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How to Arrive at a More Accurate Net Income Number for Your Investment Property

By
Real Estate Broker/Owner with Veritas Prime, LLC dba Veritas Prime Real Estate CT, NY, FL

How to Arrive at a More Accurate Net Income Number for Your Investment Property

 


In an earlier post, we discussed very basic methodology for analyzing potential investment properties, where Net Income was a rough estimate that included annual rent only. This is mostly useful for comparison purposes prior to purchasing, or when details of expenses are simply not available.

 

Net Income on Investment PropertiesThe cost of running and maintaining an investment property will clearly affect the profit derived from it. To arrive at a more meaningful Net Income calculation, one needs to determine to the extent possible the details regarding the expense of operating a particular building.

 

The Pro Forma Income and Expense considerations might look something like this:

INCOME:

Rent Income

+

Fee and Interest Income

=

Potential Gross Income

Less Vacancy/Credit Loss @10% (for example, or maybe 5%)

=

EFFECTIVE GROSS INCOME (EGI)

 

EXPENSES: (for example)

Property Taxes

Utilities

Liability Insurance

Maintenance and Repairs

Management Fees

Reserve

Advertising

Mortgage Interest

Legal Fees

Payroll and Payroll Taxes

Exterminating

Landscaping and Snow Removal

Supplies

Sewer Fees

Other

TOTAL EXPENSES:   Sum of all expenses

 

To arrive at the NET OPERATING INCOME, we subtract TOTAL EXPENSES from EFFECTIVE GROSS INCOME.

 

Effective Gross Income

Less

Total Expenses

=

NET OPERATING INCOME (or LOSS)


Return on Investment on Investment Properties

 

 

 

With a more precise Net Income number, which takes into consideration the actual expenses of operating an investment property, we can now arrive at a more accurate value of that property as well as the Return on Investment (ROI) on that particular property.

 

 

 

 

 

Note: images courtesy of stuart miles of freedigitalphotos.net

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For Quality Solutions and Intellegent Answers to Your

Real Estate Needs or for Referrals, Consult With Olga

 

   

OLGA SIMONCELLI

Consultant

Real Estate Risk Management

203-482-2009 Cell

consultwitholga@gmail.com 

Visit My Website: www.thegoodrealestateagent.com

Your Local or Global Real Estate Consultant and “green broker. 

Candlewood Lake Real Estate

 

 

 

 

John Pusa
Glendale, CA

Olga Simoncelli This is very good report on accurate net income for investment property.

Sep 06, 2016 10:56 AM
Jim Smith
The Property Management Company - Round Rock, TX
Broker,CRS,GRI,RMP,CNE,TRLP

I highly recommend taking the Certified Residential Specialist (CRS) CRS-204 course, which goes into detail how to properly analyze an investment property.  I have been using the formulas provided in the course for over 25 years now, as well as similar formulas learned through the CCIM (Certified Commercial Investment Member) courses.

Sep 06, 2016 11:19 PM
Olga Simoncelli
Veritas Prime, LLC dba Veritas Prime Real Estate - New Fairfield, CT
CONSULTANT, Real Estate Services & Risk Management

John Pusa - thank you John, appreciate your kind words.

Sep 07, 2016 03:21 AM
Olga Simoncelli
Veritas Prime, LLC dba Veritas Prime Real Estate - New Fairfield, CT
CONSULTANT, Real Estate Services & Risk Management

Jim Smith - thank you for your recommendation. You should consider writing a post about the courses from which you learned so much!

Sep 07, 2016 03:21 AM
Jim Smith

Thank you for your suggestion!  I teach courses and seminars on this, but have not really written any blogs on this.  I believe I will!

Sep 08, 2016 10:07 AM