Chapter 16 - 2 to 4 Unit Residential Income

Net Operating Income

"The actual or anticipated net income that remains after all operating expenses are deducted from Effective Gross Income but before mortgage debt service and book depreciation are deducted " is the definition of Gross Income Potential Gross Income Effective Gross Income Net Operating Income

Effective Gross Income

"The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses and an addition is made for any other income" is the definition of Operating Expenses Potential Gross Income Effective Gross Income Net Operating Income

Potential Gross Income

"The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted" is the definition of Cash flow Potential Gross Income Effective Gross Income Net Operating Income

Operating expenses

Effective Gross Income - __________________ = Net Operating Income. Vacancies and credit loss Mortgage debt service Replacement allowance Operating expenses

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In Form 216, the income and expenses have to be projected for the next ____ months. 6 12 18 24

The appraiser though the underwriter and borrower can help and provide information

In actual practice, the Operating Income Statement (Form 216) is typically prepared by: The underwriter Fannie Mae The listing real estate agent The appraiser

Operating

Lenders use _____________ income when underwriting loans for 2 to 4 unit residential properties. Operating Potential Gross Effective Gross Taxable

allowance for vacancies, Effective Gross Income

Potential gross income plus other income minus ___________ equals ______________. operating expenses, Net Operating Income allowance for vacancies, Effective Gross Income reserves allowance, Effective Gross Income allowance for vacancies, Net Operating Income

Foundations

Replacement reserves might be established for all of the following items EXCEPT Roof covering Boilers Water heaters Foundations

Operating expenses

The main difference between gross and net income is Income taxes Operating expenses Reserves for replacement Profit

V = I / R

This is summed up in the standard formula that says V = I / R, or Value equals Income divided by a Rate. Let's look at the formula again: V = I / R The Value in the formula is market value. The Income is Net Operating Income. The Rate is a capitalization rate.

NOI

To find Net Operating Income, we do the following steps. Gross Annual Rental (Potential Gross Income) + Other Income - Vacancy/Credit Loss = Effective Gross Income - Operating Expenses = Net Operating Income

Vacancy and Collection Loss

Vacancy and Collection Loss is defined as: "A deduction from potential gross income (PGI) made to reflect income reductions due to vacancies, tenant turnover, and nonpayment of rent; also called vacancy and credit loss or vacancy and contingency loss."

Net Operating Income

________ _____________ Income (NOI) we defined as: "The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted. Note: This definition mirrors the convention used in corporate finance and business valuation for EBITDA (earnings before interest, taxes, depreciation, and amortization)."

Effective Gross Income

__________ Gross Income (EGI) is defined as "The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses and an addition is made for any other income."

Gross Income

__________ Income we defined as: "Total income from a property before deducting any expenses, customarily stated on an annual basis."

Operating Expenses

_____________ Expenses are defined as: "The periodic expenditures necessary to maintain the real estate and continue production of the effective gross income, assuming prudent and competent management. See also total operating expenses." Similar to this is: Total Operating Expenses "The sum of all fixed and variable operating expenses and the replacement allowance cited in the appraiser's operating expense estimate."

Potential Gross Income

_____________ Gross Income (PGI) "The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted."

Replacement Allowance

__________________ Allowance (replacement reserves) "An allowance that provides for the periodic replacement of building components that wear out more rapidly than the building itself and must be replaced during the building's economic life; sometimes referred to as reserves or reserves for replacement."