined by taking the GMI (gross monthly income), subtracting 5% vacancy rate, to get the GOI (gross operating income). Then taxes, HOA fees, .9% of aquisition costs for insurance, 10% of GOI for management, and 10% of GOI for maintenance is deducted from the GOI to arrive at the NOI. Management cost is always included, even if the owner manages the property themselves as a personal decision to increase profits. If the owner must move or falls ill, management must still take place and must be outsourced.

    I like the following formula to compare price: Find Price Using CAP Rate
    Use NOI / CAP Rate = Price

    This information was gathered from multiple sources including this blog, Bawld Guy, and other websites. I use an Excel spreadsheet to roll my numbers.

  2. The excel spreadsheet is a good idea…though I still like to sit down with pencil and paper because it makes me think more.

    For pricing, and I’ll discuss this later, I like to use all three legs of the stool. Or, in the case of investment property, all four legs. I’ll explain later when I don’t have my bbq grill and a cold beer calling my name. 🙂

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