Example: $26,655 – 19,114 = $7,541
7. Taxable Income or Loss
– This is the net operating income, less mortgage interest, real propertyand capital additions depreciation, amortized loan points and closing costs, plus interest earned on property bank accounts or mortgage escrow accounts. Taxable income may be negative as well as positive. If negative, it can shelter your other earnings and actually result in a negative tax liability.Example: $1,492
8. Tax Liability (Savings)
– This is what you must pay (or save) in taxes. It's calculated bymultiplying the taxable income or loss by the investor's tax bracket.Example: $1,492 x .28 = $418
9. Cash Flow after Taxes (CFAT)
– This is the amount of spendable cash generated from the property after consideration for taxes. In brief, it's the bottom line, and is calculated by subtractingthe tax liability from cash flow before taxes.Example: $7,541 - 418 = $7,123
10. Gross Rent Multiplier (GRM)
– This provides a simple method you can use to estimate themarket value of any income property.Formula: Price / Gross Scheduled Income = GRMExample: $360,000 / 46,800 = 7.69
11. Capitalization Rate
– Cap rate (as it's more commonly called) is the rate at which youdiscount future income to determine its present value.Formula: NOI / Value = Cap RateExample: $26,655 / 360,000 = 7.40%
12. Cash on Cash Return
– This represents the ratio between the property's annual cash flow(usually the first year before taxes) and the amount of the initial capital investment (down payment,loan fees, acquisition costs).Formula: CFBT / Cash Invested = Cash on CashExample: $7,541 / 110,520 = 6.82%
13. Time Value of Money
- This is the underlying assumption that money, over time, will changevalue. For this reason, investment real estate must be studied from a time value of moneystandpoint because the timing of receipts might be more important than the amount received.
14. Present Value (PV)
- This shows what a cash flow or series of cash flows available in thefuture is worth in purchasing power today. It's calculated by "discounting" future cash flows back in time using a given rate of return (i.e., discount rate).
©2008 James R Kobzeff. All rights reserved.