Investor Math

Basis: the amount used as a value baseline for tax purposes such as capital gains tax and depreciation.  The original purchase price of the property, plus improvements minus losses and depreciation deducted over time

Depreciation: helps you recover the cost of income producing property.  You can deduct some of the cost of the improved value of the building, not the land each year on your tax return because the property suffers from wear and tear.

NOI Net Operating Income: Rent – Expenses = NOI

Estimated Annual Net Operating Income = Multiply NOI by 12 months = Annual NOI

Estimated CAP rate: the rate at which the property earns money depending on the value of the property.   NOI – gross rents – gross expenses dividing by the value or purchase price = CAP rate

Cash on Cash Return CCR is a measurement of cash flow based on an investor’s initial investment (down payment and closing costs) You take the cash flow generated by a property over 1 year divide it by the initial investment down payment and closing costs.

Debt Service Ratio DSR a simple ratio that lets investors know if their mortgage payments will be too high for the property to be a good investment.  It’s the net operating income (rent minus expenses) divided by the debt service, or mortgage payment.  It is recommended to have a debt service ratio of more than 1.2