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You are here: Home / Archives for Investment Income

July 15, 2014 by Peter Maclennan 1 Comment

Calculating Net Operating Income or NOI

Calculating NOI graphic
It seems like each industry has their own acronyms. The same is true for real estate.

In real estate, the letters NOI stand for Net Operating Income. The net operating income is a number on paper 9 times out of 10. It is not an actual figure that will show up in an investor’s bank account nor is it the number that will be used for tax purposes. NOI is useful in comparing the returns of various properties and for determining if a property is financeable. Think of NOI as the return a property would generate if it was purchased for all cash and regardless of taxes and depreciation.

Actual vs. Pro Forma

NOI can be calculated on an actual basis with the actual rents and the actual expenses. NOI can also be calculated on an expected or pro forma basis based on future estimated rents and estimated expenses. NOI is calculated on an annual basis in most cases.

Start with Income

To begin the calculation of NOI begin with the annual gross rental income for the property. Gross rental income is all the expected income from the property. If the property is a NNN property this will include CAM reimbursements.Calculation of NOI

Vacancy

Next you will need to deduct vacancy expenses. Vacancy expenses are an estimate of the amount of time that a property will be vacant in any given year due to tenants moving or not paying their rent. Usually this is expressed as a percentage of time. A property in a desirable location may have a low vacancy factor of 5% of the time. Another property in a questionable location may have a much higher vacancy factor and may be empty for 25% of the time or more.

By multiplying the vacancy factor by the gross income you arrive at the vacancy expense. Next you subtract the vacancy expense from the gross income. This will give you the Effective Rental Income.

To the Effective Rental Income you add Other Income. Other Income is usually miscellaneous income from parking fees, laundry, billboards, etc. Now you have arrived at the Gross Operating Income.

Minus Expenses

From the Gross Operating Income you subtract the property’s Operating Expenses to arrive at the Net Operating Income. Operating Expenses include all cash expenses paid to keep the property running at maximum efficiency. They will include property taxes, property insurance, management fees, utilities, advertising costs, accounting fees, legal fees, licenses, and other expenses.

Using NOI

NOI is used to calculate a properties Cap Rate (capitalization rate) for properties. NOI is also the number most lenders use to determine if a property has an adequate debt service coverage ratio (DSCR or DCR) to qualify for a loan.

NOI is a useful tool in helping investors analyze and compare investment properties.

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Filed Under: Investment Property, Real Estate Investing Tagged With: Commercial Real Estate Investing, Investment Decisions, Investment Income, Investment Property, Real Estate Investing

January 31, 2012 by Peter Maclennan Leave a Comment

Earned Income vs. Passive Income

The goal of most retirees is to switch from an earned income to passive income.

Earned Income

Earned income is what most of us do every day. We trade time, energy, or brain power for money. We go to the job site, check into the office, go to the firehouse, or our shop and get to work. We get paid for what we produce or do. If we don’t produce or do, we don’t get paid. We work in order to get money.

Passive Income

Passive income isn’t generated directly from our work. Passive income is money working for us. Passive income is interest from a savings account, interest from a bond, a dividend from a stock, or cash flow from a real estate investment. Passive income is produced whether or not we take an action.

The trick to getting a huge passive income is accumulating lots of investments. A $300,000 investment earning 3% returns $9,000 to the investor. A $3,000,000 (million) investment returning 3% returns $90,000 to the investor.

If you would like to discuss opportunities to start accumulating investments using real estate, please call me at (925) 385-8798.

 

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Filed Under: Benefits of Real Estate Investing, Real Estate Investing Tagged With: Investment Income, Retirement Freedom

July 17, 2009 by Peter Maclennan Leave a Comment

Accumulation and Income

As an investor makes plans for Retirement Freedom, they should keep in mind where they are in the wealth building process.

Investors, generally, can be put into one of two phases depending upon their financial needs and their employment status. I will call these the Accumulation and Income Phases.

Accumulation Phase

During the Accumulation Phase an investor is not trying to live off of their investments. Usually, the investor has a source of employment that generates their investing capital and supports their daily needs.

At this point it vital that the investor attempt to gather and grow assets. These assets need to be as large as possible to create as large an income as possible.

Appreciation is a key ingredient in a successful Accumulation Phase. Appreciation is the growth in value of real estate.

Imagine that you will earn a return of 7% on your assets once you retire. Would you rather retire with assets worth $500,000 or $5,000,000 ?

Income Phase

Once you have quit your day job, retirees need their investments to support their lifestyle. Consequently, income is more important than growth during this phase.

A transition to properties that will generate regular cash flow should be executed prior to your transition from 9-5 to retirement. Hopefully, much of this income is sheltered from the IRS through depreciation.

Why Accumulation and Income Matter

So what? Why should you care?

Your investing phase will determine the types of real estate investments you should consider.

An apartment building that will appreciate slowly over the next 5-10 years and throws off tons of cash flow may not be the best investment if you need to accumulate wealth. It may be the perfect investment for someone in the income phase of their wealth planning.

A four-plex that is break even on cash flow, but will appreciate by 15% in the next 5-10 years isn’t a great fit for someone who needs to survive off of their investment income. It may fit well into the accumulation plans of someone starting out on their journey to Retirement Freedom.

Do you need help evaluating which phase you are in? Do you need assistance making the transition from one phase of investing to the next? If so click the link below to give us a call, we would love to chat with you.

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Filed Under: Real Estate Investing, Retirement Freedom Tagged With: Accumulation Phase, Investment Income, Retirement, Retirement Freedom

June 11, 2009 by Peter Maclennan Leave a Comment

6 Reasons Real Estate Is Better Than Your Mattress

CNN is reporting:

A woman in Tel Aviv, Israel, gave her elderly mother a new mattress as a surprise gift, throwing out the old tattered bed her mother had slept on for decades. The gesture ended up bankrupting Annat’s mother, who had stuffed her savings of nearly $1 million inside her old bed for decades, Annat told Israel Army Radio.

While it might be nice to sleep on a $1 million mattress, there are better places to put your money.

Real Estate is Better than Your Mattress Because…

  1. Your daughter can’t throw it away. I think this one speaks for itself.
  2. Real estate might offer you a return on your money. A mattress keeps your money close at hand but it offers no opportunity for return. In other words, your money is not working for you. If inflation is in effect, your dollars are actually losing value by sitting in your mattress.
  3. Real Estate is an asset not somewhere your @$$ sets. A poor attempt at humor.
  4. The Four Benefits of Real Estate Investing. Cash flow before taxes, depreciation, principal reduction, and appreciation.
  5. A building is harder to steal and haul away than a mattress. Every two-bit burglar is going to start cutting open old mattresses to look for nest eggs, upon hearing this story.
  6. Someone will still sleep in a used house. Just let this settle into your mind for a bit.

Hiding Money

Putting silliness aside, where are you hiding your money because you are afraid? Is it a 401k? A CD earning 1%? A coffee can buried in the back yard?

Prudence, not fear, should rule in the realm of investments. A mark of maturity is handling responsibilities well. Money and wealth is a responsibility to be stewarded. At the very least, we have a responsibility to leave our heirs with an inheritance.

A good man leaves an inheritance to his children’s children,
but the sinner’s wealth is laid up for the righteous.
– King Solomon

Rest Easy

The poor woman that lost her fortune may have slept on a lumpy mattress, but it probably allowed her to rest easily at night knowing exactly where her money was.

Are you able to sleep at night because you know where your money is and what it is doing? Why not put your money into an investment that you can see, touch, and understand like real estate?

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Filed Under: Benefits of Real Estate Investing, Real Estate Investing Tagged With: 1 Million, Investment Income, Nest Eggs, Real Estate Investing

April 25, 2009 by Peter Maclennan Leave a Comment

Retirement Freedom Defined

Freedom is something that most of us strive for in many areas of our life.

Merriam-Webster defines “freedom” as:

the quality or state of being free: as a: the absence of necessity, coercion, or constraint in choice or action b: liberation from slavery or restraint or from the power of another : independence c: the quality or state of being exempt or released usually from something onerous <freedom from care> d: ease, facility <spoke the language with freedom> e: the quality of being frank, open, or outspoken <answered with freedom> f: improper familiarity g: boldness of conception or execution h: unrestricted use <gave him the freedom of their home>

As the definition states freedom is the ability to do what you want, when you want to.

Now of course there are wise limits on the nature of freedom. I am not “free” to take another person’s property or life. That would be a violation of their freedom to use their own property.

Retirement Freedom

The American Dream entails the dream of “Retirement”. That time in your life when the necessity of a 9-5 job is gone. You are free of the tyranny of a boss, commute, and cubicle.

A good definition of Retirement Freedom is having the ability to invest your time, efforts, finances, and energy into the activities you choose.

This freedom varies from one person to the next. It could be vacations with your grandkids, that cruise to Europe, a home in the mountains, time to serve at your church, or the time to work in your garden.

This freedom is made possible due to the accumulation of wealth you have made during your working years. Your wealth is now working for YOU!

The years of saving and investing have finally paid off, allowing you to live off of the income your investments provide.

The Math of Retirement Freedom

How much do you need to live the retirement you have hoped for?

If you don’t have the luxury of a corporate pension plan, you will need to live off of your investment income alone.

Assume that your investments provide a conservative 5% return per year (for every $100 invested you get $5 of income per year), you will need about 20 times your expected income to live without putting your retirement at risk.

In order to maintain the same lifestyle you currently have, you will need almost 20 times your current income. Multiply your current income by 20.

Here’s some numbers:

  • If you make $50,000/year you will need approximately $1,000,000 of savings at retirement.
  • If you make $75,000/year you will need approximately $1,500,000 of savings at retirement.
  • If you make $100,000/year you will need approximately $2,000,000 of savings at retirement.
  • If you make $200,000/year you will need approximately $4,000,000 of savings at retirement.

This is just to maintain your current lifestyle. That does not include your trip to the Bahamas, the tour of the Holy Land, or the lake house you wanted.

What did you come up with? How many dollars will it take for you to retire?

The Path to Retirement Freedom

But how will you get that place of wealth?

There’s always the stock market. How is your 401k doing these days? Seems like this route is entirely outside of your control. You have no way to control whether the market goes up one day or down another.

You could rely on the government. How well will Social Security benefits allow you to live out your final days with family and friends? Does that allow you to live out your dreams?

The lottery is a possibility, but not very likely.

You have heard about real estate investing, but don’t know where to begin. Your friend owns some rental homes. The ability to control your own investments is appealing.

If this is the case, give Maclennan Investment Group a call at (925) 324-8626. Let us show you another path to retirement freedom.

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Filed Under: Real Estate Investing, Retirement Freedom Tagged With: American Dream, Investment Income, Retirement, Retirement Freedom

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