Terms a Novice Real Estate Investor Should Understand Beforehand!

novice real estate investorWhenever a novice real estate investor starts investing in real estate he or she should be expected to hear some terms typically associated with real estate investing that sound foreign. Terms that might as well have been written in Greek as far as the novice real estate investor is concerned.

But no worries. Novice investors just beginning aren’t expected to know what seasoned real estate investors have been learning by experience over the years.

In this article I want to acquaint you with several reports, returns, and revenue-related elements common to real estate investing that routinely catch novice real estate investors unaware and get them starring like a deer into the headlights of an oncoming car.

This list is certainly not exhaustive. But over the years of working with investment real estate myself, they best represent the handful of important elements where a novice real estate investor frequently becomes confused, makes common mistakes, and asks to be explained.

Reports

APOD

An APOD is an acronym for annual property operating data and essentially gives a snapshot of a rental property’s income and expense performance for one year.

This is one of the most popular reports issued in a real estate analysis for rental properties so real estate investors are bound to encounter it. Consider it as a first-glance look at a rental property’s first year’s performance.

Preview a sample…

Proforma

A proforma (or proforma income statement) provides a useful way for real estate investors to evaluate an investment property’s future cash flow performance.

Unlike an APOD, which merely concerns the property’s first year cash flow, proforma income statements look at revenue and expense projections typically up to ten years. Moreover, a proforma income statement will typically reveal more financial data than an APOD. As a result, the investor can evaluate the investment real estate’s cash flow, tax benefit (or loss), sales proceeds and other financial projections.

Preview a sample…

Returns

Cap Rate

Cap rate is maybe the most popular and frequently used returns with real estate investment. Amongst other uses, cap rate helps real estate investors make comparisons between rental properties that recently sold to any specific rental property under consideration as an investment.

Net Operating Income / Sale Value = Cap Rate

Revenue-related Elements

Gross Scheduled Income

Gross scheduled income (or GSI) is the total annual rental income a property would generate if all the rentable space were 100% occupied and all rent collected. Sometimes called potential gross income, gross scheduled income is an estimate intended to show the maximum potential income that can be generated without regard to any vacancy or credit losses.

Operating Expenses

Operating expenses include those costs associated with keeping a property in service such as costs for routine maintenance and repair, utilities, property taxes, insurance, and management fees. They DO NOT include the mortgage payment, income taxes, and allowances for depreciation.

Net Operating Income

Net operating income (or NOI) is one of the most important calculations you will make as a measure of rental property productivity. It reflects a property’s income after being reduced by vacancy and credit loss and all operating expenses and is the amount of cash flow produced to service the mortgage payment. It is what computes a cap rate amongst returns.

Gross Scheduled Income
– Vacancy & Credit Loss
– Operating Expenses
= Net Operating Income

Cash Flow Before Tax

Cash Flow Before Tax (CFBT) is the amount of cash flow available after the property’s debt payment is serviced but before any consideration of the investor’s federal income taxes.

Net Operating Income
– Mortgage Payment
= Cash Flow Before Tax

Cash Flow After Tax

Cash Flow After Tax (CFAT) is the amount of cash flow available to the investor after his or her federal income taxes are satisfied.

This calculation is somewhat more complex and beyond the scope of this article. Other articles on this subject, however, are available on this site if you would like to learn more.

So You Know

ProAPOD provides a real estate investor software solution that automatically make these calculations and appropriate reports for a novice real estate investor.