REE Ch. 29 -
If a property has an NOI of $23,500 and mortgage expenses of $12,000, what is the amount of before tax cash flow for this property?
$11,500
If an investor has a before tax cash flow of $18,000 and a tax liability of $2,500, what is this investor's after tax cash flow?
$15,500
Joe is the investor of a property with a potential income of $30,000. The property has an annual vacancy loss of $2,500 and operating expenses of $12,000. How much net operating income does Joe have for the property?
$15,500
Investor Tyler's property has a potential rental income of $19,000. The vacancy and collection losses for the year were $2,680. The property had operating expenses of $6,160. Tyler's mortgage expenses for the property were $7,700. What is the before tax cash flow for Tyler's property?
$2,460
If a property has a potential income of $50,000, a vacancy loss of $4,500, and operating expenses of $23,000, what is this property's net operating income?
$22,500
If an investor has an NOI of $55,000, a depreciation of $8,000, mortgage interest of $12,000, and is in the 29% tax bracket, what is this investor's taxable income?
$35,000
Sue's NOI is $128,000, and her operating expenses are $26,400. She has mortgage expenses of $55,250 with $48,000 of that being interest. Her property has depreciated $8,500 for the year and is in a 24% tax bracket. What is Sue's before tax cash flow?
$72,750 $128,000 NOI - $55,250 mortgage expenses = $72,750 BTCF.
Investor Rusty has a BTCF of $123,500, taxable income of $99,000, and is in a 33% tax bracket. What is Rusty's after tax cash flow?
$90,830 The after-tax cash flow is the profit that the investor actually receives from income-producing property after the income taxes are paid. It is the before-tax cash flow, minus the tax liability. Rusty's tax liability is $32,670 ($99,000 x .33), so his after-tax cash flow is $90,830 ($123,500 - $32,670).
What is a tax shelter?
A tax shelter is any investment designed to reduce or avoid income taxes.
What is listed last on the operating statement and is most important to investors?
After-tax cash flow
What is the profit that an investor actually receives from income-producing property?
After-tax cash flow
What is the formula for cash-on-cash return?
Annual before tax cash flow ÷ total cash invested
Which rate is used to determine the value of a property?
Capitalization rate
The ratio of annual before-tax cash flow to the total amount of cash invested is called what?
Cash-on-cash return
What is debt service?
Debt service is the principal and interest payments made on a debt over a period of time.
The principal and interest payments made over a period of time is called the
Debt service.
Two crucial physical traits that affect a property's ability to stay competitive are:
Functional efficiency Physical durability
The effective rental income plus any income from other sources is the
Gross operating income.
What is the two-step process for estimating current operation costs?
Identify comparable properties. Compare data to published sources.
Analysts use ratios to determine the reasonableness of operating results that have been reported or forecasted to help make decisions about purchasing or selling investment property. Four common ratios used in the analysis are:
Income Multipliers Operating Ratio Break-Even Ratio Debt Coverage Ratio
List two examples of variable expenses.
Management fees Utility expenses
Name three factors that affect net operating income.
Market rent Vacancy Expenses
What is the formula for determining taxable income?
NOI - depreciation - mortgage interest
The difference between the gross operating income and the operating expenses is the
Net operating income.
If John's investment property has an NOI of $100,000 the first year, mortgage payments of $75,000 with $60,000 in interest, and a first-year depreciation of $55,000, how much tax will John pay?
None
List three examples of fixed expenses.
Real estate taxes Insurance premiums Advertising
What is gross rental income?
The amount of revenue a property would generate if it had no vacancies.
Define cash flow.
The cash received minus the cash paid out over a given period of time.
What does a debt coverage ratio measure?
The investor's ability to pay the property's monthly mortgage payments from the cash generated from renting the property.
In addition to the demographic makeup of the population and the median income of families in a particular area, what will the market rents for retail space depend on?
The percentage of income families in the area usually spend on the purchase of goods and services from the retail companies in their area.
What is a capitalization rate designed to do?
To reflect the recapture rate of an investor's original investment over the economic life of the investment to give that investor an acceptable rate of return on his or her investment.
How does an operating statement differ from a typical income statement?
Unlike at typical income statement which shows operating revenues when they are earned and operating expenses when they are incurred, a real estate operating statement usually presents cash inflows and outflows from operations and is broadened to include non-operating cash flows, such as those that come from debt service, income taxes, and capital expenditures.
A tax shelter is
any investment designed to reduce or avoid income taxes.
To find the ____________, subtract the debt service from the net operating income.
before-tax cash flow
Debt service is subtracted from the net operating income to get the
before-tax cash flow.
A real estate operating statement usually presents cash inflows and outflows from operations and is
broadened to include non-operating cash flows, such as those that come from debt service, income taxes, and capital expenditures.
Equity dividend rate is also known as
cash-on-cash return.
Cash flow is
equal to the cash received minus the cash paid out over a given period of time.
The best starting point for estimating a property's current operations is by
looking at the property's recent past operations.
The operating expenses will show all the cash expenditures that are needed to
maintain and operate the property.
A pro forma income statement
projects future income performance.
A pro forma income statement is similar to a historical income statement, except it
projects the future rather than tracks the past.
The ________________ measures the investor's ability to pay the property's monthly mortgage payments from the cash generated from renting the property.
debt coverage ratio
The gross rental income amount is adjusted to reflect vacancy losses to derive effective rental income. The effective rental income amount is then further adjusted to include income from other sources, resulting in the
gross operating income.
Taxable income multiplied by the investor's marginal tax bracket gives the
investor's tax liability.
Taxable income is
net operating income minus all allowable deductions, including the amount allowed for annual depreciation on the property.
Pro forma income statements are an important tool for
planning future business operations.
The capitalization (CAP) rate is designed to reflect the
recapture rate of an investor's original investment over the economic life of the investment to give that investor an acceptable rate of return on his or her investment.
To calculate gross operating income, one needs to _________________ gross rental income.
subtract collection losses and add other income to
An investor's tax liability from a property is based on
taxable income rather than cash flow.
The gross rental income (gross income) is
the amount of revenue the property would generate if it had no vacancies.
Before-tax cash flow is
the measure of the cash received after the net operating income has been calculated and any mortgage-related expenses are paid, but before taxes are taken into consideration.
Debt service is
the principal and interest payments made on a debt over a period of time.
After-tax cash flow is
the profit that the investor actually receives from income-producing property after the income taxes are paid. It is the before-tax cash flow, minus the tax liability.
The cash-on-cash return, also called the equity dividend rate, is
the ratio of annual before-tax cash flow or after-tax cash flow to the total amount of cash invested, expressed as a percentage.
Net operating income is
the term that describes the net income produced by a specific property after all expenses have been deducted from the gross receipts.
As the capitalization rate goes down, the value of the property goes
up.
At any particular point in time, all the space that is available in a building may not be leased. When units are empty, this is referred to as
vacancy.
There are two kinds of expenses that are normally associated with income properties:
variable expenses and fixed expenses.
Sue's NOI is $128,000, and her operating expenses are $26,400. She has mortgage expenses of $55,250 with $48,000 of that being interest. Her property has depreciated $8,500 for the year and is in a 24% tax bracket. What is Sue's tax liability?
$17,160 Taxable income = (NOI - Depreciation - Mortgage Interest); tax liability = taxable income x tax bracket percent, so $128,000 NOI - $8,500 depreciation = $48,000 mortgage interest = $71,500 taxable income x 24% tax bracket = $17,160 tax liability.
If a property has a potential income of $120,000, a vacancy loss of $15,000, operating expenses of $52,000, and mortgage expenses of $45,000, what is the net operating income for this property?
$53,000 $120,000 income - $15,000 vacancy - $52,000 operating expenses = $53,000 NOI.
What is the effective income for a company that has a potential rent income of $76,500, vacancies and collection losses worth $5,250, and operating expenses of $37,900?
$71,250 Effective income equals potential rent minus vacancy and collection losses: $76,500 - $5,250 = $71,250.
Investor Amanda's property has a potential rental income of $44,400. The vacancy and collection losses for the year were $1,230. The property had operating expenses of $5,120. Amanda's mortgage expenses for the property were $12,550. Amanda invested $200,000 cash with the property's down payment. What is the before-tax cash-on-cash return for Amanda's property?
12.75% Before tax cash flow equals income minus expenses: $44,400 - $1,230 - $5,120 - $12,550 = $25,500. Before-tax cash-on-cash return equals before-tax cash flow ÷ cash invested: $25,500 ÷ $200,000 = 0.1275 = 12.75%.
How is an investor's tax liability derived?
An investor's tax liability from a property is based on taxable income rather than cash flow. Taxable income is net operating income minus all allowable deductions, including the amount allowed for annual depreciation on the property.
What is before-tax cash flow?
Before-tax cash flow is the measure of the cash received after the net operating income has been calculated and any mortgage-related expenses are paid, but before taxes are taken into consideration.
Which ratio shows the percent of gross income that is required to meet cash expenditures?
Break-even ratio
How does a pro forma income statement differ from an historical income statement?
It projects the future rather than tracks the past.
What is the equity dividend rate?
The ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage.
