Albuquerque Real Estate Investors Investment Calculations
Albuquerque real estate investors must know their numbers prior to making an offer on an investment property. Successful Albuquerque real estate investors buy properties based on sound financial principles and not on emotions. I have provided the following formulas to help you understand some of the key financial calculations necessary to create wealth in real estate investing. The following formulas are critical for Albuquerque real estate investors purchasing an investment property to be used as an income producing property. I will help Albuquerque real estate investors with these calculations if you are interested in purchasing an investment property using my services.
Gross Operating Income (GOI)
Gross operating income is a calculation of the total potential annual or monthly rental income adjusted for the vacancy rate.
Example:
Monthly Rental Income is $1200
Annual Rental Income is 12 x $1200 = $14,400
Vacancy Rate is 5%
Occupancy Rate is 100% – 5% = 95% or .95
Annual GOI is $14,400 x .95 = $13,680
Monthly GOI is $13,680/12 = $1,140
Net Operating Income (NOI)
Net Operating Income (NOI) is a calculation of gross operating income minus annual expenses. Your principal and interest payments are NOT expenses and not included in this calculation. Make sure you convert all expenses to an annual amount
Expenses Include the following paid by the owner:
- Property Taxes
- Insurance
- Home Owners Association
- Property Management Fee
- Utilities
- Yard Maintenance
- Vacancy Reserve
- Advertising
- Cleaning
- Travel Expenses
- Other
Example:
Annual Expenses = $4,500
GOI minus Annual Expenses = NOI
$13,680 – $4,500 = $9,180
Annual NOI is $9,180
Monthly NOI is $9,180/12 = $765
Capitalization Rate or Cap Rate
Capitalization Rate is the Net Operating Income (NOI) divided by Purchase Price
Your purchase price includes closing costs and repairs made after the purchase and paid for by the owner.
For example, your paid $150,000 for the home, closing costs were $4,500, the owner made $5,000 in repairs.
Purchase price = $150,000 + $4,500 + $5,000 = $159,500.
Cap Rate = $9,180/$159,500 = .0574 or 5.74%
A higher Cap Rate indicates a better investment opportunity.
Debt Service Ratio
The debt service ratio is a calculation of the net operating income divided by the debt service or the mortgage payment. You want this number to be greater than 1.2. Make sure to convert your numbers to a monthly or annual for both the NOI and Mortgage payment. In this example I will use monthly numbers.
Monthly NOI is $765
Assume your mortgage payment is $600
The Debt Service Ratio is $765/$600 = 1.275
The Debt Service Ratio in this example is 1.275 which is greater than 1.2 and this might be a good investment.
Cash Flow
The monthly cash flow is a calculation of the net operating income minus the mortgage minus expenses.
Make sure all of your numbers are converted to a monthly or annual number. In this example, I will use monthly numbers.
Monthly NOI is $765
Mortgage is $600
Expenses are $50
Cash Flow is $765 – $600 – $50 = $115
Cash Flow is $115 on a monthly basis.
I strongly recommend Albuquerque real estate investors purchase rental property with positive cash flow. Negative cash flow properties are highly speculative and may not be the best investments for Albuquerque real estate investors.
Cash On Cash Return
The cash on cash return is a calculation of the yearly cash flow divided by the initial cash investment which includes the down payment, closing costs, and repair costs immediately after purchasing the property.
Cash on Cash Return = Annual Cash Flow/Initial Cash Investment
Yearly cash flow is $115 x 12 = $1,380
Your Initial Cash Investment is $30,000 down payment + $4,500 closing costs, + $5,000 repair costs.
Your Initial Cash Investment is $39,500
Cash on Cash Return is $1,380/$39,500 =.0349 or 3.49%.
A higher Cash on Cash Return indicates a better investment opportunity for Albuquerque real estate investors.
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