Some Financial Terms

GSI vs GOI vs NOI

Gross Scheduled Income: Total scheduled income, not considering vacancies

Gross Operating Income:  Total income from rent Not considering expenses

Net Operating Income: Usually shorted as NOI. Total net income after we remove vacancies and all expenses, excluding financing costs and depreciation cost. ( NOI is not the same as taxable income or cash flow of a property). NOI is similar to EBITDA for corporations and it excludes Interest, Corporate-Level Taxes, and Depreciation & Amortization. NOI serves the same purpose as EBITDA: it approximates how much in cash earnings the property can generate.

You have a property with a scheduled gross income of $100,000, vacancy and credit loss of 5%, and total operating expenses of $40,000. What is this property’s net operating income? Begin with the gross scheduled income and use that to calculate the dollar amount of the vacancy and credit loss: Vacancy and Credit Loss = 100,000 × .05 = 5000 Now you can calculate the GOI: From this, subtract the operating expenses to determine the NOI:

GOI = $100000-$5000=$95000

NOI = $95000-$40000=$45000

CASH FLOW = Monthly or yearly income – Cash Flow and NOI are the same if you pay all cash

Cash Purchase:

Rent is $2000/month

Estimate expenses = $500/month

NOI = 2000 (rent) – 500 (expenses) = $1500/month = Cash Flow = 1500 (NOI)

Purchase  with mortgage, Principal+Interest payment is $900/month

Rent is $2000/month

Estimate expenses = $500/month

NOI = 2000 (rent) – 500 (expenses) = $1500/month

Cash Flow = 1500 (NOI) – 900 (Debt Payment)

Cash Flow = $600/month

Note: For Cap Rate calculation we should always considered the stabilized NOI of a property. Also NOI does not include capital expenditures cost ( example  a new roof) so this will have to be taken into account when buying a property.

Return on Investment:

Simple ROI = (Investment Gains – Investment Cost) / (Investment cost) 
                      = (1,200,000 – 1,000,000) / (1,000,000)     = 20.0%

But in reality there are costs associated with a property –

 So lets make the example more realistic:

$2,000  Loan origination and loan closing fees
$8,000  Insurance and RE taxes

$20,000 Maintenance Costs
$60,000 Twelve monthly loan payments ($50,000 interest + $10,000 principal)

These additional Year-1 costs total $80,000

We do not include the Amortization ( money toward the principal in the expenses since this money eventually will go to us )

ROI = (Total Gains – Total Investment Costs) / (Total costs) 
                      = (1,200,000 – (1,000,000 + 80,000 ) / (1,080,000) 
                      = 13% approx

Paolo
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