Updated: Jan 29, 2022
A lot of people like to invest in real estate because of the low risk and opportunity for appreciation. However, when you invest in real estate you should know your goal and objectives. Even though different investors have different goals, the way to measure and describe investment performance is common for all types of investment. The fundamental objectives in measuring and evaluating an investment are income and growth. Here are some real estate investment terms you should know.
1. Potential Gross Income (PGI):
PGI is the sum total of all possible income which could be generated from the property, and it assumes that the property is fully rented at all times and all tenants are paying their rent on time.
2. Vacancy and Collections (V&C):
Vacancy is a percentage of potential gross income that is estimated lost due to property vacancy. Collections refer to the amount of rent lost due to non-payment, which can be expressed as an allowance in dollars or as a percentage of the PGI.
3. Effective Gross Income(EGI):
EGI is the amount of rent that is actually collected by the landlord or property manager.
4. Operating Expenses (OEXP):
OEXP is the cost for the on-going operation of the property. Some OEXP is fixed, such as taxes and insurance, and some can be variable, such as leasing fees, management fees, utilities, maintenance and repairs.
5. Net Operating Income (NOI):
Net operating income is effective gross income minus operating expenses.
6. Debt Service (DS):
DS is the annual amount of the mortgage payments (principal and interest).
7. Pre-Tax Cash Flow (PTCF):
PTCF is the amount funds after deducting debt service from net operating income. It is calculated on an annual basis. It is actual amount that the investor receives each year.
Example: LiLianLi LLC bought a townhouse $200,000 for cash as an investment property for retirement. The property has been rented for $1600 per month. The property is vacant for two months before it is rented. The insurance and the taxes are $4200 per year. The HOA assessments are $300 per year. They anticipate that leasing management fees, maintenance and repairs will be $200 per month.
What is Pre-tax Cash Flow for this property in the first year?
PGI: $1600 x 12 = $19200
V&C: $1600 x 2 = $3200
EGI: $19200 - $3200 = $16000
OEXP: $4200 + $300 + $2400 ($200x12) = $6900
NOI: $16000 - $6900 = $9100
PGI：$ 1600 x 12 = $ 19200
V＆C：$ 1600 x 2 = $ 3200
EGI：$ 19200 - $ 3200 = $ 16000
OEXP：$ 4200 + $ 300 + $ 2400（$ 200x12）= $ 6900
NOI：$ 16000 - $ 6900 = $ 9100